A former CEO of investment firm Systematic Alpha Management LLC (SAM) pleaded guilty on Wednesday to a “cherry-picking” scheme, in which he fraudulently misappropriated profitable trades to himself and saddled his investors with losses, the US Department of Justice announced in a press release.
The DOJ noted that this is the first criminal charge against a commodities trading adviser and commodities pool operator for engaging in a cherry-picking scheme involving cryptocurrency futures contracts.
The DOJ’s case
According to court documents, Peter Kambolin, a US-Russian national of Sunny Isles Beach, Florida, was the owner and chief executive officer of SAM, an investment firm that he marketed as offering algorithmic trading strategies involving futures contracts.
The DOJ alleges that between January 2019 and November 2021, Kambolin, who at the time was a commodity trading adviser and a commodity pool operator, engaged in a cherry-picking scheme in which he fraudulently allocated profits and losses from futures trades in a manner designed to benefit his own accounts. He also misrepresented to his clients that SAM employed trading strategies focused on cryptocurrency futures contracts and foreign exchange futures contracts.
In reality, the cherry-picking worked against his clients’ interests and approximately half of Kambolin’s trading in each pool involved equity index futures contracts and not cryptocurrency futures contracts and foreign exchange futures contracts.
“This plea demonstrates that the Justice Department will not allow financial advisers to place their self-interest ahead of clients, including by cherry-picking trades.”
Nicole M Argentieri, Acting Assistant Attorney General, US Justice Department
In doing so, Kambolin defrauded investors located in the United States and abroad by depriving them of profitable trades, among other things, the DOJ said. Kambolin used the proceeds of the scheme to fund personal expenses, including rent for a beachfront apartment, and transferred proceeds to foreign bank accounts his co-conspirator controlled in Belarus and Dominica, the agency said.
“The defendant breached client trust for personal profit,” said Acting Assistant Attorney General Nicole M Argentieri of the Justice Department’s Criminal Division.
“This conduct undermines investor confidence in the commodities markets. This plea demonstrates that the Justice Department will not allow financial advisers to place their self-interest ahead of clients, including by cherry-picking trades. It also underscores the Justice Department’s commitment to using data analytics to prosecute wrongdoing in the financial markets,” she said.
Kambolin pleaded pleaded guilty to conspiracy to commit commodities fraud and faces a maximum penalty of five years in prison.
The prior CFTC case
This isn’t the first time a federal agency has charged Kambolin for fraud. The US Commodity Futures Trading Commission (CFTC) hit SAM and Kambolin with civil charges back in April for defrauding pool participants and managed account customers.
By trading in an inequitable manner via cherry-picking, the CFTC said the defendants defrauded pool participants and managed account customers, caused the commodity pools and managed accounts to incur net trading losses of more than $1.5m and generated more than $1.4m in profits for their proprietary accounts.
In that case as well, the CFTC noted how its data analysis capabilities enabled it to proactively identify and prosecute the misconduct.
Investment managers
Cherry picking is the fraudulent practice of allocating profitable or unprofitable trades by investment managers and their staff to certain accounts preferentially. Instead of using block orders in the market to electronically buy or sell for all of their customer accounts simultaneously, the fraudulent version of cherry picking involves investment managers selecting specific profitable or unprofitable trades and allocating them in a manner of their choosing.
There is a completely benign way of performing cherry-picking, which is to merely choose investments by following other investors and institutions that are considered reliable and successful. (Research-driven investment selection is not part of the definition, as you’re using the research of others to inform your investment decisions with cherry picking.)
In these types of cases, defendants normally argue they used block trading and not fraudulent cherry-picking, but this is where strong data analytics come into play.
The DOJ and SEC have in place the fraud detection rooted in data analytics that is needed to catch cherry picking. In a civil action in 2018, Joseph Sansone, the head of the SEC’s Enforcement Division’s Market Abuse Unit said: “SEC data analysis played an important role in identifying this type of alleged securities law violations. We will continue to develop and use data analytics to root out cherry-picking and other frauds.”