A former Cetera Financial adviser picked day trades for his own benefit, making about $5.3 million in “illegal” first-day profits, according to new charges from the SEC. The commission also accused another adviser of similar actions and settled the charges with Cetera.
According to the commission, the Kirkland, Wash.-based consultant William Carlton and Hillsborough, NJ councilor Hans Hernandez conducted special multi-year cherry-picking schemes that defrauded investors.
Carlton was originally associated with First Allied Advisory Services from July 2012 to November 2020 before joining Cetera until he was fired in late 2023 (First Allied was part of the same “corporate family” as Cetera, and it withdrew its SEC filing in late 2020; its advisors, including Carlton and Hernandez, joined Cetera).
Beginning in 2015, Carlton began buying securities through a personal account jointly held by him and his wife and an account called Carlton Wealth Management.
After doing so, Carlton would track the paper's price swing throughout the trading day; if it went up, he would sell it the same day and pocket the profits. But if the price fell, Carlton would often call his broker late in the day and tell them to distribute some or all of the failed trades to his clients' accounts, keeping a small portion of the unprofitable trades for himself.
“This process allowed Carlton to be disproportionately rewarded with trades with positive first-day returns (ie, trades that increased in price from the time of purchase to the time of sale or market close) and to offload clients. that do not suspect with negative trading of the first day. reversals (ie, trades that decreased in price from the time of purchase to the time of sale or market close),” the SEC complaint said.
Overall, Carlton's approach led to $5.3 million in profits, while his clients suffered mostly unrealized losses totaling more than $6.4 million, according to the commission. His behavior allegedly continued after he joined Cetera in 2020, but in September 2022 Cetera banned Carlton from placing trades in his accounts and later distributing them to clients. Carlton's first-day gains and its clients' first-day losses were immediately wiped out, according to the SEC.
Notably, his clients' accounts had suffered first-day losses and negative first-day rates of return every month for more than seven years, but after Cetera stopped him from allocating trades, the results of his clients' day-to-day accounts the first were positive for eight of the others. 16 months, according to the commission.
Cetera sacked Carlton in December 2023, but the firm (and First Allies) agreed to settle with the SEC for failing to “reasonably” supervise the actions of the two advisers, for failing to implement policies designed to prevent such violations, and for including misleading statements on their Forms ADV. The two firms agreed to a cease and desist order and a $200,000 fine.
According to a spokesperson, after Cetera learned of the matter, it “acted immediately” to end the activity, including terminating both advisors' affiliation with Cetera. The charges against Hernandez parallel those of Carlton.
“We have established processes to prevent any similar actions in the future,” the spokesman said. “Cetera has cooperated fully with the SEC in this case and will continue to do so as the SEC pursues actions against these individuals.”
Carlton and Hernandez could not be reached for comment prior to publication.
In the case of both advisers, the SEC is seeking permanent injunctions against the pair, as well as removal with prejudice and civil penalties.