Adviser Charged by SEC in Cherry Picking Scheme
An investment adviser favored select clients at the expense of others and then used the favorable results obtained for the one client group for marketing and to increase fees while misusing the soft dollars garnered from the trading. The scheme cost the disadvantaged clients over $10 million while improperly using over $1 million in soft dollars, according to the Order in In the Matter of J.S. Oliver Capital Management, L.P., File No. 3-15446 (August 30, 2013). The adviser, its founder and the COO are charged with fraud.
The Respondents named in the Order, in addition to J.S. Oliver, are Ian Mansner and Douglas Drennan. J.S. Oliver is a registered investment adviser with approximately $115 million in assets under management. The firm provides advice to separate client accounts and is the manager of four affiliated hedge funds referred to as the JS Oliver Funds. Mr. Mansner is the founder of the firm as well as is portfolio manager and control person. Mr. Drennan is also a portfolio manager and has been CCO since June 2011.
Beginning in June 2008, and continuing for over a year, the adviser disproportionately allocated profitable equity trades to six client accounts, thereby disadvantaging three others, according to the Order. The favored accounts included the JS Oliver Funds. The scheme was executed by making block trades in omnibus accounts at broker-dealers. The trades were not immediately allocated in many instances. This permitted Mr. Mausner to allocate those which were favorable because, for example, they appreciated over the day, to the selected accounts. This approach also permitted him to assign the less favorable trades to other accounts. Over the period that the cherry-picking scheme was operated, the disadvantaged accounts suffered total harm of $10.7 million.
As the scheme unfolded Mr. Mausner utilized the favorable results obtained in the favored accounts to market the business. The scheme also increased the fees paid by the select accounts. From one fund the adviser netted over $212,000 in performance fees.
JS Oliver received over $1.1 million in soft dollar credits accrued from trading commissions paid by firm clients between January 2009 and November 2011. Rather than use the funds for the legitimate research and brokerage expenses of the adviser, and as disclosed in various materials, Respondents diverted the funds to pay: Mr. Mausner’s ex-wife for amounts due under a divorce decree; for grossly inflated rent paid to another company Mr. Mausner owned, much of which settled in his bank account; for what was claimed to be outside research but in reality was word performed by adviser employee Mr. Drennan; and for Mr. Mausner’s personal timeshare in New York city.
The Order alleges willful violations of Securities Act Section 17(a), Exchange Act Section 10(b), Advisers Act Sections 204, 206(1), (2) and (4) and Section 207. The proceeding will be set for hearing.