SEC Charges Investment Adviser with Cherry-Picking

So many of the investment advisory rules and regulations are based on common sense principles.  The story below is another example of a manager not using common sense with regard to the allocation of trades between different accounts.  Using a hedge fund’s assets to pay personal expenses is blatantly illegal.  Unfortunately there are too many of these cases out there and investors must do everything they can to protect themselves from such hedge fund frauds.  (One way to do this is through a hedge fund manager background check which is part of the hedge fund due diligence process.)

The article below can be found here.

SEC Charges Investment Adviser with Cherry-Picking

On September 9, the Commission charged James C. Dawson with securities fraud and investment adviser fraud, for orchestrating a cherry-picking scheme in which he allocated profitable trades to his personal account at the expense of his clients. Dawson is the investment adviser to a hedge fund, Victoria Investors, and individual clients.

The Commission’s complaint, filed in the U.S. District Court for the Southern District of New York, alleges that from April 2003 through October 2005, Dawson allocated profitable trades to his personal account by purchasing securities throughout the day in a single account and allocating the trades amongst his clients and his personal account after he saw whether the trades were profitable. The Commission’s complaint further alleges that Dawson used Victoria Investors’ funds to pay for personal and family expenses. Dawson did not tell his clients -Victoria Investors or his individual clients – about his cherry-picking scheme, and did not tell Victoria Investors that he was using fund assets for his personal expenses.

The Commission alleges that Dawson violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Investment Advisers Act. The Commission seeks an order permanently enjoining Dawson from violating these provisions of the federal securities laws, and seeks disgorgement of ill-gotten gains and losses avoided, plus prejudgment interest, and civil penalties against Dawson. [SEC v. James C. Dawson, 08 Civ. 7841 (SDNY) (WCC)] (LR-20707)

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