Published September 04. 2012 4:00AM Updated September 05. 2012 5:13PM
A Lyme investment adviser stands accused by the U.S. Securities and Exchange Commission of fraudulent trading practices that the financial regulator claims cost clients of his Essex firm, MiddleCove Capital LLC, more than $2 million.
Noah L. Myers, 40, principal, sole owner and chief investment officer of MiddleCove, will face an SEC hearing on the so-called "cherry-picking" scheme before an administrative law judge within two months. A decision on possible penalties and sanctions is expected within 10 months.
According to regulatory documents released last week, the SEC's Division of Enforcement determined after an investigation that Myers had earned profits of $460,000 from the scheme, which the SEC said involved commingling his own transactions with those of his clients and then taking the most profitable trades as his own.
"When a security appreciated in value on the day of purchase, Myers would often sell the security and disproportionately allocate the purchase and the realized day-trading profit to his own accounts or accounts benefiting himself or his family members," the SEC said in documents. "In contrast, for securities that did not appreciate on the day of purchase, Myers would disproportionately allocate these purchases to his clients' accounts and his clients would hold the position for more than one day."
The SEC, which has no authority to press criminal charges but sometimes forwards information to law enforcement officials, could convince a judge to penalize Myers and order him to return any "ill-gotten gains" to clients. Separate proceedings also could be held, if the SEC allegations are found to be true, on whether Myers should face a suspension or ban from the industry.
James Heckman, a spokesman for the state Department of Banking, said the agency is not investigating MiddleCove because the company is not registered to do business in Connecticut and, as far as he knows, it is not active. "We are aware of the situation, and we are monitoring the situation," Heckman said.
J. Peter Purcell, chief executive of Purshe Kaplan Sterling Investments Inc. in Albany, N.Y., confirmed in a voice message that Myers had been a registered representative of the firm, but said the company terminated the relationship in April because Myers had been uncooperative in an internal investigation.
A call to Myers, who has a 4,281-square-foot house on Joshuatown Road listed for sale on zillow.com at $1.55 million, and an email to his attorney, Hugh Keefe of New Haven, went unreturned.
At its height in 2010, MiddleCove, located on Main Street in the Centerbrook section of Essex, managed $129 million in assets, according to the SEC, and as recently as September of last year it had about 350 clients. After one of the company's managers departed from the firm last year following the cherry-picking allegations, the portfolio took a hit, according to SEC documents, and in its latest filings in February the company claimed $63 million in assets under management, mostly involving people with high net worth.
According to a summary of the SEC case, Myers conducted his cherry-picking scheme between October 2008 and February 2011. In November 2010, the SEC said in its complaint, a compliance officer for Charles Schwab & Co. Inc. flagged Myers' trading as potentially suspect and called a MiddleCove employee, who investigated the trading patterns further and concurred that Myers was cherry-picking. "All four of MiddleCove's employees confronted Myers about his trade allocation in mid-December 2010," according to the SEC document.
The employees made their boss back down, the SEC said, as Myers agreed to change his trading methods to differentiate his trades from those of his clients. After a few months, though, the employee who had initially investigated his boss's trades noticed that Myers was back to cherry-picking, according to the SEC, and confronted his boss again, threatening to report him to the SEC if he did not re-allocate the trades in favor of his clients, according to documents.
"After this confrontation, Myers stopped cherry-picking and did relatively little trading in his own accounts," the SEC said.
SEC staff first interviewed Myers in November 2011 about the allegations, "but he did not offer a plausible explanation for his stellar day-trading performance," which was profitable 95 percent of the time, according to the agency.
The SEC said the likelihood of Myers' trades being "lucky" compared with those of his clients was between one in 10 million and one in a trillion.
Some of Myers' investors lost heavily. According to the SEC, one 84-year-old retiree with all her savings invested with MiddleCove lost more than $14,000 on one particular investment, while others saw losses of nearly $60,000 and more than $83,000 in speculative instruments called exchange traded funds that are essentially highly leveraged one-day bets on the ups and downs of the stock market.
"Many of these clients were retired and/or were using their MiddleCove account as their source of funds for retirement and had limited willingness or ability to accept significant investment risk," according to the SEC allegations.
According to the MiddleCove website, Myers was previously a senior vice president and senior portfolio management director at Smith Barney in Essex, later bought out by Citigroup Global Markets. The University of Connecticut graduate founded his own company in February 2008, and his then-wife Robbin had served as its marketing director. The Myers are divorced and she is not involved in the SEC investigation.
The website said Myers is a past board member of Habitat for Humanity of Southeastern Connecticut.