Lexisnexis

LexisNexis Corporate & Securities Law Community 2011 Top 50 Blogs

Bon mots

"You can observe a lot just by watching." Yogi Berra

"We do not distain to borrow wit or wisdom from any man who is capable of lending us either." Henry Fielding, Tom Jones

"In our complex society the accountant's certificate and the lawyer's opinion can be instruments for inflicting pecuniary loss more potent than the chisel or the crowbar." United States v. Benjamin, 328 F.2d 854, 862 (2d Cir. 1964)

Bar Upheld For IA Enjoined for Cherry Picking

James C. Dawson, IA Act Rel. 3057, July 23, 2010

Time since appeal – 6 months 15 days
Time since last brief – 3 months 25 days

The ALJ barred Dawson from association with any investment adviser following an injunction based on anti-fraud violations. The Commission affirmed the bar order.

In 2009 the district court enjoined Dawson and ordered him to pay $300k disgorgement, $100k prejudgment interest, and a $100k penalty. Dawson was charged with "cherry picking" allocating profitable trades to himself and losing trades to his clients. He used the same account for personal trades and trades for his clients but did not allocate the trades until after the markets had closed. 98% of the trades he allocated to himself were profitable while only 52% of the trades allocated to clients were.

In affirming the bar the Commission characterized Dawson's violations as egregious. This is because investment advisers have "an affirmative duty of 'utmost good faith, and full and fair disclosure of all material facts,' as well as an affirmative obligation to 'employ reasonable care to avoid misleading' clients." Advisers also have "a duty to act 'in a manner consistent with the best interest of [their] client and ... not subrogate client interest for [their] own.'"

Dawson argued that he reduced the commissions he charged clients to compensate for the misallocation of trades. The Commission rejected this argument because the violations were egregious not because of the gain Dawson reaped, but the underlying deceitful nature of his conduct. The Commission discounted letters of support from some of Dawson's clients noting that it looks "beyond the interest of particular investors in assessing the need for sanctions, to the protection of investors generally."

It is clear that an anti-fraud injunction will in almost all circumstances form the basis for an outright bar. Clearly there is a presumption that a bar will be imposed by this Commission.