A Delaware-based investment advisory firm is facing fraud charges from the SEC over claims that its clients were defrauded in a nearly five-year cherry picking scheme that put more than $1 million in the owner’s pocket.
But the firm’s principal says she is ready to fight the allegations,
Marguerite Cassandra Toroian and Bell Rock Capital have been charged in the U.S. District Court for the Eastern District of Pennsylvania with violating sections of the Securities Exchange Act of 1934, the Securities Act of 1933 and the Investment Advisers Act of 1940.
The SEC complaint also charges Bell Rock with failing to adopt and implement adequate compliance policies in violation of the Investment Advisers Act. The regulator is seeking injunctive relief, disgorgement of Toroian's profits with prejudgment interest and civil penalties.
Court documents allege that from at least January 2011 through December 2015, Toroian traded securities in Bell Rock's master trading account and held off on allocating the securities to client accounts until after observing how the securities performed.
She then disproportionately allocated profitable trades to accounts that belonged to her and her family while allocating less profitable and losing trades to her client accounts, court documents allege.
The SEC complaint states that the securities that Toroian allocated to accounts that she and her loved ones controlled increased in value by more than 2%, or a gain of more than $1 million, between the time Toroian purchased them and when she allocated them. Meanwhile, the securities that Toroian allocated to her clients' accounts decreased in value by more than 1.3%, or a loss of over $1 million.
Toroian stands accused of misrepresenting information to clients when she told them that all trades would be allocated fairly and that Bell Rock would not put its interests before clients' interests.
During the time referred to in charging documents, Bell Rock had between 100 and 200 investor clients and managed between $175 million and $220 million in assets.
“Toroian never directed anyone else at Bell Rock to perform periodic reviews to ensure that no Bell Rock accounts were systematically disadvantaged through cherry picking during the relevant period,” court documents said. “Instead, Toroian and her designees only performed random ad hoc reviews of individual trades for consistency with Bell Rock’s investment strategy.”
Toroian told the independent community newspaper that if need be, she will fight this battle in court for years.
“I chose to not settle this situation with our regulator because I could see very clearly that they use bullying, threats, mental torture, whatever they can do, to settle with them and write them a check,” Toroian said in a statement to the Cape Gazette. “How do you agree to settle something when you did nothing wrong and you know it?”
Toroian said she has cooperated with the SEC by turning over hundreds of documents. But she told the Cape Gazette that the commission has not properly read all of those materials, nor has it given her company a proper audit. She said the SEC is supposed to do so every five years.
Toroian also called the SEC’s tactics “bizarre,” and she hopes a court case exposes them.
“I can fight and shed light on this because they do this kind of thing all the time,” Toroian told the newspaper. “No one oversees and holds them accountable, and as the years have gone on, it’s gotten worse and worse.”
University of Nevada, Las Vegas law professor Ben Edwards said this case highlights a number important topics regarding trust and enforcement in the industry.
He notes that over time, the SEC is gaining more analytic expertise and sophistication to detect wrongdoing, but its oversight resources remain somewhat limited.
“Only about 16% of registered investment advisors will be examined in any given year. If you compare that to the brokerage industry, about half of broker firms will be examined every year,” Edwards said. “So regulation and oversight has been much more principles-based and a lighter touch in the registered investment advisor space. But if the number of frauds increases, I would expect there to be calls for more intense oversight.”
Edwards, who is not involved in the Bell Rock case, adds that getting to the truth of the matter is important for the entire industry.
“This sort of enforcement activity is absolutely essential for maintaining trust in financial services,” he said. “So much of the industry really depends on people being able to have confidence in the advisors and in the institutions that they trust their savings to. Cases like this make people much less willing to work with financial advisors, so it's a threat to the entire industry.”
According to the
Her record includes three disclosures, two being related to the investigation and filing of the SEC’s cherry picking case.
The other is a $350,000 customer dispute from late 2020. In the entry’s broker comments, it states that Toroian “effectuated the customer desires consistent with its fiduciary obligations to work in the customer's best interests, including following the customer’s stated investment objectives and conducting an orderly liquidation of all positions.”
As a result, the customer suffered no losses, the entry states. The matter was then dismissed without prejudice in March 2021.
