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.