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SEC Cherry Picking Defense

SEC Defense Lawyers for Securities Brokers Accused of Cherry Picking Investment Gains and Losses

John W. Sellers
Attorney John W. Sellers
SEC Cherry Picking Defense Team Lead
Former DOJ Trial Attorney
envelope iconContact John

The U.S. Securities and Exchange Commission (SEC) investigates securities brokers suspected of engaging in a wide range of fraudulent practices. One practice that has gained increased attention in recent years is cherry picking. In a typical scenario, cherry picking involves pooling multiple investors’ funds into a single account and then choosing which investors receive gains and losses.

In one recent case, the SEC described the defendants’ alleged cherry picking scheme as follows:

“The defendants allegedly used a single account to place trades without specifying the intended recipients of the securities at the time they placed the trades. As alleged, after the defendants established a position, if the price of the securities increased during the trading day, the defendants usually closed out the position and allocated those profitable trades to the two preferred accounts. Conversely, the complaint alleges that if the price of the securities decreased during the trading day, the defendants usually allocated the unprofitable trades to other client accounts.”

Notably, in addition to pursuing charges against the brokers accused of cherry picking, the SEC identified the brokers’ preferred clients as “relief defendants”—seeking to obtain disgorgement of their allegedly unlawful gains. However, if the preferred clients in a cherry picking scheme are accused of being complicit in the scheme, these individuals could potentially face securities fraud, conspiracy, or other charges as well.

Put our highly experienced team on your side

Dr. Nick Oberheiden
Dr. Nick Oberheiden

Founder

Attorney-at-Law

Lynette S. Byrd
Lynette S. Byrd

Former DOJ Trial Attorney

Partner

Brian J. Kuester
Brian J. Kuester

Former U.S. Attorney

Amanda Marshall
Amanda Marshall

Former U.S. Attorney

Local Counsel

Joe Brown
Joe Brown

Former U.S. Attorney

Local Counsel

John W. Sellers
John W. Sellers

Former Senior DOJ Trial Attorney

Linda Julin McNamara
Linda Julin McNamara

Federal Appeals Attorney

Aaron L. Wiley
Aaron L. Wiley

Former DOJ attorney

Local Counsel

Roger Bach
Roger Bach

Former Special Agent (DOJ)

Chris Quick
Chris J. Quick

Former Special Agent (FBI & IRS-CI)

Michael S. Koslow
Michael S. Koslow

Former Supervisory Special Agent (DOD-OIG)

Ray Yuen
Ray Yuen

Former Supervisory Special Agent (FBI)

Experienced Defense Counsel for SEC Securities Fraud Investigations

Our team of career defense lawyers, former U.S. Department of Justice (DOJ) prosecutors, and former Special Agents brings notable experience to defending brokers in SEC securities fraud investigations. This includes experience on both sides of these complex and high-risk matters. Several of our former DOJ prosecutors and Special Agents previously handled securities fraud investigations on behalf of the federal government; and, in private practice, our lawyers and consultants have successfully resolved numerous SEC investigations without formal charges being filed.

When facing allegations of cherry picking from the SEC, experience matters. Securities brokers accused of cherry picking need to know that their defense strategies are backed by insights gained from relevant real-world experience. At Oberheiden P.C., our federal defense lawyers and consultants have the experience that high-stakes cherry picking cases demand, and we are able to get to work immediately defending brokers in SEC enforcement matters.

Statutory and Regulatory Allegations in SEC Cherry Picking Cases

The SEC pursues a wide range of statutory and regulatory charges in cases involving alleged cherry picking schemes. To do so, it relies on “sophisticated analytical tools to ferret out investment professionals who abuse their positions to engage in cherry-picking and other fraudulent conduct.” Some examples of potential charges in cherry picking cases include violations of:

Sections 17(a)(1) and (3) of the Securities Act of 1933

Under Section 17(a)(1) of the Securities Act of 1933, it is unlawful, “in the offer or sale of any securities . . . directly or indirectly—to employ any device, scheme, or artifice to defraud.” Section 17(a)(3) makes it illegal, “to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser [of a security].” Cherry picking for the purpose of saddling certain investors with losses while assigning gains to other investors violates both of these provisions of the Securities Act of 1933.

Section 10(b) of the Securities Exchange Act of 1934

Section 10(b) of the Securities Exchange Act of 1934 contains prohibitions similar to those found in Section 17(a) of the Securities Act of 1933. Under Section 10(b), brokers who engage in cherry picking can face civil or criminal charges for “employ[ing], in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, or any securities-based swap agreement [1] any manipulative or deceptive device or contrivance” in violation of SEC rules.

SEC Rule 10b-5(a) and (c)

SEC Rule 10b-5 also contains prohibitions similar to those found in Section 17(a) of the Securities Act of 1933. Securities brokers accused of cherry picking can face prosecution for “employ[ing] [a] device, scheme, or artifice to defraud” under SEC Rule 10b-5(a), and for “engag[ing] in [an] act, practice, or course of business which operates or would operate as a fraud or deceit upon” investors under SEC Rule 10b-5(c).

Sections 206(1) and (2) of the Investment Advisers Act of 1940

The language of Section 206 of the Investment Advisers Act of 1940 mirrors the language of SEC Rule 10b-5, but applies specifically to brokers who are also registered as investment advisers. While securities brokers now owe fiduciary duties to their customers under SEC Regulation Best Interest (Reg BI), investment advisers owe certain heightened duties, and they can face heightened scrutiny, and penalties, in appropriate cases.

SEC Regulation Best Interest (Reg BI)

The SEC’s Reg BI is intended to, “enhance the quality and transparency of retail investors’ relationships with investment advisers and broker-dealers, bringing the legal requirements and mandated disclosures in line with reasonable investor expectations.” Under Reg BI, securities brokers owe four “component obligations” to their customers—(i) the Disclosure Obligation, (ii) the Care Obligation, (iii) the Conflict of Interest Obligation, and (iv) the Compliance Obligation.

Cherry picking implicates all four of the component obligations under Reg BI. The SEC has published extensive guidance regarding Reg BI compliance, and it expects all brokers to strictly comply with the Regulation’s requirements. Intentionally diverting gains from certain investors’ accounts for the benefit of other investors (who are frequently family members or business associates) is clearly adverse to the non-preferred investors’ best interests; and, as such, it will constitute a clear violation of Reg BI in virtually all cases.

Defense Strategies When Facing SEC Allegations of Cherry Picking

While cherry picking is a serious offense that violates multiple federal securities laws and regulations, brokers who are accused of cherry picking will have strong defenses in many cases. Some examples of potential defense strategies our lawyers may use in SEC cherry picking cases include:

  • Disputing the SEC’s Substantive Allegations – Cherry picking cases are often highly complex, and the reality of the circumstances at hand won’t always align with the SEC’s allegations. If the SEC’s investigation is misguided, our lawyers and consultants can use their experience to demonstrate that further investigative or enforcement activity is unwarranted.
  • Demonstrating Good-Faith Compliance Efforts – In some cases, apparent cherry picking may result from inadvertent compliance failures. If you or your brokerage firm has inadvertently misdirected funds from a pooled account, for example, our lawyers and consultants may be able to demonstrate that this inadvertent mistake does not warrant SEC prosecution.
  • Challenging SEC Subpoenas – The SEC relies heavily on its subpoena power in cherry picking and other securities fraud investigations. At Oberheiden P.C., we have significant experience helping our clients challenge SEC subpoenas and craft strategic responses that minimize their exposure risk and potential liability.
  • Responding to SEC Wells Notices – A Wells Notice identifies the SEC’s proposed charges flowing from an investigation. While responding to a Wells Notice is not mandatory, submitting a strategic and well-timed response can set the stage for a favorable result in many cases.
  • Negotiating a Settlement in Appropriate Cases – In some cases, negotiating a settlement with the SEC will be the most advantageous option in light of the circumstances presented. If it makes sense to target a settlement in your case, our lawyers will leverage the favorable aspects of your cherry picking case to secure a favorable settlement.

FAQs: Defending Against SEC Cherry Picking Allegations

What Does the SEC Consider Unlawful Cherry Picking?

 

Under federal securities laws and regulations, unlawful cherry picking involves apportioning investment gains and losses between different investors’ accounts, with the specific purpose of benefiting certain investors to others’ disadvantage.

How Does the SEC Uncover Evidence of Cherry Picking?

 

The SEC uncovers evidence of cherry picking through various means. These means include obtaining information from investors, conducting financial and forensic analyses, and issuing SEC subpoenas to brokers suspected of engaging in fraudulent practices.

Can Preferred Investors Face Prosecution in SEC Cherry Picking Cases?

 

Yes, along with securities brokers accused of cherry picking, investors who are complicit in cherry picking schemes can face prosecution as well.

What are the Potential Consequences of an SEC Cherry Picking Investigation?

 

The potential consequences of an SEC cherry picking investigation depend on whether the investigation is civil or criminal in nature. In civil cases, brokers can face fines, cease-and-desist orders, and suspension or debarment. In criminal cases prosecuted under the Securities Exchange Act of 1934 and other federal securities laws, brokers can face federal imprisonment in addition to the penalties listed above.

Do I Need Defense Counsel for an SEC Cherry Picking Investigation?

 

Due to the complexity of the issues and the level of risk involved in SEC cherry picking investigations, it is strongly in targeted brokers’ best interests to engage experienced defense counsel. At Oberheiden P.C., our federal securities fraud defense lawyers and consultants handle cherry picking cases nationwide.


Discuss Your SEC Cherry Picking Investigation with a Senior Federal Securities Fraud Defense Lawyer in Confidence

If you are under investigation for cherry picking, we encourage you to contact us promptly for a complimentary consultation. Call 888-680-1745 or request an appointment online to speak with a senior attorney at Oberheiden P.C. in confidence.

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