A Delray, Beach, Fla.-based investment advisor representative is being forced to pay $1.2 million in fines after settling charges with the Securities and Exchange Commission that he cherry-picked trades of certain highly-leveraged ETFs into his own accounts.
According to the SEC, Scott Adam Brander, who was previously an IAR for Buckman Advisory Group, a New Jersey-based RIA, made more than $800,000 in the scheme from 2012 to 2017. Brander worked for the firm form 2007 through 2021, and was also registered with the firm’s affiliated broker-dealer.
The SEC also settled charges against the firm and Henry Buckman, Brander’s former supervisor.
In the commission’s order filed in New Jersey federal court, the SEC claims Brander managed a number of advisory client accounts at Buckman on a discretionary basis, while also managing an account for himself and a joint account with his wife.
Starting in January 2012 and for the following five years, Brander would purchase securities in block trades for both his clients and his own accounts. But Brander would often fail to provide instructions on how all the block trade shares should be allocated into different accounts, sometimes waiting until several hours after the trades closed or even until the next day.
Brander would often make these trades with highly-leveraged ETFs, which often have significant price moves during a single day and are riskier than the typical ETF, according to the commission, which said the fund prospectuses warned investors of the danger.
But according to the SEC, Brander would often wait to give allocation instructions until he could determine which trades had been profitable, and would then direct unprofitable trades toward other clients and successful ones to his own accounts. During the time period in question, Brander allocated nine out of 10 trades with positive performance into his own accounts, and only allocated 30% of negative trades into his accounts.
But Brander allocated 70% of losing trades and only 10% of the winning trades into the accounts of his harmed clients, according to the SEC. It led to a situation where Brander’s accounts typically saw first-day gains, while his clients suffered more than 3.2% in average first-day losses. In total, Brander allegedly made $812,876.
“The likelihood that Brander would have earned these returns for himself in the absence of cherry picking, with trade allocations determined by chance, is less than one in a million,” according to the commission.
None of the affected clients had high risk tolerances, and all of them relayed in account documents that they preferred investments that carried a “moderate or conservative risk,” according to the commission. But Brander would allegedly allocate trades from leveraged ETFs that had suffered first-day losses to accounts that would hold those shares (sometimes for as long as several days).
Brander didn’t admit or deny the findings, but agreed to settle the charges by paying disgorgement of $812,876, prejudgment interest of $169,089.83 and a $200,000 penalty. The commission’s settled charges with Buckman and his firm were based on their alleged failures to have policies in place that would’ve prevented Brander’s alleged actions.
Representatives for Brander did not respond to requests to comment.
Regulators have often expressed concern about the dangers of complex products, including leveraged ETFs. The Financial Industry Regulatory Authority also proposed new rules on the sale of “complex products and options,” which could include leveraged and inverse ETFs.
Earlier this year, SEC Commissioner Caroline Crenshaw said that the particular features of leveraged, inverse and (especially) single-stock ETFs could make it “challenging” for an advisor to recommend such a product to a retail investor while fulfilling fiduciary or Regulation Best Interest obligations. Even as far back as 2009, SEC regulators were warning of the dangers when holding leveraged ETFs for longer than a single day.
