According to SEC’s complaint against Strong Investment Management and its owner, Joseph Bronson, for more than four years, Bronson traded securities in Strong’s omnibus account but delayed allocating the securities to specific client accounts until he had observed the securities’ performance over the course of the day. This allowed Bronson to harvest substantial profits at his clients’ expense by “cherry picking” the trades. He would disproportionately allocate profitable trades to himself and unprofitable trades to Strong’s clients.
Of course, there is an additional charge of Strong and Bronson misrepresenting their trading and allocation practices in the firm’s Form ADV filings. The forms stated that all trades would be allocated in accordance with pre-trade allocation statements and that the firm did not favor any account, including those of the firm’s personnel. That does make me wonder if you could get away with cherry picking by stating that you could do so in Form ADV. But let’s not go down that path.
Bronson’s brother and the former chief compliance officer of Strong, John Engebretson, was also charged with failing to perform his compliance responsibilities and ignoring numerous “red flags” raised during the course of the fraudulent scheme. As a result, Engebretson was charged along with Bronson and Strong with violating the compliance requirements of the federal securities laws. Engebretson agreed to settle the charges against him. As part of the settlement, Engebretson agreed to be enjoined, pay a civil monetary penalty in the amount of $15,000, and to be barred from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization.
The SEC complaint alleges that as the chief compliance officer, John Engebretson aided and abetted the company’s violations by “carrying out his compliance responsibilities in an extremely reckless manner.”
The SEC Commissioners and senior Division of Examination staff have usually stated three circumstances that lead to CCO liability:
- when the CCO is affirmatively involved in misconduct;
- when the CCO engages in efforts to obstruct or mislead the Commission; or
- when the CCO exhibits “a wholesale failure to carry out his or her responsibilities”
I wish this standard was carried over to the Division of Enforcement. Instead, the enforcement attorneys state this
“Engebretson also aided and abetted [Strong]’s failure to implement compliance policies and procedures in several ways”
It doesn’t say that the CCO was affirmatively involved in misconduct. It doesn’t say that there was a “wholesale failure.” Please just stick with the standard. Say that “Engebretson exhibited a wholesale failure to carry out his or her responsibilities” in the complaint. Is that so hard? We can infer that the failure was wholesale. Later in the complaint, it uses “wholly abdicated his responsibilities.” So close.
Final judgement came out against Strong and Bronson recently and made me realize I never caught this story in 2018.