Adviser placed profitable trades in his own accounts, losers into clients, SEC says
Connecticut adviser accused of losing $2 million for clients, making $460,000 for himself
A Connecticut investment adviser lost about $2 million for clients and earned about $460,000 for himself by “cherrypicking” which trades he allocated to his personal and business accounts and those that he settled in client accounts, regulators said.
The Securities and Exchange Commission has alleged that MiddleCove Capital LLC and its founder, Noah Myers, 40, engaged in fraudulent trade allocation from October 2008 through February 2011 by making block purchases of securities through a master account and waiting to allocate those trades until late in the day, or the next day — after he knew whether there was a gain or a loss on the trade.
For more than two years, if a security increased in price the day it was purchased, Mr. Myers would sell it and allocate that day-trade profit to his personal and business accounts, the SEC said in an Aug. 22 administrative order. If the security’s price failed to increase the day it was bought, he generally allocated the trade to client accounts, the SEC order said.
The scheme often involved buying securities for consecutive days so that “the securities on which Myers was disproportionately making money were the same securities on which his clients were disproportionately losing money,” the commission order said.
The fraud often involved the use of leveraged exchange-traded funds, an investment that the Financial Industry Regulatory Authority Inc. has said are not generally suitable for retail investors who hold them for more than one trading session. Mr. Myers also was a registered representative of Purshe Kaplan Sterling Investment Inc. at the time of these trades, the SEC said.
The fraud was first detected by an internal program at Charles Schwab & Co. Inc., which was the custodian for MiddleCove client accounts and for the master account Mr. Myers used for the block trades. The program identified Mr. Myers’ accounts as potentially receiving favorable allocation of profitable day trades and the online brokerage alerted MiddleCove employees in November 2010, the SEC said.
SEC examiners interviewed Mr. Myers in November 2011 and the commission said he admitted to using a day-trading strategy in a personal account that was profitable 95% of the time, “but he did not offer a plausible explanation for his stellar day-trading performance.”
He asserted his privilege against self-incrimination during the investigation, the SEC said.
Hugh Keefe, a lawyer with Lynch, Traub Keefe & Errante PC, to whom Mr. Myers directed calls Wednesday, did not immediately return a call seeking comment.
Peter Purcell, chief executive of Purshe Kaplan Sterling Investments Inc., said his firm terminated Mr. Myers in April 2012 after he “did not cooperate with our inquiries to him when we were notified that the SEC was investigating him.”
The SEC administrative order institutes civil proceedings against Mr. Myers. If he is found liable, the commission could levy fines and demand disgorgement of profits plus interest from Mr. Myers and his firm.
Centerbrook, Conn.-based MiddleCove, which Mr. Myers started in 2008, managed as much as $129 million in client assets. The firm’s only other portfolio manager left in 2011, and MiddleCove had about $53 million under management as of Sept. 31, 2011, the SEC said. Its only employee at this point is Mr. Myers, according to the SEC.
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