Friends And Family Options Fraud

February 19, 2014

On February 12, 2014, the Securities and Exchange Commission ("Commission") instituted public administrative and cease-and-desist proceedings against Ronald E. Huxtable II, 68, Palm Coast, FL, who, without admitting or denying the findings, submitted an Offer of Settlement, which the SEC accepted. In the Matter of Ronald E. Huxtable II, Respondent (OIP; '33 Act Release No. 9547; '34 Act Release No. 71537; Investment Advisers Act of 1940 Release No. 3777; Investment Company Act of 1940 Release No. 30918; Administrative Proc. File No. 3-15748 / February 12, 2014).

The Hand In The Glove

In December 2008, when Huxtable was a retiree, he met an investment adviser referred to in the Order Instituting Proceedings ("OIP") as Adviser A; and, by April 2009, Huxtable became a client participating in the adviser's options trading strategy. Huxtable's entered orders in his online brokerage accounts as directed by Adviser A, who was not registered with the SEC or any state securities regulator.

With Friends Like This

The OIP further alleges that in late 2009, Huxtable began recruiting friends and family members for the options trading program, and he personally commenced trading in their accounts at Adviser's A's direction. The OIP asserts that Clients A through G had been recruited by Huxtable and that he served as their primary point of contact with Adviser A, with the exception that Client C directly communicated with Adviser A. Adviser A purportedly exercised near complete control over client accounts by determining the trading strategy (which included selecting the options for trading and the timing thereof). 

A Matter of Fees

Adviser A charged management fees that were a percentage of a client's monthly realized profits; and Huxtable would invoice certain clients for management fees to be shared with Adviser A. The OIP asserted that in February 2011, Huxtable knew that he and Clients B, C, and H had sustained net realized losses.  Although no management fee should have been due from the clients based upon the losses, Adviser A concocted a ruse that generated what appeared to the clients to be earned fees. 

In an effort to generate unearned management fees for February 2011, a month in which there was a net realized loss, Adviser A decided to spread the month's losses over a span of five months.  Accordingly, the adviser charged only 1/5th of the realized losses for February against realized gains for that same month. By massaging the profits and losses in this fashion, Adviser A gave the fraudulent appearance that the clients had net realized profits for February 2011, thereby creating a false basis for invoicing his monthly management fee. Huxtable, Clients B, C and H paid Adviser A's invoices.

The OIP asserts that Huxtable sent Client B an email in which he claimed that she had "a great month in February," despite having actually sustained some $47,000 of realized losses. Additionally, Huxtable provided Client B with a document setting forth her month's transactions; however, 80% of the loss-generating positions were omitted from this document as part of the  five-month loss spreading scheme. 

The Settlement

The OIP asserted that Adviser A had violated the anti-fraud provisions of the federal securities laws by charging clients fees for the month of February 2011 based on false performance and concealing from them that they had actually incurred net realized losses that month.  Moreover, the OIP alleged that Huxtable had willfully aided and abetted and caused Adviser A's violations.  In accordance with the terms of the Settlement Offer, the SEC ordered that Huxtable cease and desist from further violations of securities laws and:
  • barred him from association with any broker, dealer, investment adviser,municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization; and 
  • prohibited from serving or acting as an employee, officer, director, member of an advisory board, investment adviser or depositor of, or principal underwriter for, a registered investment company or affiliated person of such investment adviser, depositor, or principal underwriter.
Further, Huxtable was ordered to disgorge $12,132.00, prejudgment interest of $952.01, and a $50,000 civil money penalty.