Securities Law Prof Blog

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

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Monday, December 17, 2012

SEC Charges Hedge Fund Manager in Cherry-Picking Scheme

The SEC charged  Peter J. Eichler, Jr., and his firm Aletheia Research and Management, Inc. with conducting a "cherry-picking" scheme by steering winning trades to their own trading accounts and favored clients to the detriment of certain hedge fund investors. They are also charged with failing to disclose the firm's precarious financial condition to clients in a timely manner.  According to the SEC,  Eichler and his firm disproportionately allocated losing trades to the accounts of two hedge funds managed by the firm, resulting in monetary losses for those funds' investors. Meanwhile, they allocated winning trades to accounts owned by Eichler and Aletheia employees as well as accounts belonging to select clients.

According to the Commission's complaint filed in federal court in Los Angeles, Aletheia had more than $1.4 billion in assets under management and managed two hedge funds. By engaging in a cherry-picking scheme, Aletheia and Eichler violated the fiduciary duties they owed to their advisory clients. Aletheia failed to implement policies, procedures, or a code of ethics that could have prevented a cherry-picking scheme from occurring.

The Commission further alleges that Aletheia also breached its fiduciary duties and federal law when it did not disclose its financial troubles to clients until immediately before a bankruptcy filing. Aletheia was in a precarious financial condition in July 2012 after the state of California had filed a tax lien for more than $2 million against the firm for unpaid taxes and penalties. On Oct. 1, 2012, California suspended Aletheia's corporate status for non-payment. The firm filed for Chapter 11 bankruptcy on November 11.

The Commission's complaint seeks permanent injunctions, disgorgement of the defendants' ill-gotten gains plus pre-judgment interest, and penalties.

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