SEC charges advisor for ‘cherry-picking’ scheme
An investment manager operated a “cherry-picking” scheme that allocated profitable stock trades to his personal accounts, while stiffing clients with securities that had losses, the SEC says.
Joseph Bronson allegedly “reaped substantial profits” from 65 of his clients by using an omnibus account that managed multiple clients’ trades simultaneously without having to identify the intended accounts to the broker in advance.
By waiting to see which securities performed the best over the course of the day, Bronson assigned lucrative trades to his own accounts, while allocating the losses to the accounts’ of his clients, the SEC says.
Bronson’s firm Strong Investment Management manages mostly individual clients and has $58 million in client assets, according to the firm’s latest Form ADV filed in January.
Bronson’s brother and the firm’s chief compliance officer, John Engebretson, is also listed on the complaint for ignoring numerous “red flags,” the SEC says. Bronson’s family trust was one of his clients, of which, he and six siblings were beneficiaries, according to the complaint.
Bronson and Engebretson worked for their late father’s firm, Engebretson Capital Management, which was also an investment advisor registered with the SEC, according to the complaint. The firm ran afoul of regulators in 1999 for distributing advertising materials that overstated the firm’s annual performance, the SEC says.
Bronson even went as far as to change his last name from Engebretson because of the SEC enforcement proceedings, and formed Strong Investment Management to escape his prior firms’ “bad reputation,” according to the complaint. The firm terminated its registration with the regulator, according to a form ADV filed in 2011 on or around the time of his father’s death.
However, Bronson hired the same compliance consultant used by his former firm and founded Strong Investment Management in 2009, says the regulator.
Bronson’s original custodian first noticed the suspicious behavior, according to the complaint. The custodian noticed that Bronson’s personal account traded many of the same securities as his family’s trust account, according to the complaint.
Over the course of a year, Bronson’s account had a gain of $205,788.25, a return of 14.54%, while the family trust account endured a $638,421.48 loss during that same period, a negative 13.58% return, according to the complaint.
The dealer decided to terminate Strong Investment Management due to Bronson’s “behavior of allocating favorable trades to his accounts” and his failure to heed multiple “warnings regarding the block account usage,” according to the complaint.
The complaint did not name the brokers. Strong Investment Management’s Form ADV lists Schwab as its most recent custodian. A company spokesman did not return requests for comment.
In other cases, Bronson sold a stock and waited to allocate the sale until later in the day, says the SEC. When the price of the security dropped, he then used the omnibus account to purchase the same security at a lower price and pocketed the difference as profit, says the regulator.
A representative of Strong Investment Management declined to comment when reached by phone.
The investigation is part of a larger crackdown on “cherry-picking” schemes by the SEC, which announced two similar cases in September, the regulator says.