Securities and Exchange Commission v. Charles J. Dushek, et al., Civil Action No. 13-cv-3669 (N.D. Ill., filed May 16, 2013)

SEC Charges Chicago-Area Father and Son Conducting Cherry-Picking Scheme At Investment Firm

The Securities and Exchange Commission (“Commission”) filed a civil injunctive complaint on May 16, 2013, in the United States District Court for the Northern District of Illinois relating to a fraudulent cherry-picking scheme conducted by Charles J. Dushek (Dushek Sr.) of Warrenville, Illinois and his son Charles S. Dushek (Dushek Jr.) of Wheaton, Illinois. The Commission charged Dushek Sr., Dushek Jr., and their Lisle, Illinois-based investment advisory firm, Capital Management Associates, Inc. (CMA), with securities fraud, among other violations of the securities laws, for defrauding CMA clients in a cherry picking scheme that garnered the Dusheks nearly $2 million in illicit profits.

The Commission alleges that the Dusheks placed millions of dollars in securities trades without designating in advance whether they were trading personal funds or client funds. They delayed allocating the trades so they could cherry pick winning trades for their personal accounts and dump losing trades on the accounts of unwitting clients at CMA. Meanwhile, CMA misrepresented the firm’s proprietary trading activities to clients, many of whom were senior citizens.

According to the Commission’s complaint filed in federal court in Chicago, the scheme lasted from 2008 to 2012 at CMA. The Dusheks made more than 13,500 purchases of securities during that period totaling more than $350 million. The Dusheks typically waited at least one trading day – and often several days – before allocating the trades to client accounts or their personal accounts, and by that time they knew whether the trades were profitable. The Dusheks ultimately kept most of the winning trades and assigned most of the losses to clients. At the time of the trading, they did not keep any written record of whether they were trading client funds or personal funds.

The Dusheks’ extraordinary trading success reflects the breadth of their scheme. For 17 consecutive quarters from 2008 to 2012, the Dusheks reaped positive returns at the time of allocation while their clients suffered negative returns during those same 17 quarters. One of Dushek Sr.’s personal accounts increased in value by almost 25,000 percent from 2008 to 2011 while many of his clients’ accounts decreased in value.

The Commission alleges that the illicit trading profits from his personal accounts were Dushek Sr.’s only source of regular income outside of Social Security. It alleges that he drew no salary or other compensation as president of CMA and relied on profits from the scheme to make mortgage payments on his 6,500 square foot luxury home featuring separate equestrian facilities. He also spent the money on luxury vehicles including a Mercedes Benz SL550, membership in a luxury vacation resort, and vacations abroad. Dushek Jr. is alleged to have used trading profits to pay for a boat slip and vacations to ski resorts and Hawaii.

According to the Commission’s complaint, CMA misrepresented its proprietary trading activities to clients in a brochure that is part of the firm’s Form ADV. The brochure falsely claimed that Dushek Sr. maintained “reports” of his proprietary trading activities that he submitted to an associate for review, when in fact he did not maintain such reports nor have any associate review his trades. The brochure further stated, “We do not merge or aggregate any client order with any employee order.” That claim also was false. When the Dusheks placed orders, there were no client orders or employee orders, but instead merely block purchases in CMA’s brokerage accounts that were later allocated to client accounts or personal accounts.

The Commission’s complaint alleges that all of the defendants violated the antifraud provisions in Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder, that Dushek Sr. and Dushek Jr. aided and abetted those violations, and that Dushek Sr. is liable for those violations as a control person of CMA. The complaint also alleges that CMA and Dushek Sr. violated the antifraud provisions in Sections 206(1) and (2) of the Investment Advisers Act of 1940, and that Dushek Sr. and Dushek Jr. aided and abetted those violations. The Commission’s complaint seeks permanent injunctions, civil penalties, disgorgement and prejudgment interest, and other relief against all defendants. The complaint also names Margaret Dushek as a relief defendant and seeks from her disgorgement of ill-gotten gains and prejudgment interest.

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