Articles Posted in Securities and Exchange Commission

Stoltmann Law Offices is investigating claims on behalf of defrauded victims of California Registered Investment Advisor Strong Investment Management. According to a complaint filed by the SEC on February 21, 2018, Strong and its President and sole owner Joseph B. Bronson defrauded its advisory clients by engaging in what is called a “cherry picking” scheme.   The complaint alleges that for at least four years Bronson abused his clients’ trust by earmarking profitable trades to himself while booking the losers in his clients’ accounts.  The complaint also alleged that Bronson and Strong misrepresented the trading strategy they were engaging in, stating that all trades were allocated pursuant to a pre-trade allocation statement. In reality, alleged the SEC, Bronson reaped substantial personal profits to his clients’ detriment.

On September 25, 2019, the SEC obtained a final judgment against Bronson and Orange County-based Strong Investment which were ordered to pay over $1 million in restitution to defrauded investors. Bronson also faces a lifetime bar from the securities industry. Cherry-picking schemes like that engaged in by Bronson are fairly common unfortunately.  On September 20, 2018, a Louisiana based investment advisory firm, World Tree Financial, was charged by the SEC with orchestrating a $54 million cherry picking scheme. In January 2017, the SEC uncovered another cherry-picking scheme engaged in by Massachusetts based investment advisory firm Strategic Capital Management with a $1.3 million cherry picking scheme.  The list of investment advisors that have engaged in this scheme goes on and on.

Cherry Picking schemes are pretty easy to execute which is why they’re fairly common.  A lot of investment advisors use omnibus accounts to trade their clients’ investments in bulk and then allocate the gains and losses directly to client accounts pursuant to an allocation practice. These practices have to be disclosed on the advisory firm’s Form ADV, but no one is looking over their shoulder to make sure these allocations are done correctly. No one audits these accounts to make sure the investment advisor, who is provided full discretion to execute these transactions, is not cherrypicking or skimming off the top.  The only entity that should be aware of this sort of scam is the brokerage firm through which these cherry-picking schemes are executed.

No yield hungry investor wants to miss out on the next Google, the next big thing.  But as this Securities and Exchange Commission civil prosecution shows the only big things in some start-ups may be fraud.  A number of high net worth individuals thought an Orange County, California investment adviser was appealing.  But they were mistaken and taken to the cleaners for $14 million for undisclosed and excessive fees, claims the SEC.

According to an SEC court filing, Stuart Frost and his investment advisory firm, Frost Management Company, raised $63 million from the investors to put into another firm he owned, Frost Data Capital (FDC) that was supposedly performing operational support and other services to help incubate a portfolio of start-ups.  In reality, much of the money was said to have been diverted to fund a lavish lifestyle for him which included a boat, luxury cars and an archery range.

“When Frost needed more cash to fund his lavish lifestyle, he created new portfolio companies and, after investing more fund capital into the new companies, FDC then extracted even more incubator fees,” according to the SEC complaint.  The SEC is alleging Frost and his investment advisory firm violated their fiduciary duties by keeping the super-charged fees hidden from the investors.

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