A computer application deployed by the Charles Schwab Corporation that supported day trading online has flagged “cherry picking” of profitable trades by a Connecticut financial advisor, according to a court filing by the Securities and Exchange Commission.
The SEC is focusing the case on Noah Myers, a 40-year-old financial advisor who resides in Old Lyme, Connecticut. Myers is the principal, chief investment officer, and sole owner of MiddleCove Capital, according to the filing.
According to the SEC complaint, Myers used an omnibus account with Charles Schwab to engage in fraudulent allocations of trades conducted from October 2008 to February 2011.
Myers would delay allocation of trades until after he saw which appreciated in value. Then he would “cherry pick” trades that gained value and put them in his own personal or business accounts, according to the federal regulator.
Trades that lost value got put in the accounts of clients.
Myers made about $460,000 of “ill-gotten gains’’ with the activity, the SEC contends.
Schwab, however, “had an internal program that flagged Myers’s accounts as potentially receiving favorable allocation of profitable day trades,’’ according to the SEC’s filing.
Myers did not respond to two calls for comment.
Schwab declined to comment on the specifics of the case. But indicated such “flagging” is ongoing.
“We are very vigilant about account security at Schwab and use a combination of automated and manual systems that raise red flags about unusual behaviors,’’ said Sarah Bulgatz, director of its corporate public relations.
According to the filing, a MiddleCove employee investigated Myers’s trading patterns after he received a call from an employee of Charles Schwab in November 2010.
That Schwab employee indicated the financial services firm had investigated block trades made by Myers, as ‘’potentially giving profitable trades to an account that benefited Myers.”
The MiddleCove employee then analyzed Myers’s allocation for trading in Research in Motion, the company that makes Blackberry mobile devices, and a leveraged exchange-traded fund, the ProShares UltraShort Financials or SKF fund.
From that analysis, the employee suspected Myers was cherry-picking trades at the expense of his clients, the filing says.
As a result of the confrontation with this employee, Myers agreed “to place all of his client trades through a certain Charles Schwab trade application, and to use a different method for his own trades,’’ according to the filing.
But on February 18 of last year, the same MiddleCove employee suspected Myers had allocated a day trade profit to himself using the Charles Schwab trade application.
After this, “Myers stopped cherry-picking and did relatively little trading in his own accounts,’’ the SEC said.
Schwab provides software that allows advisors to rebalance single or multiple accounts, rebalance accounts tied to a household or to model portfolio, and analyze current holdings to set up customized model portfolios for portfolio rebalancing.
For day trading, Schwab also appears to offer an “applet” for Charles Schwab Web Trading that allows advisors to make trades, allocate shares to different accounts and make instructions on how to handle different lots. That applet is found on schwabadvisorcenter.com.
“We didn't know that Schwab had a program that tracked trade allocations,’’Todd Cipperman of Cipperman Compliance Services in Wayne, Pa., said in a report on the case to clients Wednesday. This kind application, though, should be “helpful for compliance staff that use Schwab or other broker-dealers that offer these tools,’’ he said.
Commission staff interviewed Myers in November 2011 about his trading. Myers, the SEC said in its filing, “admitted that he had a day-trading strategy in one of his personal accounts that was profitable about 95% of the time, but he did not offer a plausible explanation for his stellar day-trading performance. ’’
MiddleCove Capital, a registered investment adviser “providing financial planning, asset management and investment counsel,” was ranked third among Connecticut firms in Wealth Manager magazine’s list of “2009 Top Wealth Managers,’’ according to a release on MiddleCove’s site.