SEC Nails Strong Investment for Cherry-Picking Scheme, What Do Victims Do?

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.

When RIA’s like Strong trade their clients’ money, they typically do so using a discount trading platform like Schwab, Fidelity, or TD Ameritrade. These brokerage firms have regulatory obligations to supervise the conduct of these RIAs – even if they are unaffiliated with the firm – in order to ensure they are not engaging in fraudulent conduct.  These firms have compliance systems in place so that they are alerted of trading patterns or practices that are fraudulent, like cherry-picking schemes. Failing to have the compliance procedures in place or failing to execute those procedures can be grounds for liability against the brokerage firms for damages.

If you are a victim of a cherry-picking scheme executed by a trusted Investment Advisor, you could have claims against the brokerage firm that executed the transactions. Call Stoltmann Law Offices at 312-332-4200 to determine whether you have claims to pursue.  We are a contingency fee law firm which means we do not get paid until you do.