Picking Cherries

cherry picking

As an investment adviser, you can’t take the best investments for yourself and leave the lesser ones for your clients. That’s exactly what the Securities and Exchange Commission is accusing J.S. Oliver Capital and Ian O. Mausner of doing.

The SEC’s Enforcement Division is alleging that J.S. Oliver and Mausner engaged in a cherry-picking scheme that awarded more profitable trades to favored clients. Meanwhile they doled out less profitable trades to other clients, including a widow and a charitable foundation. (You have to love the SEC’s highlighting a widow and a charity as victims. If only the charity were for orphans, then the cliche would be perfect.)

Mausner financially benefited from the cherry-picking scheme because he and his family were personally invested in the hedge funds. Plus, he earned additional fees from one of the hedge funds based on the boost in its performance as a result of the cherry-picking. Mausner profited by more than $200,000 in fees earned from one of the hedge funds based on the boost in its performance from the winning trades he allocated.

This cherry-picking scheme is the classic failure to allocate trades before they are made. Mausner made block trades in omnibus accounts at various broker-dealers. The block trades were reported to J.S. Oliver’s prime broker and then Mausner allocated the shares among the client accounts. According to the SEC complaint Mausner often delayed allocating trades until after the close of trading or the following day, allowing him to determine which securities had appreciated or declined in value.

Even if Mausner was trying to allocate trades on a fair and equitable basis, the mere fact that trades were not allocated until after they made makes the process suspect. Then you have the uphill battle of proving you were fair, when in hindsight better trades ended up in favored accounts.