The SEC charged Strong Investment Management and owner Joseph Brian Bronson of Yorba Linda, California with defrauding customers from 2012 through 2016, utilizing an illicit discretionary trading scheme known as "cherry picking," through which the firm and Bronson purportedly favored certain accounts held by Bronson himself over other accounts held by firm clients, siphoning winning trades to the favored accounts while allocating losing trades to disfavored accounts.
The complaint alleges that Bronson and Strong Investment Management, along with the firm's chief compliance officer, John B Engebretson of Anaheim Hills, engaged in the fraudulent "cherry picking" scheme and reaped substantial profits from the fraud at clients' expense. The SEC also accused Bronson of violating fiduciary duties owed to clients, and Engebretson of recklessly and repeatedly ignoring red flags relating to the firm's inappropriate trade allocation practices.
As the SEC noted in its complaint, cherry-picking and allocating favorable trades to certain accounts (such as those owned by firm personnel) while allocating unfavorable trades to certain accounts (such as those owned by clients) is a fraudulent activity, not to mention its betrayal to an adviser's fiduciary duty to the client, that has the potential to harm customers whose accounts are selected to receive the "losing" trades or unfavorable allocations.
In Strong Investment Management's case, Bronson purportedly carried out the scheme by trading in the firm's omnibus account, delaying allocation of his trades until he could determine their performance.
According to the SEC, if the securities performed well, Bronson disproportionately allocated these profitable trades to one or more of his personal accounts, thus increasing the value of his personal accounts. For example, Bronson allegedly allocated favorable trades in Apple (AAPL) stock to a personal account, resulting in a $140.91 profit; similar favorable trades in CRM (Salesforce.com) earned Bronson's personal account an additional $2,605.
By contrast, if the securities performed poorly or the trades were unprofitable, Bronson allegedly allocated these "losing" trades to his clients' accounts, resulting in "significant losses" and negative returns. Bronson purportedly allocated losing AAPL trades to an unfavored trust account, resulting in a $390,000 loss; the corresponding negative CRM trades produced a $60,000 loss in the same unfavored trust account.
The documents indicate that Bronson's favored personal account enjoyed a 14.54% gain, while the unfavored trust account lost 13.58% of its value.
According to the firm's brochure, Strong's preferred custodians were TD Ameritrade and Union Bank of California.
A brief review of Bronson and Engebretson's histories indicates a previous cease-and-desist order and $150,000 penalty from the duo's time at preceding firm Engebretson Capital Management, Inc., and related to SEC findings that the firm distributed misleading advertising materials that overstated annual performance figures.
In fact, the SEC found that Bronson "changed his last name from 'Engebretson' to 'Bronson' at least in part because of that SEC enforcement proceeding against [Engebretson Capital Management]." Investigators determined that Bronson and Engebretson formed Strong Investment Management, in part, because their preceding firm had a "bad reputation" as a result of the aforementioned SEC enforcement proceeding.
The Bronson/Strong Investment Management complaint follows two 2017 SEC proceedings against Jeremy A Licht and his firm JL Capital Management of Sherman Oaks, California, and Gary Stanley Howarth's Howarth Financial Services of Oregon, in which the Commission alleged that both sets of defendants cherry-picked profitable trades for personal accounts and to the detriment of client accounts.
In the end, Licht agreed to a settlement order requiring payment of $278,289.34 in disgorgement and penalties, while Howarth agreed to pay $203,444. Both men also agreed to a permanent bar from the securities industry.
If you have invested with Joseph Brian Bronson's Strong Investment Management, or with any firm, broker, or financial adviser who has traded with Strong Investment Management or otherwise engaged in a fraudulent cherry-picking scheme through abusive discretionary practices that have proven harmful to your investments or interests, please call The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for an investigation and consultation.