Connecticut Investment Adviser Admits Defrauding Clients Through Cherry-Picking Scheme
Deirdre M. Daly, United States Attorney for the District of Connecticut, and Patricia M. Ferrick, Special Agent in Charge of the New Haven Division of the Federal Bureau of Investigation, today announced that NOAH L. MYERS, 43, of Lyme, waived his right to indictment and pleaded guilty yesterday before U.S. District Judge Stefan R. Underhill in Bridgeport to defrauding investment clients in a “cherry-picking” securities scheme.
“Investors place an extraordinary amount of trust in their investment advisors, and we will always protect their right to the fair and ethical management of their savings,” stated U.S. Attorney Daly. “Investment advisors who breach their clients’ trust in violation of federal securities laws will be prosecuted and risk losing both their freedom and their ill-gotten gains. We thank the FBI and the SEC for their diligent work in uncovering this cherry-picking scheme.”
“Noah Myers put his financial self-interest ahead of that of his clients,” stated FBI Special Agent in Charge Ferrick. “This conduct undermines the confidence of the American public in our securities markets. The FBI and the U.S. Attorney’s Office, along with our law enforcement partners, will continue to vigorously investigate and prosecute these crimes.”
“Cherry-picking” is a fraudulent securities trading practice in which the responsible individual executes trades without assigning those trades to a particular trading account until the individual determines whether or not the trade has become profitable or suffered losses. The responsible individual then allocates the profitable trades to favored accounts—often the individual’s own account—and assigns unprofitable trades to disfavored client accounts.
According to court documents and statements made in court, MYERS was the sole owner of MiddleCove Capital, LLC (“MiddleCove”), a Connecticut limited liability company with its principal place of business in the Centerbrook section of Essex. MiddleCove had been registered with the U.S. Securities and Exchange Commission (“SEC”) as an investment adviser since 2008, and MYERS was the portfolio manager and managed a number of client accounts with assets of approximately $129 million. MiddleCove used Charles Schwab & Co., Inc. (“Schwab”) to trade securities and as the custodian of the investments held in client accounts. As part of the trading arrangement with Schwab, MYERS was permitted to place block purchases and sales of securities through a master account with Schwab and then, later in the day, allocate the purchases and sales to various accounts, including his personal accounts and various client accounts, all held by Schwab.
Between April 2009 and November 2010, MYERS engaged in “cherry-picking” at MiddleCove by purchasing the leveraged exchange traded fund (ETF) ProShares UltraShort Financials, otherwise known by its ticker symbol “SKF,” as well as other securities. MYERS then disproportionately allocated trades that had appreciated in value during the course of the day to his personal and business accounts and allocated trades that had depreciated in value during the day to the accounts of his advisory clients. As a result, MYERS gained as his clients suffered commensurate trading losses.
For example, in August 2009, on the nine days when MYERS purchased SKF in block trades in the master account and the security was sold as a day trade, MYERS allocated between 9 percent and 32 percent of the profitable block trades to his personal accounts. On three of those days he allocated between 27 percent and 31 percent of the profitable day trades to his personal accounts.
In addition, on September 2, 2009, MYERS purchased SKF in a block trade in the master account and, after the investment increased in value, sold the shares in a day trade and allocated more than 31 percent of the investment to his personal accounts. In sharp contrast, MYERS undertook four additional block purchases in the master account of SKF on September 3, 4, 16 and 28, 2009. On each of these days, when the SKF investment declined in value by the close of trading, MYERS allocated no more than 5 percent of the block trade to his personal accounts and instead allocated the remaining 95 percent of the shares to his clients’ accounts.
In filings with the SEC in April 2009 and March 2010, MYERS and MiddleCove represented that batched trades would be allocated fairly and not unduly favor MYERS or MiddleCove.
MYERS pleaded guilty to one count of security fraud, which carries a maximum term of imprisonment of 20 years and a fine of up to $5 million. Judge Underhill scheduled sentencing for January 12, 2015.
The SEC has revoked the registration of MiddleCove as an investment adviser and barred MYERS from the securities industry.
This matter has been investigated by the Federal Bureau of Investigation with the assistance of the U.S. Securities and Exchange Commission. The case is being prosecuted by Assistant U.S. Attorney Christopher W. Schmeisser.
Citizens are encouraged to report any financial fraud schemes by calling, toll free, 855-236-9740, or by sending an e-mail to firstname.lastname@example.org.