Fine Amount: $375,000
Date: 12 December 2024
Violation Period: June 2019 to mid-April 2022
Primary Violation: Cherry Picking
The SEC has charged Eric Cobb, a South Carolina-based investment adviser representative, with operating a fraudulent cherry-picking scheme while working at SeaCrest Wealth Management.
The scheme involved allocating profitable trades to favored accounts (including his own and his wife's) while directing unprofitable trades to other client accounts.
Separately, SeaCrest Wealth Management agreed to pay a $375,000 penalty for failing to implement adequate supervisory controls and procedures.
Trade Execution Method:
Cobb placed trades in an omnibus account.
Deliberately delayed trade allocations, often waiting a day or longer.
Used the delay to observe price movements before making allocation decisions.
Allocation Pattern:
Profitable trades were disproportionately allocated to Cobb's personal and wife's accounts.
Unprofitable trades were systematically directed to other client accounts.
Examples:
Initial Purchase: 3,500 shares at $84.94.
Waiting Period: Until January 3, 2019.
Price Movement: Declined to $81.46.
Final Allocation: 100% to client accounts, zero to Cobb accounts.
Client Loss: Approximately $12,180 total.
February 21, 2020 TVIX Trade
Initial Purchase: 500 shares at $45.45.
Waiting Period: Until February 24, 2020.
Price Movement: Increased to $60.06 (32% gain).
Final Allocation: 100% to Cobb's personal account.
Cobb's Profit: Approximately $7,305.
March 12, 2020 JNUG Trade
Initial Purchase: 1,500 shares at $23.27.
Partial Same-Day Sale: 125 shares at $65.52 (181% gain).
Delayed Allocation: Until March 13, 2020.
Price Movement: Declined to $9.89.
Allocation Pattern:
Profitable same-day trades: To Cobb's accounts.
Losing positions: To client accounts.
Client Losses: Approximately $18,398.
Cobb's Profits: Approximately $5,281.
The pattern of favoritism is clearly demonstrated in the success rates:
Cobb's Personal Accounts:
Success rate: 75% of allocated trades were profitable.
Dollar-weighted win rate: Above 90% for block account trades.
Average ROI: 7.46%.
Client Accounts:
Success rate: 43% of allocated trades were profitable.
Dollar-weighted win rate: Approximately 42%.
Average ROI: -0.22%.
Investment Suitability Issues:
Placed clients in highly volatile and risky investments.
These investments were inconsistent with clients' investment profiles.
Demonstrated systematic disregard for client investment objectives.
Examples:
Client A (Paralyzed School Teacher):
Investment: $264,000 from injury settlement.
Exposure to leveraged ETFs: 37% of the portfolio.
Losses: Over $27,800.
Risk Profile: Conservative, needed funds for medical expenses.
Client B (Retired Teacher):
Initial Investment: Approximately $1,008,000.
Leveraged ETF exposure: 42-45% across accounts.
Losses: $153,000.
Risk Profile: Moderate, retirement-focused.
Client C (Divorce Settlement Client):
Initial Investment: $400,000
Leveraged ETF exposure: 27-35%
Losses: Over $65,000
Risk Profile: Conservative, needed capital preservation
For SeaCrest Wealth Management:
$375,000 civil monetary penalty.
Censure.
No admission or denial of findings.
For Eric Cobb (pending court decision):
Permanent injunction sought.
Conduct-based injunction sought.
Civil monetary penalties sought.
Disgorgement of profits sought.
Prejudgment interest sought.
"The enforcement action against SeaCrest demonstrates the importance of decentralized firms having robust compliance oversight with regard to employees who may be located elsewhere." - Sheldon L. Pollock, Associate Regional Director, SEC New York Regional Office
"We will use all the tools at our disposal to hold individuals accountable, including asking Courts to enforce our subpoenas, as we did in this case." - Sheldon L. Pollock
"[SeaCrest] failed to implement policies and procedures reasonably designed to prevent violations of the federal securities laws and failed to supervise Cobb's activities." - SEC Order