Investment Manager Without Ethics Policy Acted Unethically

Peter Eichler and his firm Aletheia Research and Management seem to have had a good run; Aletheia managed $10 billion and per DealBook “Mr. Eichler’s stellar investment performance attracted the likes of Goldman Sachs and Morgan Stanley, which entrusted him with millions of dollars of their clients’ money.” But now that Aletheia is in bankruptcy everyone’s a critic, and the latest SEC’s complaint makes Aletheia out to be a garden-variety bucket shop with no evident investing abilities.

The SEC’s main complaint here is that Eichler, the sole and unsupervised options trader – and, apparently, everything trader – at the firm, made lots of options trades that he didn’t allocate for an hour or more after making them. Winning trades were allocated to his personal accounts or those of his friends and employees; losing trades were allocated to the accounts of two in-house hedge funds. There were varying degrees of blatancy here, with the worst being 463 trades allocated after the positions were closed, which returned 11% to favored customers, 17% to Aletheia insiders (including 19% to Eichler’s personal account), and negative 1.7% to the in-house hedge funds. The overall result, across all categories of blatancy, was:

Between mid-August 2009 and the end of November 2011, the Favored Aletheia-Related Accounts and Favored Custom Accounts obtained about $4.14 million in profit on option trades allocated more than one hour after execution, or allocated after the position was closed out (including roughly $2 million in trading profits to Eichler himself), while the Disfavored Hedge Funds lost $4.4 million on late-allocated or “perfect information” trades.

So one thing to notice there is that the net profits, firm-wide, on these option trades were negative $260,000-ish, which, I mean, which would anger you more in a manager, (1) allocating you his worst trades or (2) being a money-loser in the aggregate?

What’s going on here? The SEC might be, um, cherry-picking, in talking about a few million dollars worth of net-unprofitable options trades over three years by a $10 billion, 15-year-old, often-high-performing-then-later-not-so-much investment advisor. This theory would be supported by the second part of the complaint – that Aletheia didn’t warn investors explicitly enough about its precarious financial condition – which is vague and sort of churlish; it’s harsh to get mad at people because they didn’t run around boasting about an impending bankruptcy.1

On the other hand if you don’t trust the SEC you could trust the market:

At the end of 2008, shortly before the start of the fraudulent options trading alleged herein, the Insider I Fund had net assets of $35.9 million and the Insider II Fund had net assets of $75.6 million. By July 1, 2012, due to subsequent investor redemptions and trading losses – including those sustained as a result of the cherry-picking scheme alleged herein – the Insider Fund I had only $1.3 million in net assets and the Insider II Fund had only $1.4 million in assets.

Speaking of cherry-picking, doesn’t it seem like the SEC brings a disproportionate number of customer-screwing complaints2 against investment managers who are already pretty much kaput? This makes a sort of sense – the kaput managers are the ones who’ve done the most damage – but of course preventing the damage would make even more sense. Here’s the complaint again:

Aletheia had no polices or procedures to ensure that Eichler allocated options trades at or near the time of trade execution, or that Eichler was not disproportionately allocating profitable options trades to favored accounts of clients or himself, while at the same time disproportionately allocating less profitable or unprofitable options trades to disfavored client accounts.

So … that seems like an oversight no? And not just on Aletheia’s part. Aletheia has been around since 1997,3 and the SEC examines investment advisors every 2-4 years; shouldn’t someone have suggested that they put some policies in place?

Actually, the SEC sort of did:

[The SEC] found that Aletheia, in seeking new business, failed to disclose in 10 RFP responses that it had received deficiency letters from the SEC regarding its failure to show it had most employees sign ethics forms. The [SEC] says Aletheia also failed to make or keep the employee ethics statements despite two SEC deficiency letters in 2005 and 2008.

I think that what that says is that the SEC kept telling Aletheia to put some “don’t screw customers” policies in place, and Aletheia pretty much ignored them.

It’s generally easy to sniff at SEC requirements that you sign ethics statements or put policies in place. Ethics can’t be imposed by signature, and if you want to screw customers, you can just violate the policies. (Especially if you’re the mostly unsupervised CEO.) But! Here it might have helped. You get some paperwork, some policies, some signatures on the ethics forms, and maybe some assistant booking Eichler’s trades says on, say, the 400th trade allocated after the position was closed, “um, Pete, shouldn’t we be allocating these trades to accounts when we open them?”

To its credit, the SEC seems to have tried for years to get Aletheia to do things that might have prevented a customer-screwing that seems to have occurred. It’s just harder to get anyone to take you seriously when you’re going after a successful money manager than when you’re going after one who’s already blown up.

SEC v. Aletheia Research and Management [SEC complaint]
S.E.C. Says Asset Firm Manipulated Trades to Enrich Some Clients [DealBook]

1. Honestly it’s pretty lame stuff. E.g.:

Aletheia’s November 9, 2012 Form ADV, Part 2A brochure further stated that Aletheia intended to file for bankruptcy to protect itself from costly litigation, to raise additional capital, and to assist in the resolution of Aletheia’s tax and corporate status issues. But Aletheia’s November 9, 2012 Form ADV did not, however, provide a complete account of Aletheia’s precarious financial condition. For example, the November 9, 2012 Form ADV failed to disclose that Aletheia was behind in its payments to its business creditors.

I mean … telling your investors you are planning to file for bankruptcy is not sufficiently clear disclosure that you are in financial trouble? “Well, I knew they were filing for bankruptcy, but not that they were behind on payments to business creditors.”

2. As opposed to insider trading, which targets the wee and the mighty alike.

3. Ooh incidentally this is gonna bother me all day:

Named after the Greek word for “truth and disclosure,” Aletheia was started in 1997 by Mr. Eichler, a former Bear Stearns executive.

How could that be true? How could a language work that way? “I seek the truth and disclosure,” Socrates says. Ugh. Anyway here is Liddell-Scott-Jones.

(hidden for your protection)
Show all comments

25 Responses to “Investment Manager Without Ethics Policy Acted Unethically”

  1. Hillary Clinton says:

    It's a good thing this sort of thing could never have happened in cattle futures in the late 70s. Lucky for me, Jim Blair had stellar ethics and adamantine compliance procedures.

  2. Bacon Is Tasty says:

    All of this could have been avoided if they just named the funds as the SEC did………Insider Fund I and Insider Fund II versus Sloppy Seconds Growth Fund and Table Scraps Income Appreciation Fund. The marketing would have been a bitch, but at least the 800 pound gorilla would have been knee deep in bananas, ya know?

  3. I beg to differ says:

    "To its credit, the SEC seems to have tried for years to get Aletheia to do things that might have prevented a customer-screwing that seems to have occurred." implies that the customer-screwing was accomplished via the allocation of poorly conceived trades, and not the execution of poorly conceived trades themselves.

  4. Hobbes says:

    Apparently someone at the SEC has stopped watching tranny porn and started studying for CFA Level I.

  5. Guesto says:

    Can you imagine if this all went down under his original firm name, Philip Morris?

  6. Grizzled Trader says:

    The problem is that GS -et al- think "young is good" when it comes to dispersing trading capital. So, young dumbass fund distributors give hundreds of millions of dollars to young, unsupervised assholes like the fellow mentioned above. And since turnover in the trading biz is about every 4 to 10 years (depending on sophistication of employer) you have one of these fucking incidents every 4 to 10 years at a minimum in possibly every trading realm. You have to have young people in the firm, of course, to fetch sandwiches and coffee and such, but can't the older fuckheads in their risk management departments at least teach them about the oldest fucking tricks in the bad trader book?

  7. Sandusky says:

    "…young, unsupervised assholes…"

    Go on…

  8. Seattle says:

    You know who else you can't trust.

    Mark Sanchez

  9. prana says:

    Peter's wife has a fabulous yoga studio in Venice.

  10. Very informative allocation about Peter Eichler and his firm Aletheia Research and Management!! Peter is quite energetic and brilliant investment knowledgeable person and by learning about his works is always I find educative for me. So thanks for this description full allocation.

  11. Peter Eichler is a good of example of of what I've been thinking about: how could you just give your money to some investing company where your account doesn't have government insurance, like at bank or brokerage? Considering how lenient the law system is to whitecolar crime and how hard it is to prosecute these guys in accordance with current law, the temptation for them to cheat is just too big.

  12. Andy says:

    Without any doubts I can say Peter is really a wise person in the field of investment and through reading about him I'm now very glad because I've come to know what I've need to do in my real estate investments. Thanks
    realtor in Surprise

  13. Tony says:

    About investment manager without ethics policy acted unethically whatever shared here is seem to me very informative presentation! I truly enjoyed learning such precious information for regarding investment purpose. Thanks.

  14. Much appreciation goes to Peter. He is really a talented person in the field of investments and I would like to meet with him anyhow for getting some idea for my investment business in real estate. Thanks