SEC Announces Entry of Final Judgment Against President of Maplewood, New Jersey-Based Investment Adviser for Operating a Cherry-Picking Scheme
The Securities and Exchange Commission announced that on May 9, 2023, the U.S. District Court for the District of New Jersey entered a final judgment against Carl S. Schwartz, the president, co-owner and managing member of RRBB Asset Management, LLC.
The Commission's complaint, filed on September 10, 2020, alleged that from at least August 2016 through April 2017, RRBBAM and Schwartz engaged in a fraudulent trade allocation or "cherry-picking" scheme in breach of their fiduciary duties to their advisory clients. According to the complaint, Schwartz traded securities in RRBBAM's omnibus trading account and delayed allocating the securities to specific client accounts until he had observed the securities' performance over the course of the day. He allegedly then allocated favorable trades (i.e., trades that had a positive first day return) to accounts held by a new client, who was one of RRBBAM's largest and most lucrative clients in terms of assets under management, while disproportionately allocating a number of unfavorable trades (i.e., trades that had negative first day returns) to six accounts associated with two elderly widows, including a charitable foundation of which Schwartz was a trustee. The complaint alleged that through this scheme, RRBBAM and Schwartz earned substantial management fees and made misrepresentations in RRBBAM's brochures and other disclosures in which they claimed trades would be fairly and equitably allocated among all client accounts.
Without admitting or denying the allegations, Schwartz consented to the entry of a final judgment that permanently enjoined him from violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, Sections 17(a) of the Securities Act of 1933, and Sections 206(1), 206(2) and 207 of the Investment Advisers Act of 1940, and aiding and abetting violations of Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder. The final judgment also ordered Schwartz to pay disgorgement of $50,000.00, prejudgment interest of 13,754.13, and a civil penalty of $100,000.00. Pursuant to the stipulation of the parties, RRBBAM was dismissed from the action as it has ceased operations, has no assets, and has withdrawn its registration with the Commission as an investment adviser.
The SEC's investigation was conducted by Matthew Montgomery and supervised by Robert Conrrad, with assistance from Eugene Orlov and Raymond Wolff in the Division of Economic and Risk Analysis. The litigation was led by Donald Searles and supervised by Gary Leung, with assistance from Erin Smith and Eugene Canjels in the Division of Economic and Risk Analysis.
Read the original litigation release from the U.S. Securities and Exchange Commission here.Click Here to Follow SEC Alerts