A former advisor cherry-picked trades, favoring personal accounts held by himself and his wife to the detriment of clients, according to the Securities and Exchange Commission.
The commission charged Spartanburg, S.C.-based Eric Cobb with allegedly defrauding clients while he was a representative at SeaCrest Wealth Management, located in Purchase, N.Y. The SEC also settled charges against the firm.
“The enforcement action against SeaCrest demonstrates the importance of decentralized firms having robust compliance oversight with regard to employees who may be located elsewhere,” SEC New York Regional Office Associate Regional Director Sheldon Pollock said.
According to SEC records, Cobb first registered with Merrill Lynch in 1996, where he stayed for 11 years. Following a five-year stint at Morgan Stanley, he registered with Raymond James for nearly two years before he was fired in Feb. 2016 for “violation of firm policy and FINRA rules related to communications with the public.” He began working with SeaCrest shortly after that.
During his time at SeaCrest, Cobb used an aggregate or “block” account for clients to trade more than 86% of the approximately $55.3 million he invested in his accounts and client accounts, but he’d often wait one to two days following the b/d’s trade execution before allocating the trades from the aggregate account into client accounts.
“In this way, Cobb created for himself the opportunity to see whether the trades he placed were profitable or unprofitable, as of the time he allocated those trades between the Cobb accounts and client accounts,” the complaint read.
Cobb would then disproportionately assign profitable trades to his own account while placing less profitable trades in clients’ accounts, according to the commission.
Of the 194 trades Cobb allocated to accounts held by either himself or his wife, 147 were profitable at the time they were allocated (above 75%), while of the 5,537 trades allocated to client accounts, only 2,378 were profitable (about 43%). Cobb concentrated on leveraged ETFs and securities involving the precious metals and mining industries to allegedly boost his profits.
“The volatility of these securities maximized Cobb’s opportunity to grab quick profits between the time trades were executed and the delayed time he chose to allocate them between the Cobb accounts and the client accounts,” the complaint read.
According to the commission, the scheme netted him about $170,110 in profits. The SEC claimed Cobb was notified in May 2020 that the firm’s b/d and SeaCrest’s chief compliance officer were “concerned” he was cherry-picking trades because of his late allocations. Cobb significantly slowed down the scheme after becoming aware his trades were under scrutiny, according to the complaint.
According to the commission, the CCO confronted Cobb on May 4 by telephone about the b/d’s concerns, and Cobb denied that he was cherry-picking or “otherwise disfavoring” clients.
In a later letter, Cobb acknowledged he had delayed allocating trades but said he “never intentionally put any of my clients at a disadvantage.”
However, by 2022, SeaCrest decided to cut its ties and terminate Cobb’s association with the firm because of concerns that he was cherry-picking trades, according to the commission.
As part of the SEC’s investigation, the SEC went to court earlier this year to compel Cobb to comply with a subpoena, including producing documents and testimony. The commission is seeking a permanent injunction against Cobb and civil penalties.
The SEC’s settlement with SeaCrest found the firm “willfully violated” antifraud and recordkeeping provisions of securities laws while failing to supervise Cobb. The firm didn’t admit or deny the findings but agreed to pay $375,000 to settle the charges. Neither Cobb nor SeaCrest could be reached for comment prior to publication.
