Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Tuesday, February 27, 2007

SEC Alleges Investment Adviser Engaged in Cherry-Picking

On February 26, the SEC instituted proceedings against Melhado, Flynn & Associates, Inc. (MFA), George M. Motz (Motz) and  Jeanne  McCarthy  (McCarthy), alleging that, from at least January 2001  through  April 2005, George M. Motz, the President, CEO and Chairman of the Executive Committee of MFA, engaged in fraudulent trade  allocation  -  "cherry-picking" - at MFA, a registered investment adviser and  broker-dealer.  During the initial period of the scheme, from at  least  January  2001 until approximately September 2003,  Motz  allegedly unfairly  allocated  trades that had appreciated in value during the course of the  day  to  MFA's proprietary  trading  account  and  allocated   purchases   that   had depreciated in value during the day to the accounts  of  his  advisory  clients. Beginning in the summer of  2003,  Motz allegedly engaged  in  cherry- picking to favor one of the firm's  advisory  clients,  a  hedge  fund  affiliated with MFA, over his other advisory clients. In addition,  in the fall of 2003, Motz, with the assistance of McCarthy, altered order tickets in an attempt to cover-up these fraudulent trade  allocations.  As  a  result  of  this  fraud,  MFA  realized  ill-gotten  gains   of  approximately  $1.4  million.  In  addition,  MFA  and   Motz   earned commissions and fees from advisory clients who were  disadvantaged  by the cherry-picking scheme.

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