Sec. & Exch. Comm'n v. World Tree Fin., L.L.C.

43 F.4th 448

SECURITIES AND EXCHANGE COMMISSION, Plaintiff—Appellee,

v.WORLD TREE FINANCIAL, L.L.C. ; Wesley Kyle Perkins; Priscilla Gilmore Perkins, Defendants—Appellants.

No. 21-30063

United States Court of Appeals, Fifth Circuit.

FILED August 4, 2022

Daniel Matro, U.S. Securities & Exchange Commission, Washington, DC, for Plaintiff—Appellee.

Steven G. Durio, Lauren Noel Maurer, Durio, McGoffin, Stagg & Ackermann, Lafayette, LA, for Defendants—Appellants.

BEFORE Jones, Higginson and Duncan, Circuit Judges.

Stephen A. Higginson, Circuit Judge:

This appeal arises from an enforcement action brought by the Securities and Exchange Commission (SEC) against Appellants-Defendants World Tree Financial, L.L.C. (World Tree) and its principals Wesley Perkins (Perkins) and Priscilla Gilmore Perkins (Gilmore). After a bench trial, the district court found that Perkins and World Tree engaged in a fraudulent "cherry-picking" scheme, in which they allocated favorable trades to themselves and favored clients and unfavorable trades to disfavored clients. It also found that all three Defendants made false and misleading statements about the firm's allocation and trading practices. The court entered permanent injunctions against Perkins and World Tree, ordered them to disgorge ill-gotten gains, and imposed civil penalties on each Defendant. We AFFIRM.

I.

A.

In 2009, Perkins and Gilmore founded World Tree, a Louisiana-based investment adviser. Perkins served as chief executive officer and chief investment officer, and Gilmore served as chief financial officer, chief compliance officer, and chief operating officer. Perkins and Gilmore, who married in 2017, owned 60% and 40% of World Tree, respectively.

As of March 2018, World Tree managed over $54 million in assets and had 161 advisory clients, most of whom were individual investors. World Tree charged its clients an advisory fee that ranged between 0.5% and 1.5% of the client's assets under management. Because World Tree managed its clients' assets on a "discretionary basis," it had authorization to trade securities on their behalf. From December 2009 to October 2015, World Tree traded through Charles Schwab, which doubled as custodian for World Tree's client accounts.

World Tree traded through a "block trade" account, sometimes known as an "omnibus" account. A block trade, as defined by the district court, "allows a broker to execute a single large trade in its own name for the benefit of its clients and then allocate portions of that trade to particular client accounts." As chief investment officer, Perkins was responsible for trading decisions for World Tree accounts and allocating trades made through the omnibus account. He transmitted trades to Schwab by entering them in an online trading template or calling them in.

Two of World Tree's documents, its compliance manual and its Form ADV, contain important language outlining its block trade practices. In its compliance manual, World Tree recognized that block trading raises "important issues ... concerning the equitable distribution of such securities." It announced that its policy was "to allocate [block trade] orders and opportunities in a fair and equitable manner." The manual charged Perkins, as chief investment officer, with ensuring adherence to the policy and "verify[ing] that no client account was systematically disadvantaged by the allocation."

World Tree's compliance manual also set out specific procedures for block trades. In advance of placing block trades, World Tree was to:

• Disclose its aggregation policies in its Form ADV;

...

• Ensure that each client will be treated fairly and will not favor any client over another; and

• Ensure that the decision to aggregate a trade for a client is based on individual advice to that client.

When placing block trades, World Tree was to "[d]esignate on the trade order memorandum, the number of shares of the block trade to be allocated to each specific account prior to placing the order" or to "[m]ake a pro rata allocation of the shares to each account based upon size of the client's account." It was to maintain, in its "books and records ... all documents that relate to allocation of block trades."

In addition, the manual prohibited Perkins and Gilmore from trading in securities that World Tree was trading or considering trading on behalf of clients. Perkins and Gilmore read and understood the compliance manual.

World Tree's Forms ADV also addressed allocation and trading procedures. A Form ADV is an annual registration form that must be filed with the SEC with information about the firm and its services. Perkins and Gilmore had ultimate control over the Forms ADV: they reviewed drafts, signed them, and authorized their filing and distribution. Defendants provided Part 2A of the Forms ADV to clients when they entered a contract with World Tree and annually thereafter.

From 2011 to 2015, the Forms ADV, Part 2A, Item 11 represented that Access Persons, including Perkins and Gilmore, would not personally trade in the same securities concomitantly with their clients:

Unless specifically permitted in World Tree's Code of Ethics , none of World Tree's Access Persons may effect for themselves or for their immediate family (i.e., spouse, minor children, and adults living in the same household as the Access Person ) any transactions in a security which is being actively purchased or sold, or is being considered for purchase or sale, on behalf of any of World Tree's clients.

When World Tree is purchasing or considering for purchase any security on behalf of a client, no Access Person may effect a transaction in that security prior to the completion of the purchase or until a decision has been made not to purchase such security. Similarly, when World Tree is selling or considering the sale of any security on behalf of a client, no Access Person may effect a transaction in that security prior to the completion of the sale or until a decision has been made not to sell such security.

In August 2015, World Tree amended Item 11 to reflect that Perkins and Gilmore could trade in the same securities as World Tree's clients through the omnibus account.

The Forms ADV, part 2A, Items 8 and 12 provided that World Tree "allocates investment opportunities among its clients on a fair and equitable basis" and may "combine or ‘batch’ " orders. Item 12 further provided that if World Tree "aggregate[s] client orders for the purchase or sale of securities, including securities in which World Tree's Supervised Persons may invest, World Tree shall generally do so in accordance with applicable rules promulgated under the Advisers Act and no-action guidance provided by the staff of the [SEC]."

In mid-2015, Charles Schwab began investigating World Tree after its surveillance team detected allocations indicative of cherry-picking.¹ Schwab's investigator, Grant Moore, inquired about World Tree's "allocation process," "why [certain trades] were allocated the way they were," and "whether [World Tree] followed [its] ADV on how [it] allocated." Perkins and Gilmore explained that they surveyed clients’ accounts "to see who had cash available," assessed "client objectives," and determined "whether [clients] would be able to participate or not in the day trades."

Moore requested documentation from World Tree to verify that allocations were made as outlined in the Forms ADV. Gilmore sent Moore an e-mail with documents containing incomprehensible numbers, which "made no sense" to Moore and did not show "anything about how and why they did the trade allocations the way they did." When asked for additional records, Perkins and Gilmore said they did not have any because they did not retain documentation upon completing allocations. Schwab suspended World Tree's ability to block trade and subsequently terminated its relationship with World Tree. The SEC began investigating Defendants in November 2016.

B.

The SEC commenced this action in September 2018. It alleged three types of fraud claims. First, it alleged that Perkins and World Tree carried out a fraudulent cherry-picking scheme, in violation of Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b) ; Rules 10b-5(a) and (c) thereunder, 17 C.F.R. § 240.10b-5(a), (c) ; Section 17(a)(1) of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. § 77q(a)(1), (3) ; and Sections 206(1) and (2) of the Investment Advisers Act of 1940 ("Advisers Act"), 15 U.S.C. § 80b-6(1), (2). Second, the SEC alleged that Gilmore aided and abetted the fraudulent cherry-picking, in violation of Section 209(f) of the Advisers Act, 15 U.S.C. § 80b-9(f). Finally, the SEC claimed that Defendants made material misrepresentations about their allocation and trading practices, in violation of Section 10(b), 15 U.S.C. § 78j(b) ; Rule 10b-5(b) thereunder, 17 C.F.R. § 240.10b-5(b) ; Section 17(a)(2), 15 U.S.C. § 77q(a)(2) ; and, with respect to Perkins and World Tree only, Sections 206(1) and (2), 15 U.S.C. § 80b-6. The SEC sought injunctive relief, disgorgement of all ill-gotten gains, and civil penalties.

The district court held a four-day bench trial in November 2020. It received over 150 exhibits and heard testimony from Perkins, Gilmore, and two expert witnesses—Dr. Cathy Niden for the SEC and Dr. Charles Theriot for Defendants—as well as other witnesses.

In making its case, the SEC relied heavily on statistical data. The timing of the allocations was critical to the SEC's argument that Perkins would have known how the trades had performed that day by the time he allocated them. The SEC presented evidence that Perkins transmitted most trades to Schwab during the trading day, but that 90% of the time he waited until the markets closed to allocate the trades.

To analyze World Tree's allocation data, Niden divided the client accounts into three categories: (1) accounts controlled by Perkins, Gilmore, or both ("Favored-Perkins accounts"); (2) accounts owned by World Tree clients other than ...