In the high-powered world of finance, it’s never surprising when a scandal is uncovered. But even I, a seasoned financial and legal professional, found myself raising an eyebrow at the recent SEC charges against investment advisors William “Bill” Carlton of Kirkland, Washington and Hans Hernandez of Hillsborough, New Jersey. Their purported choice of devious tactics leaves a bitter taste in the mouth – cherry-picking.
A Distasteful ‘Cherry-Picking’ Worth Over $6.3 million
The stories I have come across in my years of practice have certainly been varied. Yet, the case of these two gentlemen stands out for its blatant disregard for fiduciary duties. Reportedly, Carlton and Hernandez have been defrauding clients through separate but similar “cherry-picking” schemes. This operation has supposedly cost the investors more than $6.3 million in potential returns.
Established in late September 2024 by the SEC, the charges against the two depict a deliberate strategy to delay the allocation of trades. Aligning this with daily price movements, the advisors were allegedly able to secure the profitable trades for their personal accounts, leaving the unprofitable ones for their clients. As a result, Carlton generated about $5.3 million between 2015 to 2022, with Hernandez accruing over $1 million from 2020 to 2022.
Throwing this into sharper focus, it certainly serves as a stark reminder of the importance of transparency and thorough research when choosing a financial advisor to manage your investments.
The Advisors’ Backgrounds
To better understand the scale of the allegations, let’s delve a little into the background of the two advisors in question. Reportedly, their respective brokerage firms, Cetera Investment Advisers and First Allied Advisory Services, failed to adequately supervise their activities.
Despite the firms denying any wrongdoing, they agreed to a cease-and-desist order and a $200,000 fine. They immediately took action upon discovering the wrongdoings and have since terminated the advisors.
The Simple Words Behind Cherry-Picking and the FINRA Rule
As complex as the intricacies of financial jargon can be, the term “cherry-picking” in this context is actually quite simple. It refers to selectively assigning trades in a way that secures personal gains at the expense of clients, violating the fiduciary duty owed to those clients.
Cherry-picking exemplifies the unscrupulous manipulation of a financial advisor’s position for personal advantage. That’s why it’s strictly prohibited by the Investment Advisers Act of 1940 and regulated by FINRA rule. The rule stresses the obligation of firms to supervise advisor activities, ensuring they align with ethical and regulatory standards.
Consequences and Lessons Learned
As Warren Buffet wisely said, “It takes 20 years to build a reputation and five minutes to ruin it.” And indeed, the repercussions for these alleged infractions could be significant, particularly the SEC’s pursuit of permanent injunctions, disgorgement of profits, and civil penalties.
It remains a sobering financial fact that one in every 20 financial advisors has been involved in some sort of legal issue. But remember, it’s not all doom and gloom. The overwhelming majority of financial advisors act with their clients’ best interests at the forefront.
Final Thoughts
Perhaps the most crucial takeaway here is awareness and vigilance on the part of investors. The unfortunate reality teaches us to scrutinize our advisors, research their backgrounds and remain engaged in our financial affairs. Cherish your investments like you would a thriving garden – choose who tends your financial affairs wisely to ensure steady and fertile growth.
The case of Carlton and Hernandez, while unpleasant, serves as another reminder that transparency, honesty, and ethical dealings remain the cornerstone of solid financial planning and investment.