The SEC recently accused a California-based hedge fund manager and his investment advisory firm of assigning profitable trades with its proprietary and other favored accounts and assigning losing trades with client accounts. This is a practice commonly known as “cherry picking.”
Peter J. Eichler, Jr., the CEO of Aletheia Research and Management, Inc. which is currently in bankruptcy under Chapter 11, is charged with allocating losing trades to two hedge funds managed by the investment advisory firm. According to the SEC, the transactions occurred over a two-year period ending in November 2011 and caused the two funds to lose $4.4 million. At that same time, the firm allocated winning trades to personal and favored accounts, resulting in $4.1 million in profits for such accounts. As an investment adviser, Mr. Eichler and his firm had a fiduciary obligation to treat all of the firm’s clients fairly. Instead, according to the SEC, Mr. Eichler and his firm treated certain clients, including proprietary accounts, favorably over the interests of the other client accounts.
In addition, according to the SEC, the firm failed to forewarn clients, as required under the Investment Advisers Act of 1940, of the firm’s precarious financial condition until just before filing for bankruptcy.
According to the SEC, the firm had knowledge of its precarious financial condition months before it advised clients of the situation.
The “cherry picking” transactions and the failure to timely alert clients about the firm’s dire financial situation are, according to the SEC, violations of the anti-fraud provisions under the Advisers Act and a breach of the firm’s fiduciary responsibilities to its clients.
The SEC is seeking permanent injunctions and disgorgement from Mr. Eichler and his firm