The SEC has alleged that Delaware investment advisor Cassandra Toroian, along with her firm Bell Rock Capital, over a period of five years engaged in a cherry picking scheme that manipulated which clients made short-term profits on trades.
The SEC outlined five claims of fraud or fraud-related behavior and said it’s seeking a permanent ban for Toroian and Bell Rock, disgorgement of all gains, prejudgment interest and civil penalties in a jury trial.
When contacted for comment, Toroian said she could have settled with the agency, but didn’t because the accusations are untrue and she intends to fight the case.
In a prepared statement, Toroian stated the SEC is “basing its claims entirely on a statistical research method that is unfounded, focusing on arbitrary numbers and data.”
“The SEC’s complaint may be long on words, but it lacks any real evidence to support its weak allegations,” she wrote.
Rehoboth Beach, Del.-based Bell Rock is an investment advisory firm founded by Toroian in 2006 that caters to individuals and high-net-worth individuals while also providing some services to pensions, according to the firm latest ADV filing. At the time of that filing it had almost $240 million in assets under management among roughly 385 clients. The firm’s website states that its investment strategy centers on picking individual securities, does not use mutual funds or preset model portfolios, and focuses on long-term buy-and-hold strategies.
The SEC’s complaint, filed in U.S. District Court, Eastern District of Pennsylvania, said that Toroian, who during the relevant period was her firm’s sole owner, managing member, president, chief investment officer and chief compliance officer, traded for herself and her family alongside her clients, often using Bell Rock’s master trading account.
According to the complaint, there are benefits to using a master trading account, in which an advisor can buy and sell securities for multiple accounts without having to identify a specific account to the broker in advance. One benefit is all the accounts end up paying the same price, since the securities are purchased at a single moment in a block and allocated later. Another is it can reduce some fees and costs, such as when the advisor executes one large trade instead of several smaller ones each with its own fees.
“However, investment advisors can abuse master trading accounts, including by waiting to see how a security purchased through the master trading account performs during the trading day before deciding how to allocate it,” the complaint said. “’Cherry-picking’ occurs when an investment advisor unfairly allocates securities that have performed well to favored accounts and/or allocates securities that have performed poorly to disfavored accounts.”
Between January 2011 and the end of December 2015, when making block trades in Bell Rock’s master trading account, Toroian allegedly often allocated the day’s best performing stocks to the accounts owned by herself and her family while allocating the day’s worst performing stocks to the accounts owned by other clients.