This story first ran in Financial Advisor IQ's sister publication, Ignites.

The Securities and Exchange Commission has filed a civil complaint against an investment advisor for allegedly cherry-picking client trades in highly leveraged ETFs and putting the better-performing trades into his own account.

Between January 2012 and June 2017, Scott Brander, a former representative at Buckman Advisory Group, allegedly allocated a disproportionally high level of profitable trades to himself and unprofitable trades to his advisor clients, according to the complaint filed Monday in the U.S. District Court of New Jersey.

Most of Brander’s cherry-picked assets were in highly leveraged ETFs, which fluctuate dramatically over each trading day, the complaint says. Court documents don’t state which highly leveraged ETFs were utilized in the trades.

“Even though prospectuses for these ETFs contained warnings about the risks of holding these investments, and even though all the disfavored clients stated in their account opening documents that they were seeking more conservative investments, Brander failed to perform any analysis to determine whether these ETFs were suitable for the disfavored clients’ stated investment objectives and risk tolerance,” the complaint says.

Brander used block trades at Buckman Advisory Group’s affiliated broker-dealer, Buckman, Buckman, & Reid, to place the client trades, the complaint states. Brander allocated 90% of trades with a positive performance to accounts held by him and his wife and put the rest in clients’ accounts. And 70% of negatively performing trades went to client accounts.

These allocations led to Brander’s accounts receiving first-day gains of 1.84%, while his clients suffered first-day losses of 3.24%, the complaint says. “The likelihood that Brander would have earned these returns for himself in the absence of cherry-picking, with trade allocations determined by chance, is less than one in a million,” the SEC said.

Brander failed to determine whether such trades of highly leveraged ETFs were suitable for clients, even though each of the harmed clients had indicated that they favorited a conservative investment approach, the SEC alleged.

As a result of his fraud, Brander received nearly $813,000 in ill-gotten gains, the complaint says. In addition to disgorgement, the SEC is seeking undisclosed penalties.

Brander has five securities violations, Finra’s Brokercheck database shows. They occurred between 1994 and 2000 and relate to customer complaints and violations of Utah state securities laws.

Buckman Advisory Group, Brander’s then-employer, was fined $400,000, the SEC said Tuesday. Its principal, Harry Buckman, Jr., was ordered to pay $75,000.

At the time of publication, the advisory group’s website was down for scheduled maintenance, it said. Buckman and Buckman, Buckman & Reed declined to comment.

Buckman allegedly failed to implement policies and procedures designed to prevent such cherry-picking schemes, such as reviewing Brander’s activities and requiring him to submit trade allocation data upon execution, says the SEC’s settlement with Buckman.

“Buckman allowed Brander to create portfolios for his clients that differed from the pre-approved portfolios that other [Buckman Advisory Group] investment adviser representatives were required to use and was on notice that Brander did not always allocate trades at the time orders were placed,” the settlement says.

The advisory group’s regulatory disclosures were also allegedly misleading because they inaccurately stated that the firm “generally seeks investment strategies that do not involve significant or unusual risk,” the settlement says, and that the firm will “document any transactions that could be construed as conflicts of interest and will always transact client business before their own.”

In addition, the SEC ordered Buckman Advisory Group to hire a compliance consultant to review the company’s policies and procedures related to suitability, trade allocation, employee monitoring and other related practices, the settlement says.

The SEC declined comment beyond the complaint and settlement.

This action likely relates to the agency’s focus on advisors that unsuitably recommend complex exchange-traded products, said Amy Lynch, president and founder of FrontLine Compliance.

In November 2020, the SEC announced that its enforcement division had launched an initiative designed to ensure complex products are being properly evaluated. The first batch of enforcement actions were filed against five firms that improperly sold volatility-linked exchange-traded products to retail investors.

Then, in 2021, the SEC fined UBS Financial Services $8.1 million to settle allegations that the firm had faulty policies and procedures that led to short-term, volatility-linked ETPs to be held longer than designed.

Such products are becoming more popular with hedge funds that are looking to trade shorted investments simply, Lynch said.

“Retail investors, generally, don’t need to be in these types of products, if they’re buying and holding of any type, which most retail investors are,” she added. “They’re so volatile, your timing has to be really well versed in order for these trades to work out well.”