Over the past several years, there has be an increasing number of registered investment advisors and financial advisors using omnibus accounts. In short, an omnibus account allows an advisor to trade the same securities on behalf of multiple clients, while typically identifying in advance which trades are intended for which client accounts. However, in some cases, trades are allocated after they are made. This creates an increased risk of fraud since some firms’ supervisory failures have allowed advisors to “cherry-pick” which accounts get the winning trades, and which accounts suffer losses. The securities fraud lawyers at Rich, Intelisano & Katz, LLP (RIK) won multiple claims against broker-dealers for allowing third parties to engage in this misconduct.
An omnibus account is intended to facilitate large purchase blocks of securities for multiple client accounts. The idea of aggregating or bunching purchases in a single transaction is to obtain more favorable prices, lower brokerage commissions, and create more efficient execution. After the trades are made, the advisor is supposed to allocate the trades to client accounts in accordance with the previously approved allocations. The allocations of trades then should be reviewed by compliance and/or risk management periodically to ensure that accounts are not systematically disadvantaged by this policy.
Unfortunately, some advisors use this policy to scam their clients. Sometimes allocation instructions are submitted after trades are executed, when the adviser has had the opportunity to view the performance of the trade over the course of the day. By reviewing trade performance first, the advisor knows which trades are profitable and which are unprofitable, then can “cherry-pick” – that is to allocate the profitable trades to favored accounts and allocate losing trades to other disfavored accounts.
In a recent case, this cherry-picking scam is exactly what Corbin Lambert is accused of. See https://www.sec.gov/litigation/litreleases/2020/lr24925.htm. The complaint alleges that Lambert bought block purchases in the form of options but delayed allocation until after he had observed the securities’ price movement during the rest of the day. With the benefit of this knowledge, Lambert disproportionately allocated winning trades to his personal account, while at the same time disproportionately allocating losing trades to his clients’ accounts.
Partners John Rich and Ross Intelisano won a $43 million collected arbitration award against Refco at the National Futures Association (NFA) related to a trade allocation scheme run by Jay Goldinger in Los Angeles. At the time, it was the largest collected arbitration award ever recovered by retail investors.
Investors should be aware of the increased risk of fraud for advisors that have control over omnibus accounts. Our firm has extensive experience recovering losses for investors who have suffered from fraud associated omnibus accounts. If you have any questions regarding losses where the adviser controls an omnibus account, feel free to contact us.