A registered investment adviser, J.S. Oliver Capital Management, and two financial advisers were ordered to pay nearly $20 million for an alleged cherry-picking scheme that defrauded several clients out of about $10.9 million, according to an SEC enforcement action.
Chief administrative law judge for the Securities and Exchange Commission, Brenda Murray, fined J.S. Oliver Capital $15 million for breach of fiduciary duty and violations of securities laws, and ordered it to pay $1.4 million in disgorgement. The firm's founder, Ian Oliver Mausner, was ordered to pay an additional $3 million penalty and was permanently barred from the industry. Another affiliated portfolio manager received a $410,000 fine and was also barred, according to Ms. Murray's decision, which ran 64 pages.
The SEC alleged that J.S. Oliver Capital Management, which had about $142 million in assets under management at the time of the violations in 2008, benefited by awarding profitable trades to hedge funds affiliated with the firm and in which Mr. Mausner had invested personally. He also misused soft-dollar commissions to pay about $300,000 he owed his ex-wife under his divorce agreement, according to the SEC.
The SEC issued a cease-and-desist order against J.S. Oliver Capital Management last August. As of April this year, its assets under management had fallen to about $24 million, according to agency filings from April.
Meanwhile, Mr. Mausner has rebranded as a relationship consultant, according to his LinkedIn page and website. He published a book last month titled Getting Back on Top: The Uncensored Guide to Sex, Dating and Relationships After Divorce.
“Ian Oliver [Mausner] has advised and guided individuals and families with comprehensive financial advice and money management for over 28 years,” his website states. “During this time, he built one of the largest practices in the industry, most recently starting his own firm in 2004.”
Mr. Mausner did not respond to calls placed to J.S. Oliver or to an e-mail sent to an address on his LinkedIn page.
He represented himself and his firm in SEC hearings and denied the allegations, according to the decision. He attributed the disproportionate allocation of profitable trades to market volatility and said that the trades were allocated based on clients' investment appraoches, such as long-term or buy-and-hold strategies.
Ms. Murray disagreed, however, stating that J.S. Oliver made more than 4,000 transactions of potential cherry-picking between 2008 and 2009. Approximately six favored accounts gained 22%, while three “disfavored” clients lost 99.7%, according to an analysis from the SEC's expert witness, Paul Glasserman, a professor at Columbia Business School.
“Any time your allocation comes after the trade and there has been time for a profit or loss in the investment, the adviser is taking a risk, unless they have a very defined way they are doing the allocation,” said Daniel Bernstein, a principal at the Hamburger Law Firm who focuses on RIA compliance.
In addition, between 2009 and 2011, J.S. Oliver Capital Management misappropriated $1.1 million of client money by misusing soft-dollar funds for noninvestment-related activities, including helping to pay for a two-bedroom unit at the St. Regis Residence Club in New York City, as well as the payments to his ex-wife.
Soft dollars are rebates that brokerages pay to investment advisers and clients for commissions on transactions in their accounts. Advisers may keep the money but must disclose that fact, and must use the funds for research or other activities that can benefit clients' investments, Mr. Bernstein said.
Mr. Mausner founded the RIA in 2004 and ran it out of his luxury home in San Diego, Calif., according to the decision.
The close quarters made it harder for J.S. Oliver Capital's two or three employees to plead ignorance, because “conversations were heard by all,” the SEC wrote.
The decision will become final unless a party files a petition within three weeks of the Aug. 5 publication date.