Another Cherry Picking Case

At the center of the broker- trader relation is a duty which governs the relationship when trading. Reflected in Reg. BI is a duty which seeks to ensure that the relationship is fair and governed by the full and fair disclosure of all material facts relating to the scope and terms of the relationship. Thus, when a broker allocates trades to clients based on which had profits and which suffered losses, the duty is breached. That is what happened in SEC v. Leech, Civil Action No. 1:24-cv-09017 (S.D.N.Y. Filed Nov. 25, 2024).

Defendant Stephen K. Leech is the former co-chief investment officer of Western Asset Management Company, LLC. Over a period of years he engaged in what is typically called a “cherry picking” scheme. Specifically, beginning in January 2021, and continuing through October 2023, Defendant was named portfolio manager for several investment strategies. As part of his duties he placed trades using omnibus brokerage accounts.

When placing trades Mr. Leech did not immediately allocate the trade to a particular account. Rather, he waited until later in the day, and in some instances after market close, to assign a particular trade to an accountant. During much of the period the trader assigned the trades which had favorable first day results to select accounts which also benefited him. Those that had unfavorable accounts were assigned to other accounts. Ultimately, he cherry-picked the trades, a disregard of his duties. The complaint alleges violations of Securities Act Section 17(a)(1), Exchange Act Section 10(b) and Rule 10b-5, Advisors Act Sections 206(1) and 206(2) and Investment Company Act Sections36(a) and 37.

A parallel action was filed by the U.S. Attorney’s Office for the Southern District of New York. See, Lit. Rel. No. 26183 (Nov. 25, 2024).