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Regulatory Sanctions

‘Cherry Picking’: A Custodian B/D Sees Something, Says Something

June 7, 2018

Gary Freeman, the Chief Investment Officer of Oak River Financial Group, an investment adviser registered in Texas, settled SEC charges that he allocated profitable trades to his personal accounts and disproportionately allocated unprofitable trades to his clients. For his efforts, Freeman will be barred from the industry and pay $125K in disgorgement, prejudgment interest and civil fines.  


According to FINRA CRD records, prior to association with investment advisors, Freeman, 66, had 19 years’ experience with 8 broker-dealers, from 1980 through 2000.


SEC FINDINGS.    Over a 14-month period, from July 2012 through September 2013, Freeman engaged in the cherry-picking of trades through the Adviser’s omnibus trading account - disproportionately allocating profitable trades to his personal accounts and unprofitable trades to client accounts. After purchasing stocks in the omnibus trading account in the morning, Freeman would allocate the purchase by day’s end - generally just before or after the market close - based on whether the stock price went up or down. On those occasions that Freeman sold the stock on that same day – again, near the close of trading - he would allocate realized profits to one of his personal accounts and realized losses to client accounts.


The Broker-Dealer Custodian's Active Role.   Throughout the relevant period, an unnamed broker-dealer (“B/D”) was custodian for all individual accounts - Freeman's personal accounts and those belonging to clients he managed. Freeman conducted all securities trading through that B/D. While Freeman placed some separate trades directly in each client’s individual account, the vast majority of his trades were placed into the Adviser’s omnibus trading account.


     In January 2013, the B/D’s surveillance unit detected that Freeman was using the omnibus trading account to trade stocks for his accounts.They specifically noted that 17 profitable day-trades in January had been executed through the omnibus trading account and then were allocated to one or more of his personal accounts. On or about January 25, 2013, the B/D called to warn him against using the omnibus account in this way and stressed that the omnibus trading account was to be used to allocate trades to multiple client accounts and not to allocate to one of his accounts.


    Following that call, Freeman employed 2 different strategies so that his cherry-picking would go undetected:

  • In one, he placed the initial trade in the omnibus account and the second trade through one of his personal accounts. He then allocated the initial trade to his personal account.
  • In another, when Freeman allocated profitable trades to one of his personal accounts, he allocated a small portion of the profitable trade to a client account - with the rest of the profit going to a personal account.


     In August 2013, the B/D inquired about a trading pattern it had detected from May through August 2013, whereby Freeman would allocate trades with intraday losses to clients, and would allocate trades with intraday profits to his personal accounts (less a small portion that he allocated to a client).


     In mid-September 2013, the B/D informed Freeman that it was terminating its relationship with the Adviser because it had found improprieties in how he was using the omnibus trading account. At that point, Freeman’s cherry-picking of trades stopped.