Mark Welhouse and Welhouse & Associates, Inc. - South Florida Improper Trade Allocation and Cherry-Picking FINRA Arbitration and Litigation Attorney
SEC Announces Cherry-Picking Charges Against Investment Manager
Case Arises From Enforcement Initiative Analyzing Large Volumes of Investment Advisers' Trade Allocation Data
The Securities and Exchange Commission recently announced fraud charges against a Wisconsin-based investment advisory firm and its owner accused of improperly allocating to his personal and business accounts certain options trades that appreciated in value during the course of a trading day while allocating to his clients other trades that depreciated in value.
The SEC Enforcement Division has engaged in a data-driven initiative to identify potentially fraudulent trade allocations known as "cherry-picking," and this enforcement action is the first arising from that effort. Working with economists in the agency's Division of Economic and Risk Analysis, enforcement investigators analyze large volumes of investment advisers' trade allocation data and identify instances where it appears an adviser is disproportionately allocating profitable trades to favored accounts.
The SEC Enforcement Division alleges that Mark P. Welhouse purchased options in an omnibus or master account for Welhouse & Associates Inc. and delayed allocation of the purchases to either his or his clients' accounts until later in the day after he saw whether or not the securities appreciated in value. Welhouse allegedly reaped $442,319 in ill-gotten gains by unfairly allocating options trades in an S&P 500 exchange-traded fund named SPY. His personal trades in these options had an average first-day positive return of 6.28 percent while his clients' trades in these options had an average first-day loss of 5.05 percent.
As described in the SEC order instituting administrative proceedings against Welhouse and his firm, SEC staff conducted a statistical analysis to determine whether Welhouse's profitability in these accounts could have resulted from a coincidental or lucky combination of trades. After running a simulation test one million times, the staff concluded it could not.
The SEC Enforcement Division alleges that Welhouse and his firm violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, Section 17(a) of the Securities Act of 1933, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. The matter will be scheduled for a public hearing before an administrative law judge for proceedings to adjudicate the Enforcement Division's allegations and determine what, if any, remedial actions are appropriate.
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