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First "Cherry-Picking" Charges Arise From SEC's Data-Driven Initiative

The Securities and Exchange Commission (“SEC”) has charged a Wisconsin-based investment advisory firm and its owner with “cherry-picking.” Mark P. Welhouse of Welhouse and Associates, Inc. (“Welhouse”) has been accused of placing more favorable trades in his personal and business accounts while allocating less favorable ones to his clients. This is the first case resulting from the SEC’s data-driven initiative.

The SEC’s Enforcement Division analyzed large volumes of Welhouse’s trade data and worked with economists in the Division of Economics and Risk Analysis to identify the alleged cherry-picking. Mr. Welhouse is accused of buying options in an S&P 500 exchange-traded fund called SPY in a master account and delaying trade allocation until later in the day so that he could evaluate which trades were profitable . Welhouse is alleged to have disproportionately allocated the more favorable trades to his business and personal accounts while allocating trades that had depreciated in value to client accounts. According to the SEC Mr. Welhouse acquired $442,319 in ill-gotten gains through his scheme.

Cherry-picking schemes can be extremely difficult to detect without an investor astutely noticing that something may be amiss and coming to us with a complaint about the adviser,” said Julie M. Riewe, Co-Chief of the SEC Enforcement Division’s Asset Management Unit. “We devised this initiative to identify specific custodians providing services to investment advisers and their clients and leverage their trading records and other data to efficiently target preferential trade allocations occurring outside the detection of even the most observant client.”

Please click here to read the entire SEC order instituting administrative proceedings against Welhouse and his firm.

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