Strong Investment Management Securities Enforcement Case: Warnings for the Owner, Reassurances for Clients

In the Strong Investment Management securities enforcement case, a settled judgment ordered the firm and its owner to return $960,656 over alleged cherry-picking of investment trades. The SEC alleged that the owner watched prices move before assigning profitable trades to himself and losing trades to clients. For someone entering allocations or reviewing trading records, the revealing moment is when a trade gets its account assignment: before anyone knows the result, or after the owner can see a profit.

The SEC’s complaint describes Strong as an investment adviser based in Yorba Linda, California, with about 65 clients. Citing the firm’s Form ADV, it reported more than $58 million in assets under management as of December 31, 2017. This page follows Strong’s allocation practices, the broker warnings and the assurances clients received. Our broader page on cherry-picking investment trades explains the pattern across advisers and brokers.

What Did the SEC Allege About Strong’s Trade Allocations?

The SEC alleged that Strong’s owner used the time between execution and allocation to choose which accounts would receive favorable trades. The complaint describes Strong’s discretionary management of client assets. It says the owner alone had authority to determine trades and allocations, though an assistant or the former chief compliance officer sometimes entered them at his direction.

The trading arrangement described in the complaint explains the opportunity. Strong used an omnibus account, through which an adviser can buy or sell securities for multiple clients without identifying each destination account to the broker in advance. An aggregated order, or block trade, can then be divided among client accounts at an average price. On the platforms Strong used, the adviser could enter account designations and share quantities manually after execution or upload a file containing them.

According to the complaint, the owner waited to see how a stock performed during the day. When its price rose after purchase, he disproportionately assigned the profitable trade to personal accounts, sometimes selling the shares that day to lock in the gain. When the price fell, he disproportionately assigned the trade to clients. The SEC alleged that the practice ran from at least January 2012 through about July 2016.

Some allocations allegedly waited for more than the regular trading day’s price movement. The complaint describes trades around earnings announcements, with the owner sometimes waiting until a post-close report had moved the stock’s after-hours price before choosing the accounts. It also alleges a sell-then-buy sequence: the owner sold through the omnibus account, bought the same security back after its price fell, and assigned both transactions to his personal account. The difference became his profit.

The SEC alleged that these choices made clients’ first-day losses look like the result of market forces. According to the complaint, clients could not see how the adviser allocated trades across accounts. An employee who knows when the destination was chosen sees a part of that loss the account statement cannot explain.

What Did the Account Comparisons Show?

The complaint’s account comparisons showed unfavorable first-day results concentrated in client accounts. At the first broker, 39 of the 50 trades with the worst first-day returns went solely to clients, while six went solely to the owner’s accounts. At the second broker, 35 of the 50 worst first-day trades went solely to clients and four solely to the owner.

According to the complaint, the first broker compared a personal account with a family-trust account over the same twelve-month period. The accounts traded many of the same securities, yet the owner’s personal account gained $205,788 while the trust account lost $638,421.

What Did Strong Tell Clients About Allocation?

The SEC’s complaint quotes Strong’s Form ADV promise not to favor its personnel’s accounts over client accounts. The SEC alleged that this assurance contradicted the owner’s trading practices. The complaint reproduces the firm’s words:

The disclosures reproduced in the complaint went beyond a general promise of fairness. Strong said accounts participating in an aggregated order would receive the average share price for its transactions in that security that day, per custodian. It also said the firm reviewed employee trades to ensure clients with the same account objective received an equal or better price. The SEC alleged that the owner instead assigned better-priced shares to personal accounts on occasions when clients received worse-priced shares, and that the promised reviews were not consistently performed.

The complaint also describes Strong’s promise that aggregated orders would follow a computer-generated pre-allocation. The SEC alleged that the owner generally allocated by intraday performance instead and prepared documents meant to make some decisions appear to have preceded execution. We see the absurdity in the SEC’s allegation: hindsight passed off as advance planning.

These disclosures mattered to the money Strong earned as an adviser. The complaint alleged that the misrepresentations enabled the firm and its owner to keep receiving advisory fees from clients who would not have entrusted their assets to Strong had they known the truth.

What Did the Broker and Compliance Records Reveal?

The complaint says the first broker’s risk department noticed day trades allocated entirely to the owner’s accounts and repeatedly challenged the practice. Broker representatives warned him at least three times in June 2013 that day trading in the omnibus account and allocating an entire block trade to a single account were unacceptable. He allegedly promised to stop, but another day trade went to his personal accounts the following month.

According to the complaint, the broker then reviewed trading activity and found what it regarded as a pattern of allocating according to stock performance. It ended Strong’s platform relationship because of the favorable allocations to the owner and his failure to heed its warnings. The owner allegedly gave clients a different explanation in a letter: the broker considered Strong’s assets under management too small. The warning was about his trades. The letter made it about the firm’s size.

The complaint describes another opportunity to address the conflict: the outside compliance consultant’s report. The consultant recommended reviewing whether employees’ short-term trading interfered with or created conflicts with client trading. In an email copied to the chief compliance officer, the consultant also told the owner to use and retain pre-allocation documentation for all block trades. The SEC alleged that the owner falsely replied that those statements had been created for every block trade. It also alleged that Strong took no steps to implement the consultant’s suggested conflict review or ensure the pre-allocation records were maintained.

The complaint describes the former chief compliance officer’s checks as superficial reviews of papers on the owner’s desk and in a trades folder a few times a quarter. It alleges that he learned about single-account allocations from the broker, recognized a warning sign, but assumed the transactions were isolated mistakes without investigating. When the broker ended the relationship, he allegedly accepted the owner’s explanation about the firm’s size without contacting the broker or adequately investigating its decision.

Who Was Named in the SEC Case?

The SEC named Strong Investment Management, its owner and its former chief compliance officer as defendants. The company and owner faced allegations about cherry-picking and misleading disclosures. The firm also faced a claim that it failed to implement its compliance policies, with the owner and former chief compliance officer accused of assisting that failure.

The complaint describes different responsibilities. The owner controlled trading, allocations and the firm’s disclosures, while the former chief compliance officer was responsible for monitoring whether the trading policies were followed. The complaint also describes a change in control: when the former chief compliance officer retired, the owner assumed that role too.

What Did the Strong Investment Management Judgment Require?

The SEC’s announcement of the settled final judgment reported a joint repayment obligation for Strong and its owner, called disgorgement. The court entered that judgment on August 21, 2019, in the Central District of California. The owner separately was ordered to pay a $184,767 civil penalty, while the former chief compliance officer’s separate settlement included a $15,000 civil penalty.

The SEC also reported that the owner agreed to a permanent bar from associating with securities firms, including brokers, dealers and investment advisers. The former chief compliance officer’s settlement included a bar from those roles as well. The court authorized the SEC to create a fund to distribute payments to victims.

What Evidence Shows Cherry-Picking at an Investment Adviser?

In a trade-allocation case like Strong’s, the useful securities fraud evidence connects an executed trade with its intended accounts, final recipients and the instructions behind any change. Platform allocation entries, pre-trade statements, account records, Forms ADV and broker communications can show different parts of that sequence. We work with insiders to connect what they know about the decisions to what those records show.

The SEC’s complaint shows why an insider’s account matters. It alleges that the owner could direct someone else to enter a trade or allocation, and the compliance officer could see a warning without investigating it. Someone who handled those instructions or reviews may be able to explain how a fair-allocation policy operated in practice. Our work with people considering reporting securities fraud to the SEC starts with that knowledge of the business.

Eligible SEC whistleblowers can receive 10% to 30% of qualifying sanctions collected when a qualifying action exceeds $1 million in monetary sanctions. We assess the evidence and the whistleblower opportunity with you, including the records that connect a trading pattern to the person making allocation decisions.

A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. That is a separate program for fraud against the government. Strong’s trade-allocation case was an SEC securities enforcement action.

You Know What Happened After the Warning

If you handled allocation changes, broker objections or compliance reviews that management brushed aside, speak to one of our Whistleblower Experts about what happened after the warning. We build your strongest securities whistleblower case around your knowledge of the trading decisions and bring in securities fraud whistleblower lawyers who understand allocation records and adviser disclosures. We stay with you as your partners through the pursuit of the case.