SEC charges advisor for sticking elderly clients with trades that went sour
A former fund advisor and RIA stands accused of "multiple breaches of fiduciary duty" and fraud violations in a case stemming from allegations that he collected more than half a million dollars in profitable trades from an omnibus account, while sticking clients — many of them elderly and unsophisticated investors — with the trades that went sour, according to a cease-and-desist order filed by the SEC.
Additionally, the commission is claiming that Laurence Balter, operating through Oracle Investment Research in Fox Island, Washington, and later Kihei, Hawaii, misled clients about the fees that he charged and the investment strategies guiding their accounts.
The SEC is taking its case before an internal administrative court, saying that it aims to determine what remedial action might be appropriate, including the potential for civil penalties and reimbursement payments to former clients.
"We allege that Balter reaped more than a half-million dollars in ill-gotten gains by siphoning winning trades from his clients and withdrawing more than his fair share of management fees," Jina Choi, director of the SEC's San Francisco regional office, says in a statement. "Investment advisors breach their fiduciary duty when they favor their own interests and force clients to take less profitable trades without their knowledge."
Balter could not immediately be reached for comment. His defense counsel, identified by the SEC as Stanley Morris of the Santa Monica, California, law firm Corrigan & Morris, did not return phone and email messages seeking comment. According to FINRA BrokerCheck records, Balter had been the subject of two prior customer disputes, one involving excessive fees and the other relating to investment suitability and charges of an unauthorized sale.
The SEC's order outlines three distinct schemes the formerly registered investment advisor is alleged to have perpetrated from January 2011 through April 2014 while operating Oracle Investment Research, which served as an advisor to the Oracle Mutual Fund, and as many as 120 individual accounts. At its peak, Balter's firm managed $47 million in assets.
First, Balter is alleged to have conducted a day-trading strategy for himself and a handful of clients, executing trades in various equities and options through an omnibus account and then cherry-picking for himself the most profitable trades while allocating the losses to his clients. The SEC charges that that practice runs counter to Balter's firm's compliance manual, which it cites as carrying the provision that "[c]lients must always receive the best price, in relation to employees, on same day transactions."
According to the SEC order: "in virtually all instances in which Balter made trades in the omnibus trading account, he did not allocate the trades until after they were executed — in other words, after he knew the profitability of the trade. Moreover, Balter disproportionately allocated profitable trades to his own accounts and unprofitable trades to his client accounts."
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Balter's clients were unaware that he was trading their funds in a pooled account that included his own money, the commission contends. Over one 13-month period from 2012 to 2013, Balter netted proceeds of $220,000 on trades from the omnibus account, while one client — identified by the SEC only as "Client A" — incurred losses of $1.36 million.
Additionally, the SEC alleges that Balter misled his clients about the fees they would be charged, billing them for both advisory and management fees for the portions of their accounts invested in the mutual fund that he controlled. The commission says that Balter had assured his clients that he would not "double dip" on the fees, and made a similar representation on his Form ADV, but then never issued the promised quarterly credit for the management fees that he collected, amounting to another breach of fiduciary responsibilities.
Finally, the SEC contends that Balter ran afoul of the Investment Company Act in the investment strategies for the fund that he oversaw, where the majority of his clients' holdings were allocated. The SEC charges that Balter repeatedly steered the fund into more concentrated and less diversified positions than he had disclosed to clients, further violating his fiduciary duty and misleading the fund's board of trustees in the process.
The SEC is taking its claims of violations of the Securities and Exchange Act, the Securities Act, the Investment Advisers Act and Investment Company Act before an administrative law judge, with a public hearing on the matter to be held 30 days to 60 days following the issuance of its cease-and-desist order. Balter is directed to respond to the allegations within 20 days.