A former Cetera Financial advisor cherry-picked daily trades for his own benefit, netting about $5.3 million in “illicit” first-day profits, according to new charges from the SEC. The commission also charged another advisor with similar actions and settled charges with Cetera.
According to the commission, Kirkland, Wash.-based advisor William Carlton and Hillsborough, N.J. advisor Hans Hernandez conducted separate multi-year cherry-picking schemes that defrauded investors.
Carlton was originally affiliated with First Allied Advisory Services from July 2012 through November 2020 before joining Cetera until he was fired in late 2023 (First Allied was part of the same “corporate family” as Cetera, and it withdrew its SEC registration in late 2020; its advisors, including Carlton and Hernandez, became affiliated with Cetera).
Starting in 2015, Carlton began purchasing securities via a personal account co-held by him and his wife and an account called Carlton Wealth Management.
After doing so, Carlton would track the fluctuation of the security’s price throughout the trading day; if it increased, he’d sell it the same day and pocket the profits. But if the price fell, Carlton would often call his brokerage late in the day and tell them to allocate some or all of the failing trades to his clients’ accounts, keeping a minuscule portion of the unprofitable trades for himself.
“This process allowed Carlton to disproportionately reward himself with trades with positive first-day returns (i.e., trades that increased in price from the time of purchase to the time of sale or market close) and unload on unsuspecting clients trades with negative first-day returns (i.e., trades that decreased in price from the time of purchase to the time of sale or market close),” the SEC complaint read.
In all, Carlton’s approach led to $5.3 million in profits, while his clients suffered mostly unrealized losses totaling more than $6.4 million, according to the commission. His conduct allegedly continued after joining Cetera in 2020, but in September 2022 Cetera prohibited Carlton from placing trades in his own accounts and later allocating them to clients. Carlton’s first-day profits and his clients’ first-day losses disappeared immediately, according to the SEC.
Particularly, his client accounts had suffered first-day losses and negative first-day rates of return every month for more than seven years, but after Cetera stopped him from allocating trades, client accounts’ first-day results were positive for eight of the next 16 months, according to the commission.
Cetera fired Carlton in December 2023, but the firm (and First Allied) agreed to settle with the SEC for failing to “reasonably” supervise the two advisors’ actions, failing to implement policies designed to prevent such violations, and including misleading statements in their Forms ADV. Both firms agreed to a censure, cease-and-desist order and a penalty of $200,000.
According to a spokesperson, after Cetera learned about the issue, it “acted promptly” to end the activity, including ending both advisors’ affiliation with Cetera. The allegations against Hernandez parallel the Carlton charges.
“We have established processes in place to prevent any similar actions in the future,” the spokesperson said. “Cetera has fully cooperated with the SEC in this case and will continue to do so as the SEC pursues action against these individuals.”
Carlton and Hernandez could not be reached for comment prior to publication.
In the case of both advisors, the SEC is seeking permanent injunctions for the duo, as well as disgorgement with prejudgment interest and civil penalties.
