Cherry picking, in the context of trading and investment, refers to a deceptive and unethical practice where a trader or investment manager selectively reports or records only the profitable trades or investment decisions while omitting or concealing the losing ones. It can also be where trades are selectively allocated to an trader or advisor's personal accounts, while unprofitable trades are left out of these accounts, all to the detriment of the trader or advisor's client accounts.
This practice is considered fraudulent and is a violation of securities regulations in many jurisdictions. Cherry-picking schemes often remain hidden from investors for extended periods, making detection challenging.
Cherry picking, when applied to trading and investment, involves manipulating or misrepresenting trade records or performance data to create a false impression of success. Typically, the individual or entity engaging in cherry picking presents a distorted view of their trading activities by showcasing only the winning trades or favorable investment decisions to potential investors or clients. The goal is to attract investments or clients by making their track record appear much more profitable and less risky than it actually is.
Key Aspects of Cherry Picking in Trading
Cherry pickers meticulously choose which trades or investments to disclose, emphasizing the ones that resulted in gains while ignoring or downplaying those that incurred losses. This selective reporting can mislead investors into believing the trader or investment manager possesses exceptional skills.
Cherry pickers often manipulate data, performance reports, or portfolio statements to make it seem as though they consistently make profitable decisions. This misrepresentation can involve altering dates, values, or other relevant information to create a misleading narrative.
Lack of Transparency
Traders and investment managers engaged in cherry picking typically lack transparency in their operations. They may not provide full access to their trade history or portfolio details, making it challenging for investors to conduct due diligence effectively.
The primary motive behind cherry picking is to deceive investors or clients into believing that the trader or investment manager has a track record of successful trading or investment decisions. This deception can lead to investments based on false premises and result in financial losses for unsuspecting investors.
Legal and Regulatory Implications
Cherry picking is illegal and unethical, and it is considered a form of securities fraud. Securities regulators, such as the U.S. Securities and Exchange Commission (SEC), Commodities Futures Trading Commission (CFTC) and the Financial Industry Regulatory Authority (FINRA), actively monitor and investigate instances of cherry picking. Violations can result in severe penalties, including fines, disgorgement of ill-gotten gains, suspension or revocation of licenses, and civil or criminal charges.
- SEC Brings Settled Actions Charging Cherry-Picking and Compliance Failures. U.S. Securities and Exchange Commission.
- Enforcement News: Cherry-Picking Revisited. Freiberger Haber LLP.
- First Criminal Charge Against a Commodities Trading Advisor and Commodities Pool Operator for Engaging in a “Cherry-Picking” Scheme Involving Cryptocurrency Futures Contracts. Department of Justice.
- Cherry-Picking. KurtaLaw.
- Cherry-picking crypto trades lands CEO in jail. Investment Executive.
- SEC Charges Connecticut Advisory Firm GlennCap and its Owner with Cherry-Picking. U.S. Securities and Exchange Commission.