On Jun 17th, 2021, the Securities and Exchange Commission (“SEC”) charged Ramiro Jose Sugranes, a licensed financial adviser who had been in the financial market for over twenty years, for fraudulent cherry-picking.
What Is Cherry Picking?
According to Investopedia cherry picking is the process of choosing investments and trades by following other investors and institutions that are considered reliable and successful over the long term.
Sugranes and two financial entities he controlled (“UCB entities”) unfairly allocated the profit and loss for their clients, disproportionately benefiting two “preferred accounts” over $4.6 million at the cost of the rest of the clients. The SEC seeks an emergent asset freeze, disgorgement of the ill-gotten interest with interest, and permanent injunction against the defendants.
The SEC claimed in the complaint that the defendant executed trades on behalf of their clients through a single shared account. A shared account, when properly used, allows an investment adviser to allocate the same average price to their clients trading the same stock. UCB entities usually conducted their clients’ trades on a single-day basis, primarily on the volatility of the traded stocks. And so, the defendants were supposed to aggregate the executions into a single average price so that every client got a portion of the trade at the same price.
Surganes’s betrayed his fiduciary duties to his clients when he intentionally misallocated the benefit the entire Share Account generate to two preferred accounts owned by Surganes’s close relatives, Ramiro Sugranes Hernandez and Thelma Lanzas de Sugranes (the “relief defendants”). Specifically, if a trade generates profit, the profit would be direct to a preferred account, while a losing trade would be attributed to a non-preferred account. It is also noticeable that Surganes instructed the account summary of the two preferred accounts to be sent to the address of the UCB entities he controlled.
Surganes’ startling manipulation of the Share Account was unfortunately successful and consequential. From 2015 to the present, preferred accounts received over $3.9 million of first-day profit from 1600 allocations of trading of stocks. In contrast, the non-preferred account bore over $4.6 million loss in over 1400 allocations. Surganes also traded stock options, and 92% of the 400 trades carried through preferred accounts are profitable and generated over $690,000, while 43% of 1,100 non-preferred accounts made a profit, and the net loss accumulated approximately $920,000. In general, Surganes’ partiality toward the preferred account gave them an average first-day profit rate of 0.57%, 17 times higher than that of the market.
Joseph G. Sansone of the SEC said, “We allege that Sugranes used the UCB investment firms to funnel millions of dollars to two clients, while unloading over $5 million in first-day losses on their other clients”. He also said, “SEC uses sophisticated analytical tools to ferret out investment professionals who abuse their positions to engage in cherry-picking and other fraudulent conduct, as we allege happened here.”
An investment adviser like defendants owed a fiduciary duty to their clients. They owe an affirmative duty of utmost good faith and prioritize their clients’ interests and provide them with necessary and accurate information. However, the defendants of this case consciously sacrificed their clients’ interests and concealed this material fact from the clients, knowing a reasonable investor would not give his money to the defendants should he know about their dishonest behaviors. Consequently, the defendants willfully violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Section 206 of the Investment Advisers Act.
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