Adviser Operating Cherry Picking Scheme Makes over $1.8 million

Cherry picking is a long time focus of the Commission. In some senses, this practice may the be ultimate conflict of interest. It is based on an investment adviser placing a series of trades over the course of the trading day, for example. After the close of the markets the adviser values the transactions for the day. Those which were profitable are put into the adviser’s account. The trades which were not profitable are disproportionately allocated to clients. While there are variations of the transaction pattern, in the end it is the adviser who wins by securing a profit from the transactions while the client is left with the loss. In many ways these cases are the ultimate breach of duty. The Commission’s latest case in this area is SEC v. Burleson, Civil Action No. 3:24-cv-08246 (N.D. Cal. Filed Nov. 21, 2024).

Defendant James Burleson is the founder of Burleson & Co., LLC, a Commission registered investment adviser from March 2006 through May 31, 2023. Mr. Burleson owned 97% of the Firm and served as its principal, managing partner and chief compliance officer. Mr. Burleson was an investment advisers as defined in Section 202(a)(1) of the Advisers Act. The firm had over 200 clients and at one time held over $450 million in regulatory assets under management. Each client had an account at Charles Schwab & Co., Inc. The firm also maintained a block trading account. In May 2023 the Firm sold its assets to another investment adviser.

Beginning in August 2020, and continuing for about two years, Defendant executed his scheme. He did this by trading risky options in the Firm’s block trading account. There he could execute trades for multiple clients and then allocate the transactions to different accounts after the close of trading. In allocating the trades Defendant put the profitable transactions into his account. He then disproportionately allocated the unprofitable transactions to the firm’s clients. As a result, Mr. Burleson had trading profits of over $1.8 million, a return rate of +26.5%. The client accounts had over $3.2 million in losses, a return rate of -5.1%. The probability that such returns would occur on their own is less than one in a million.

Defendant also made materially false and misleading statements to his clients in the Firm’s Form ADV, Part 2A. There the Firm stated that it would allocate trades “in the most equitable manner possible.” The statement was false. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Sections 206(1) and (2) of the Advisers Act. See Lit. Rel. No. 26178 (Nov. 21, 2024).