SEC's Data-Driven Analysis Identifies Allegedly Improper Trade Allocations By Investment Advisor

Relying on a data-driven statistical analysis conducted by the Division of Economic and Risk Analysis (DERA), the SEC recently commenced administrative proceedings against an investment advisor, Welhouse & Associates, Inc., and its principal, charging them with improperly allocating profitable options trades to the principal's own accounts while allocating unprofitable trades to the firm's clients. The SEC's announcement states that it is the first enforcement proceeding arising from the Commission's recent initiative to use statistical analyses "to identify potentially fraudulent trade allocations known as 'cherry-picking.'"

The Order initiating proceedings states that DERA analyzed the firm's allocation of options trades over 35 months, from February 2010 to January 2013. During this time, the SEC alleges that options trades were typically executed through a master account at the firm's broker, and allocated later in the day to either the principal's accounts