A California-based former investment advisor is facing SEC charges he defrauded his clients by placing options trades in a block-trade account, then cherry-picking favorable returns for himself while placing losing bets into his clients’ individual accounts. The scheme allegedly cost his clients more than $3 million.
The commission filed its suit against 57-year-old James David Burleson in California federal court, claiming his scheme ran for several years at his one-time registered investment advisory firm, Burleson & Company.
According to the SEC complaint, Burleson worked with about 200 clients and $450 million in assets, using brokerage accounts at Charles Schwab. According to the commission, the firm registered in 2006 before terminating its registration in 2023.
From August 2020 to October 2022, Burleson maintained an “omnibus” block-trading account at Schwab, where he traded options for multiple clients simultaneously before allocating them to individual accounts.
Burleson made over 750 options trades through that account before parsing them out to 32 individual accounts, the SEC stated. According to the commission, one of those was his own, and two were in his children’s names.
While Burleson made trades in the omnibus account, he often didn’t allocate them to individual clients until he could see the intraday performance, the commission said. He waited until the markets closed to allocate over 87% of the trades, the commission charged.
“If the option price went up between the time of the trade and the later allocation, Burleson disproportionately allocated the trade to his personal account,” the complaint read. “If, however, the option price went down between the time of the trade and the later allocation, Burleson disproportionately allocated the trade into the defrauded clients’ accounts.”
Those late allocations earned him a $1.8 million profit (a 26.5% return) while the clients suffered more than $3.2 million in losses.
When Burleson made trades directly in his individual account, however, his returns were at -5.8%. According to the commission, the possibility that discrepancy occurred by chance, instead of purposeful action, was “less than one in a million.”
In Form ADV disclosures, Burleson maintained allocations from the block trading account would be made in “the most equitable manner possible.”
During the scheme, Burleson directed more than 90% of the trades in five accounts: his personal account and four others with over $1 million in assets. The high values of these accounts masked the losses the clients suffered through the alleged schemes.
He’d also boost his profits by making “particularly risky” trades on options expiring within three days of the sale, which offered higher potential profits but a greater chance of loss (about $1.4 million of Burleson’s profits came from these types of trades, according to the commission).
The scheme is “inherently deceptive,” according to the commission because such cherry-picking is virtually impossible for clients to detect on their own. As early as March 2021, the lopsided returns raised a red flag at Schwab, and the firm contacted Burleson that month. He told Schwab using the block-trade account for his own option trades was “easier,” but it would be “no big deal” to trade directly in his personal account going forward. Instead, he continued to use the omnibus account to his advantage, according to the complaint.
In October 2022, Schwab flagged the continued preferential treatment in the block-trade account, contacted him again and by late November terminated his relationship, according to the complaint.
The SEC is asking the court to force Burleson to make restitution, pay civil penalties and be banned from participating in the purchase or sale of any security, except for his own personal account, as well as any other punishment the court sees fit to impose.
Burleson could not be reached for comment prior to publication.
