A former California-based investment adviser is facing SEC charges that he defrauded his clients by placing options trades in a block trading account, then picking favorable returns for himself while placing losing bets on individual accounts of its customers. The scheme allegedly cost his clients more than $3 million.
The commission filed its lawsuit against 57-year-old James David Burleson in California federal court, alleging that his scheme operated for several years at his once-registered investment advisory firm, Burleson & Company.
According to the SEC complaintBurleson has worked with about 200 clients and $450 million in assets using brokerage accounts at Charles Schwab. According to the commission, the firm was registered in 2006 before completing its registration in 2023.
From August 2020 to October 2022, Burleson maintained an “omnibus” block trading account at Schwab, where he traded options for multiple clients at the same time before distributing them to individual accounts.
Burleson made over 750 options trades through that account before breaking them down into 32 individual accounts, the SEC said. According to the commission, one of them was his and two in the names of his children.
While Burleson made trades in the omnibus account, he often did not distribute them to individual clients until he saw intraday performance, the commission said. He waited until the markets were closed to allocate over 87% of the trades, the commission charged.
“If the option price increased between the time of the trade and the subsequent allocation, Burleson disproportionately allocated the trade to his personal account,” the complaint said. “However, if the option price decreased between the time of the trade and subsequent distribution, Burleson disproportionately distributed the trade to the defrauded clients' accounts.”
These late splits netted him a $1.8 million profit (a 26.5% return) while customers suffered more than $3.2 million in losses.
When Burleson traded directly in his individual account, however, his returns were at -5.8%. According to the commission, the chance that the non-compliance occurred by chance, rather than deliberate action, was “less than one in a million”.
In its Form ADV disclosure, Burleson maintained that allocations from the block trading account would be made in the “fairest manner possible.”
During the scheme, Burleson directed more than 90% of the trades in five accounts: his personal account and four others with over $1 million in assets. The high values of these accounts masked the losses customers had suffered from the alleged schemes.
According to the commission).
The scheme is “inherently deceptive,” according to the commission, because such cherry-picking is virtually impossible for customers to detect on their own. As early as March 2021, the missed returns raised a red flag at Schwab, and the firm contacted Burleson that month. He told Schwab that using the block trading account for his options trades was “easier,” but it wouldn't be “a big deal” to trade directly in his personal account going forward. Instead, he continued to use the omnibus account to his advantage, according to the complaint.
In October 2022, Schwab noted continued preferential treatment on the block trading account, contacted him again and by late November terminated his relationship, according to the complaint.
The SEC is asking the court to order Burleson to make restitution, pay civil penalties and be prohibited from participating in the purchase or sale of any securities except for his personal account, as well as any other penalties the court deems appropriate. reasonable to pronounce.
Burleson could not be reached for comment ahead of publication.