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Advisor Arrested in Trading Scheme

West Hollywood money manager is accused of taking $7.4 million in profits out of clients' accounts.

October 01, 2003|Kathy M. Kristof | Times Staff Writer

A West Hollywood-based investment advisor was arrested Tuesday on a fraud charge for allegedly plucking $7.4 million in trading profits out of his clients' accounts and transferring them to his own.

The Securities and Exchange Commission also filed a civil suit charging Paul Joseph Sheehan, who operated an investment management firm until early this year, with securities fraud and investment advisory fraud.

Sheehan -- who managed money for individuals, pensions and charitable organizations, among others -- would call in trades to a broker at Salomon Smith Barney, without designating to which client account the trade should be allocated, according to the SEC suit and the criminal complaint, both filed in U.S. District Court in Los Angeles. Late in the day, after it was clear which trades were profitable, Sheehan would divvy them up, taking the money-making transactions for himself and distributing the losers and less-profitable trades among his clients, a practice known as "cherry picking."

The alleged scheme, which took place between April 1999 and September 2000, was uncovered during a routine SEC audit, when an examiner became suspicious of the disparity between the profitability of Sheehan's trades and that of his customers.

An SEC economist performed a statistical analysis to determine how probable it was that the trades could work as Sheehan reported. The odds were "less than one in 10 quadrillion," according to authorities.

Without admitting or denying guilt, Sheehan, 64, settled some of the SEC charges by agreeing to an administrative order that revokes his SEC registration and bars him from working as an investment advisor.

The remaining SEC claims, which call for repaying ill-gotten gains and penalties, will be determined at trial.

Sheehan was expected to be arraigned on the criminal charge of investment advisory fraud, which carries a maximum penalty of five years in prison and $250,000 in fines, Tuesday afternoon.

Neither Sheehan nor his attorney could be reached for comment.

"Investment advisors have a duty to act in the best interests of their clients and to place their clients' interests before their own," said Randall R. Lee, director of the SEC's regional office in Los Angeles.

"We will aggressively pursue investment advisors who betray the trust of their clients, and we will work closely with the Department of Justice to ensure that advisors who do so are held accountable," he said.

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