Charles J. Dushek, a financial advisor from Lisle, Ill., bagged a 25,000% return in his individual retirement account from 2008 to 2011.
Never mind the housing crisis, the financial crisis, the recession, the brand-name companies filing bankruptcies, the Dow Jones Industrial Average falling below 7,000, the Wall Street firms and giant banks collapsing in on themselves like black holes, or even the unemployment rate rocketing past 10%.
During this frightening period in financial history, Mr. Dushek's investment returns ran off the charts. He lived in a 6,500 square-foot home with a barn and fenced equestrian yard. He drove a Mercedes Benz SL550. He kept up a membership at a luxury resort. He took his vacations abroad.
His only source of income, beyond his personal trading, was what he collected from Social Security.
His secret? Well, the Securities and Exchange Commission alleges that he was cherry-picking his stock trades.
Last week, the regulator filed a civil fraud complaint against Mr. Dushek, 69 years old, his son, Charles S. Dushek Jr., 37 years old, and their firm Capital Management Associates. It alleges that when they made trades, the losing trades were mostly allocated to clients. And the winning trades? They mostly went to them.
The alleged scheme generated nearly $2 million in ill-gotten gains, the SEC says.
The Dusheks plan to contest the SEC's lawsuit. It is a family affair. Mr. Dushek's wife, Margaret, is named as a relief defendant after allegedly benefitting from the scheme.
"The Dusheks and CMA have had a long record of quality client service, performance and integrity," said their attorney, Howard Rosenburg of Kopecky, Schumacher, Bleakley and Rosenburg PC on Chicago's LaSalle Street in an email.
"They are continuing to service their clients despite the SEC's unfortunate and highly misleading allegations," he wrote. "What the SEC calls "losses' were not losses at all. Rather, they were short-term price fluctuations that the SEC mischaracterizes as "losses." Indeed, CMA's most widely used investment strategy has yielded total returns of more than 66% over the last five years."
The Dusheks run a tiny firm that manages about $29 million spread across 335 accounts. But the SEC said they made 13,500 purchases of securities between 2008 and 2012 totaling $350 million.
More than 75% of the trades that were eventually assigned to their personal accounts were profitable, the SEC alleges, and less than 25% of the trades eventually assigned to client accounts were profitable.
"The Dusheks' extraordinary trading success reflects the breadth of their scheme," the SEC's complaint reads. "For 17 consecutive quarters, the Dusheks reaped positive returns at the time of allocation while their clients suffered negative returns."
The SEC alleges the Dusheks didn't keep records of whether the funds they traded were client funds or personal funds. The SEC says in its complaint that Mr. Dushek told the agency he "keeps a record in my head, that's it." He also testified that he suffered from transient global amnesia and that his "memory ability and cognitive abilities seem to be diminishing."
Cherry-picking cases are not as common at the SEC as insider trading cases, Ponzi scheme allegations and accounting fraud charges.
Earlier this year, the agency sanctioned a Connecticut firm called MiddleCove Capital, LLC and its owner Noah L. Meyers, for an alleged cherry-picking scheme. And in December, it levied similar allegations at Peter J. Eichler of Aletheia Research and Management, based in Santa Monica, Calif., a firm that once managed as much as $10 billion. Mr. Eichler has denied the charges.
The SEC complaint against the Dusheks claims that their custodian, GreatBanc, complained about the late and improper allocation of trades in 2011. "Instead of adopting an allocation policy, Dushek Sr. told GreatBanc representatives to stop telling him how to run his business," the complaint said.
"The Dusheks and their firm had an obligation to treat clients fairly and honestly," said Merri Jo Gillette, director of the SEC's Chicago Regional Office, in a press release. "Instead, they exploited the trade allocation process to enrich themselves at the expense of their clients."
Many of the Dushek's clients are senior citizens, the SEC's complaint says. In a promotional YouTube video, Mr. Dushek promises to enlighten them about asset classes they may not even know about.
"There's great investments that people need to know about that Capital Management can show them," he says. "People are in a financial cave."
(Al's Emporium, written by Dow Jones Newswires columnist Al Lewis, offers commentary and analysis on a wide range of business subjects through an unconventional perspective. The column is published each Tuesday and Thursday at 9 a.m. ET. Contact Al at firstname.lastname@example.org or tellittoal.com)