On June 29, 2015 the Securities and Exchange Commission announced fraud charges against Wisconsin-based investment advisory firm and owner Mark P. Welhouse of Welhouse and Associates Inc. The firm and owner are being charged with improperly allocating certain options trades that appreciated in value to personal and business accounts, while allocating other trades that depreciated in value to clients.
According to the SEC, the Enforcement Division has engaged in a “data-driven initiative to identify potentially fraudulent trade allocations known as ‘cherry-picking.’” Through this process the SEC Enforcement Division was able to find that Welhouse purchased options in a master account for Welhouse & Associates Inc. and put off allocating the funds into his clients’ accounts until later in the day to determine if the securities would appreciated in value. The SEC claims Welhouse gained about $442,319 in ill-gotten gains allocated to S&P 500 exchange-traded fund. On average, a personal trade made by Welhouse had “a first-day return of 6.28 percent while his clients’ trades in these options had an average first-day loss of 5.05 percent.”
The SEC conducted a statistical analysis to determine if Welhouse’s profits could have been sheer luck or coincidence, but “after running a simulation one million times, the staff concluded it could not.” This process came about because according to Julie M. Riewe, Co-Chief of the SEC Enforcement Division, “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.”