On August 30, 2013, the SEC announced charges against a San Diego-based investment advisory firm and its president for allegedly steering winning trades to favored clients and lying about how certain money was being spent.

The SEC’s Enforcement Division alleged that J.S. Oliver Capital Management and Ian O. Mausner engaged in a cherry-picking scheme that awarded more profitable trades to hedge funds in which Mausner and his family had invested.  Meanwhile they doled out less profitable trades to other clients, including a widow and a charitable foundation.  The disfavored clients suffered approximately $10.7 million in harm.

The SEC also alleged that Mausner and J.S. Oliver misused soft dollars, which are credits or rebates from a brokerage firm on commissions paid by clients for trades executed in the investment adviser’s client accounts.  If appropriately disclosed, an investment adviser may retain the soft dollar credits to pay for expenses, including a limited category of brokerage and research services that benefit clients.  However, Mausner and J.S. Oliver misappropriated more than $1.1 million in soft dollars for undisclosed purposes that in no way benefited clients, such as a payment to Mausner’s ex-wife related to their divorce.

According to the SEC’s order instituting administrative proceedings, Mausner engaged in the cherry-picking scheme from June 2008 to November 2009 by generally waiting to allocate trades until after the close of trading or the next day.  This allowed Mausner to see which securities had appreciated or declined in value, and he gave the more favorably priced securities to the accounts of four J.S. Oliver hedge funds that contained investments from Mausner and his family.  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.  Mausner also marketed that same hedge fund to investors by touting the fund’s positive returns when in reality those returns merely resulted from the cherry-picking scheme.

The SEC’s order alleged that J.S. Oliver and Mausner willfully violated the antifraud provisions of the federal securities laws and asserts disclosure, compliance, and recordkeeping violations against them.  The order also alleged that Drennan willfully aided, abetted, and caused J.S. Oliver’s fraud violations in the soft dollar scheme.  It was unclear from the SEC’s announcement whether customers initiated FINRA arbitrations, or any other type of securities arbitrations.