The Securities and Exchange Commission (SEC) is investigating allegations that Noah L. Myers, the principal of Centerbrook-based MiddleCove Capital LLC, engaged in a fraudulent trading practice known as "cherry picking."
Myers, who according to court documents lives in Old Lyme but who also owns a home in Lyme, is accused of allocating trades that had appreciated in value during the day to his personal and business accounts and allocating trades that had depreciated in value during the day to his clients' accounts.
According to the SEC, Myers used an omnibus account or "master account" at Charles Schwab & Company Inc. to mask his trading activities.
The SEC reports Myers did this from October 2008 and February 2011, and only stopped when one of his employees, alerted to the trading pattern by Charles Schwab which has an internal program that flagged Myers' account, reviewed the trades and threatened to blow the whistle.
"As a result of his fraud, Myers realized ill-gotten gains of approximately $460,000," the SEC reported in a press release issued August 22. "Myers’s cherry-picking scheme also resulted in more than $2 million in client losses from his trading."
According to the SEC, Myers' day-trading practices unknowingly exposed some of his elderly clients to much greater risk than they were prepared for, and resulted in significant losses for some who had invested their entire retirement accounts with him.
When the SEC staff interviewed Myers in November 2011 about his own securities trading, he admitted his day-trading strategy in one of his personal accounts was profitable about 95 percent of the time.
In the legal "cease and desist" order the SEC issued against Myers on August 22, (see PDF attached to this story) the Securities Commission notes, "He did not offer a plausible explanation for his stellar day-trading performance."
The SEC plans to schedule a hearing on the matter to determine whether the allegations are true and, if they are, it will determine what sanctions may be required.
Read on for the full Press Release issued by the SEC
On August 22, 2012, the Commission issued an Order Instituting Administrative and Cease-and-Desist Proceedings Pursuant to Sections 15(b) and 21C of the Securities Exchange Act of 1934, Sections 203(e), 203(f) and 203(k) of the Investment Advisers Act of 1940, and Section 9(b) of the Investment Company Act of 1940 (the Order) against MiddleCove Capital, LLC (MiddleCove), an investment adviser registered with the Commission, and Noah L. Myers (Myers), the principal of MiddleCove.
The Division of Enforcement alleges that from approximately October 2008 to February 2011, Myers engaged in fraudulent trade allocation – “cherry-picking” – at MiddleCove. Myers executed his cherry-picking scheme by unfairly allocating trades that had appreciated in value during the course of the day to his personal and business accounts and allocating trades that had depreciated in value during the day to the accounts of his advisory clients. Myers did this by purchasing securities in an omnibus account and delaying allocation of the purchases until later in the day (and sometimes the next day), after he saw whether the securities appreciated in value. When a security appreciated in value on the day of purchase, Myers would often sell the security and disproportionately allocate the purchase and the realized day-trading profit to his own accounts or accounts benefiting himself or his family members. In contrast, for securities that did not appreciate on the day of purchase, Myers would disproportionately allocate these purchases to his clients’ accounts and his clients would hold the position for more than one day.
Myers carried out his cherry-picking scheme with regard to several securities, but was most active with an inverse and leveraged exchange traded fund (ETF). Myers finally ceased these practices in February 2011 when one of his employees threatened to contact the Commission. As a result of his fraud, Myers realized ill-gotten gains of approximately $460,000. Myers’s cherry-picking scheme also resulted in more than $2 million in client losses from his trading in the inverse and leveraged ETF. Neither MiddleCove nor Myers disclosed to clients that they were engaged in cherry-picking and that they would favor Myers’s accounts in the allocation of appreciated securities. In addition, Myers and MiddleCove failed to follow the policies stated in MiddleCove’s ADV concerning trade allocation.
A hearing will be scheduled before an administrative law judge to determine whether the allegations contained in the Order are true, to provide the Respondents an opportunity to dispute these allegations, and to determine what, if any, remedial sanctions are appropriate and in the public interest. The Order requires the Administrative Law Judge to issue an initial decision no later than 300 days from the date of service of this Order, pursuant to Rule 360(a)(2) of the Commission's Rules of Practice. (Rels. 34-67709; IA-3448; IC-30179; File No. 3-14493)