Among recent enforcement actions taken by the SEC and FINRA were charges against a father and son, along with their Chicago-area advisory firm, for making undeclared trades and then cherry-picking the profitable ones for their own accounts, while assigning the unprofitable ones to clients; charges against the city of South Miami for defrauding investors on the tax-exempt status of municipal bonds; and censure and a hefty fine over misleading brochures.
Father and Son Charged by SEC for Cherry-Picking Trades
Father and son Charles J. Dushek and Charles S. Dushek, and their advisory firm, Lisle, Ill.-based Capital Management Associates (CMA), were charged with defrauding clients by cherry-picking stock trades so that the profitable ones went into the Dusheks' accounts while the losing trades went into client accounts. The scheme brought the Dusheks almost $2 million in illicit profits, which they spent on luxury homes, vehicles and vacations.
The Dusheks, says the SEC, were particularly successful in achieving positive returns—but only in their own accounts, since they waited anywhere from a day to several days to declare whether any given trade out of more than 13,500, for more than $350 million in securities purchases, turned a profit. If so, the Dusheks usually assigned the profitable trade to their own accounts; if not, the trade was usually consigned to the account of an unwitting client.
They kept up this charade for 17 consecutive quarters, not keeping any written records of trades in client funds or personal funds so that they could assign the successful trades to themselves and the losers to their clients, many of whom were senior citizens. They were so diligent about it that one of Dushek Sr.'s personal accounts gained some 25,000% from 2008–2011. His clients, on the other hand, mostly lost money.
Even though Dushek Sr. had no other source of income but the trades and his Social Security checks, he spent lavishly on his 6,500-square-foot luxury home, which boasted separate equestrian facilities, and on other goodies: a Mercedes Benz SL550 and other luxury vehicles, membership in a luxury vacation resort and vacations abroad. Dushek Jr. devoted his own illicit profits to payments for a boat slip and vacations to ski resorts and to Hawaii.
Even their brochures were deceptive, claiming that reports of the firm's proprietary trading activities were submitted to an associate for review, when there were no such reports and no review.
The Dusheks and their firm are charged with fraud, and the SEC seeks the return of ill-gotten gains with interest and additional penalties.
SEC Charges City of South Miami with Defrauding Investors
The city of South Miami, Fla., was charged by the SEC with defrauding investors concerning the tax-exempt financing eligibility of a mixed-use retail and parking structure being built in its downtown commercial district.
Originally, the city sought the financing to develop a public parking garage. To do this, it borrowed about $12 million in two pooled conduit bond offerings through the Florida Municipal Loan Council (FMLC).
However, over time the project turned into a mixed-use retail and public parking structure to be developed by a for-profit developer. The initial lease agreement with the developer specified that the city would be responsible for all construction costs except the retail portion and would retain full control over operation and maintenance of the garage segment as well as all parking revenues.
Limiting the developer's part in the arrangement was critical to qualifying for tax-exempt financing. IRS regulations specify that the project qualified for tax-exempt financing only if its use by the for-profit developer was kept to a minimum.
