SEC Whacks San Diego|Investment Adviser

WASHINGTON (CN) - A San Diego investment adviser cherry-picked trades for hedge funds in which he held an interest, inflicting $10.7 million in losses on other clients, the SEC claims in court.

The SEC filed an administrative cease and desist order against J.S. Oliver Capital Management LP, its president Ian O. Mausner, and its chief compliance officer Douglas F. Drennan.

"From June 2008 to November 2009, JS Oliver and Mausner disproportionately allocated favorable trades to six client accounts, including four affiliated hedge funds, ultimately harming three unfavored clients by approximately $10.7 million," the SEC claims in the cease and desist order. "Mausner financially benefitted from the cherry-picking scheme because he and his family were personally invested in the hedge funds, and he earned additional fees from one of the hedge funds based on the boost in its performance as a result of the cherry-picking."

Mausner and Oliver swiped another $1.1 from clients by misusing "soft dollars," which are credits or rebates on trades and commissions, the SEC says.

According to the complaint: "From January 2009 through November 2011, JS Oliver and Mausner used over $1.1 million in soft dollar credits in a manner not disclosed to clients. Soft dollar credits arise from the client commission arrangement between an investment adviser and the broker-dealer that handles the trades for the adviser. Generally, a client's investment assets are used to pay additional commissions - called 'soft dollar credits' - that the broker-dealer sets aside as payment for legitimate research and brokerage expenses of the adviser. The respondents' misuse of these soft dollar credits included: (1) $329,265 paid to Mausner's ex-wife for amounts due pursuant to a divorce agreement; (2) $300,000 in grossly inflated 'rent' paid to a company Mausner owned, the majority of which was funneled directly to Mausner's personal bank account; (3) approximately $480,000 paid to Drennan's company, Powerhouse Capital, Inc. ('Powerhouse Capital'), for purported outside research and analysis performed by Drennan, who was actually a JS Oliver employee; and (4) nearly $40,000 in payments for fees on Mausner's personal timeshare in New York, New York. Drennan participated in and substantially assisted with some of this misconduct by submitting false information to support the misuse of some of the soft dollar credits, and approving some of the improper payments. Drennan also financially benefitted through improper soft dollar credits paid to Powerhouse Capital."

Drennan was sole owner and operator of Powerhouse Capital, and also a portfolio manager for Mausner and his company, according to the SEC complaint, which adds: "Powerhouse Capital had no other employees and JS Oliver was its only client."

The defendants have 20 days from the filing, which was Friday, to file a response.

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