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The SEC also issued an Investor Alert, “All About Auto-Trading,” which lists the steps investors should take to thoroughly check out any auto-trading program before they hand over access to their accounts and hard-earned dollars. The alert explains auto-trading, arms investors with questions to ask, and provides time-tested tips for avoiding costly mistakes.
“The filing of this case illustrates once again that an investor should exercise care and appropriate skepticism before giving another person authority to direct trading in his account, particularly where that person claims to provide unrealistically high returns to the investor,” noted Ken Israel, District Administrator of the Commission’s Salt Lake District Office.
Auto-trading is a relatively new, but rapidly spreading, investment vehicle in which subscribers to online investment newsletters open designated auto-trading accounts at brokerage firms selected by the newsletters. The auto-trading clients sign an agreement with the brokerage firm giving the online adviser authority to automatically direct trades in the client’s personal brokerage account. Auto-trading services are typically offered as an additional service provided by publishers of online financial newsletters. The financial newsletters usually require subscribers to pay a fee to auto-trade in addition to the subscription fee paid to receive the general newsletter. Once the brokerage account is established, the online adviser sends specific trading instructions directly by e-mail or facsimile to the broker-dealer. These instructions are timed to take advantage of market events, and the client learns of the trades only after they have been executed by the broker.
The complaint filed in the District of Vermont alleges that Terry’s Tips and Allen have had more than 1200 clients who have invested through its auto-trading programs. The complaint also charges that Terry’s Tips and Allen published performance projections in which they stated subscribers could expect annualized returns of 100% by following Allen’s trading strategies, while at the same time portfolios following these strategies were actually experiencing substantial losses.
In this action, the Commission seeks permanent injunctive relief, disgorgement of illegal profits with prejudgment interest and civil monetary penalties based on violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and violations of Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. The Commission would like to acknowledge the assistance of the State of Vermont Department of Banking, Insurance, Securities and Health Care Administration.
The Commission’s Investor Alert on auto-trading is available at http://www.sec.gov/investor/pubs/autotrading.htm.
