SEC v. World Tree

Case: 21-30063 Document: 00516420193 Page: 1 Date Filed: 08/04/2022

United States Court of Appeals

for the Fifth Circuit United States Court of Appeals

Fifth Circuit

FILED

August 4, 2022

No. 21-30063 Lyle W. Cayce

Clerk

Securities and Exchange Commission,

Plaintiff—Appellee,

versus

World Tree Financial, L.L.C.; Wesley Kyle Perkins;

Priscilla Gilmore Perkins,

Defendants—Appellants.

Appeal from the United States District Court

for the Western District of Louisiana

USDC 6:18-CV-1229

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

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No. 21-30063

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.

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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

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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

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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.

1

As explained in detail below, cherry-picking involves using the block trade method

to make an initial trade, and then allocating individual trades to specific accounts after

observing how the transaction performed. Advisers can take advantage of this practice to

allocate more profitable trades to favored accounts.

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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.

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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 Matthew LeBlanc and his business Delcambre Cellular

(“Favored-Client accounts”); and (3) accounts owned by LeBlanc and

Delcambre (“Disfavored accounts”). She then measured several

performance measures and subsets of trades: most and least profitable trades,

day trades, average first-day returns, earnings-day trades, overlapping stocks,

and trades after LeBlanc complained to Perkins about his accounts’ poor

performance. According to her analysis, from July 2012 to July 2015, Perkins

methodically allocated trades with favorable first-day returns to the Favored-

Perkins and Favored-Client accounts, while allocating trades with

unfavorable first-day returns to the Disfavored accounts.

Niden opined that the “evidence overwhelmingly indicates that

Perkins engaged in cherry-picking.” Though she acknowledged at trial that

the data reflected only a pattern and that she did not “have the ability to

identify individual trades that may or may not be improper,” the data in the

aggregate showed a “one in one million chance that these patterns could have

occurred if allocations were being made without regard to first-day return.”

The district court found Niden credible and her testimony to be “thorough

and compelling.”

Theriot opined that Niden incorrectly interpreted the “incomplete

and fragmented data” she utilized. Theriot took issue with her use of “real

monetized gains for day trades and unrealized ‘First-Day Profits’ for stocks

not sold on the date purchased as the sole indicator of whether cherry-picking

occurred.” Theriot claimed Niden’s report reflected (1) “flawed

assumptions,” including that “all World Tree clients are identical and

should receive identical returns”; (2) “a measurement methodology that is

inconsistent with the reality of the investment returns actually realized”; (3)

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“errors in interpreting and using the data available”; and (4) “an apparent

lack of independence and objectivity,” because Niden is employed by the

SEC. Theriot opined that no cherry-picking occurred.

Perkins testified to the allocations and tried to explain the data

patterns. For example, he claimed the Disfavored accounts solely

experienced certain losses because they had “more money” and “a lot more

trades as a result.” He insisted trades were made on behalf of specific clients

at specific times in furtherance of individual clients’ financial and investment

goals. Perkins also testified that he knew what cherry-picking was, he

acknowledged that it was wrong, and he denied doing it. The court found him

not credible, as his explanations “appeared implausible or largely beside the

point” and his demeanor appeared “evasive or defensively argumentative.”

The district court found Defendants liable on all claims except the

aiding and abetting claim against Gilmore. It considered Niden’s analysis

“compelling proof of intentional cherry-picking, as there is simply no other

plausible explanation for the patterns in the data.” While Theriot “could

explain some of the disproportionate results,” his observations did not speak

to the clear pattern indicative of cherry-picking. The court “did not believe”

Perkins when he claimed he did not cherry-pick. As to the

misrepresentations, the court found that Perkins and Gilmore told their

clients they would not trade in the same securities as them but did so anyway.

The court permanently enjoined World Tree and Perkins from further

violating federal securities laws through cherry-picking. It ordered that

Perkins and World Tree, jointly and severally, disgorge $347,947 plus

$36,335.98 in prejudgment interest. The court also ordered civil penalties of

$160,000 on Perkins, $300,000 on World Tree, and $80,000 on Gilmore.

Defendants timely appealed.

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II.

On appeal from a bench trial, we review findings of fact for clear error

and questions of law de novo. Am. Guar. & Liab. Ins. Co. v. ACE Am. Ins. Co.,

990 F.3d 842, 846 (5th Cir. 2021). We will disturb a factual finding “only if

we are ‘left with the definite and firm conviction that a mistake has been

committed.’” Deloach Marine Servs., L.L.C. v. Marquette Transp. Co., 974

F.3d 601, 606-07 (5th Cir. 2020) (citation omitted). The clear-error standard

“following a bench trial requires even ‘greater deference to the trial court’s

findings when they are based on determinations of credibility.’” Luwisch v.

Am. Marine Corp., 956 F.3d 320, 326 (5th Cir. 2020) (quoting Guzman v.

Hacienda Records & Recording Studio, Inc., 80 F.3d 1031, 1036 (5th Cir. 2015)).

We employ “a strong presumption that the court’s findings must be

sustained even though this court might have weighed the evidence

differently.” Id. We review disgorgement and civil penalty orders for abuse

of discretion. SEC v. Kahlon, 873 F.3d 500, 504 (5th Cir. 2017) (per curiam)

(collecting cases).

III.

Defendants challenge the district court’s findings that Perkins and

World Tree engaged in fraudulent cherry-picking and that Defendants

misrepresented World Tree’s allocation and trading practices. They also

challenge the disgorgement assessment.

Section 10(b) of the Exchange Act makes it unlawful for a person “[t]o

use or employ, in connection with the purchase or sale of any security . . . any

manipulative or deceptive device or contrivance” in violation of SEC rules.

15 U.S.C. § 78j(b). Rule 10b-5 makes it unlawful, “in connection with the

purchase or sale of any security,” to “employ any device, scheme, or artifice

to defraud”; “make any untrue statement of a material fact”; or “engage in

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any act, practice, or course of business which operates or would operate as a

fraud or deceit upon any person.” 17 C.F.R. § 240.10b-5.

To prevail on a claim under Section 10(b) and Rule 10b-5, the SEC

must prove, by a preponderance of the evidence, that the defendant

“(1) made a misstatement or omission (2) of material fact (3) in connection

with the purchase or sale of securities (4) with scienter.” SEC v. Gann, 565

F.3d 932, 936 (5th Cir. 2009). A statement is “‘material’ if there is a

substantial likelihood that a reasonable investor would consider the

information important in making a decision to invest.” ABC Arbitrage

Plaintiffs Grp. v. Tchuruk, 291 F.3d 336, 359 (5th Cir. 2002) (quoting R&W

Tech. Servs. Ltd. v. CFTC, 205 F.3d 165, 169 (5th Cir. 2000)). To satisfy the

in-connection-with element, the fraudulent scheme and sale of securities

need only “coincide.” SEC v. Zandford, 535 U.S. 813, 822 (2002).

Scienter is a “mental state embracing intent to deceive, manipulate,

or defraud.” Abrams v. Baker Hughes Inc., 292 F.3d 424, 430 (5th Cir. 2002)

(quoting Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976)); see also

Southland Sec. Corp. v. INSpire Ins. Sols., Inc., 365 F.3d 353, 366 (5th Cir.

2004). Scienter is satisfied by a showing of “severe recklessness,” i.e., “an

extreme departure from the standards of ordinary care.” Alaska Elec. Pension

Fund v. Flotek Indus., Inc., 915 F.3d 975, 981 (5th Cir. 2019) (quoting

Rosenzweig v. Azurix Corp., 332 F.3d 854, 866 (5th Cir. 2003)).

Section 17(a) of the Securities Act outlaws “substantially the same”

conduct as Section 10(b) and Rule 10b-5, SEC v. Spence & Green Chem. Co.,

612 F.2d 896, 903 (5th Cir. 1980), but covers acts committed “in the offer or

sale of any securities,” 15 U.S.C. § 77q(a). 2 Subsection (a)(1) requires

2

Compare id. (“It shall be unlawful for any person in the offer or sale of any

securities . . . (1) to employ any device, scheme, or artifice to defraud, or (2) to obtain money

or property by means of any untrue statement of a material fact or any omission to state a

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scienter, while subsections (a)(2) and (a)(3) require only negligence. Aaron

v. SEC, 446 U.S. 680, 697 (1980).

Section 206 of the Advisers Act makes it “unlawful for any

investment adviser” 3 “(1) to employ any device, scheme, or artifice to

defraud any client or prospective client” or “(2) to engage in any transaction,

practice, or course of business which operates as a fraud or deceit upon any

client or prospective client.” 15 U.S.C. § 80b-6. Subsection (1) requires

scienter, while subsection (2) requires only negligence. Steadman v. SEC, 603

F.2d 1126, 1134 (5th Cir. 1979); see also SEC v. Steadman, 967 F.2d 636, 643

n.5 (D.C. Cir. 1992).

A.

The district court found Perkins and World Tree engaged in a

fraudulent cherry-picking scheme in violation of Section 10(b), Rule 10b-5,

Section 17(a)(1), and Sections 206(1) and (2). The district court defined

cherry-picking as a manipulation associated with block trades wherein

“because client allocations occur after an initial larger trade, an unscrupulous

broker could manipulate those allocations based on whether the asset(s)

involved in the block trade increased or decreased in value in the period of

time between the initial transaction and the allocations.” 4 Perkins and World

material fact necessary in order to make the statements made, in light of the circumstances

under which they were made, not misleading; or (3) to engage in any transaction, practice,

or course of business which operates or would operate as a fraud or deceit upon the

purchaser.”), with id. § 78j(b), and 17 C.F.R. § 240.10b-5.

3

It is undisputed that Perkins and World Tree were investment advisers.

4

Similarly, the SEC has described cherry-picking as: “a practice in which securities

professionals allocate profitable trades to a preferred account (like their own) and less

profitable or unprofitable trades to a non-preferred account (like a customer’s). To cherry

pick a trade, a securities professional typically originates the trade in an omnibus firm

account, without identifying the underlying . . . account for which the trade was placed, and

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Tree dispute the finding of cherry-picking on appeal, arguing that: (1) the

“in-the-offer-or-sale” element of Section 17(a)(1) was not satisfied; (2) the

SEC did not prove its claims by a preponderance of evidence because it relied

exclusively on statistics and introduced no direct evidence of cherry-picking,

and, in addition, Niden’s statistical analysis was flawed; and (3) similarly, the

SEC could not prove scienter without direct evidence of cherry-picking. We

affirm the district court’s factual findings and legal conclusions.

1.

Though we have not yet addressed a cherry-picking fraud theory,

several courts (and the SEC) have found that cherry-picking can be a

violation of Section 10(b), Rule 10b-5, Section 17(a)(1), and Sections 206(1)

and (2). 5 The failure to disclose cherry-picking constitutes material

misrepresentations or omissions because there is “a substantial likelihood

that a reasonable investor would consider the information important in

making a decision to invest.” ABC Arbitrage, 291 F.3d at 359 (internal

quotation marks omitted). Because cherry-picking involves allocating more

then allocates the trade to an account after observing how that transaction performed.” The

Dratel Grp., Inc., Exchange Act Release No. 77396, 2016 WL 1071560, at *1 (Mar. 17, 2016).

5

See SEC v. RRBB Asset Mgmt., LLC, No. 20-12523, 2021 WL 3047081, at *3

(D.N.J. July 20, 2021) (Section 10(b), Rule 10b-5, Section 17(a)(1) and (2), and Sections

206(1)-(2)); SEC v. Strong Inv. Mgmt., No. 18-cv-00293, 2018 WL 8731559, at *4-6 (C.D.

Cal. Aug. 9, 2018) (same); SEC v. K.W. Brown & Co., 555 F. Supp. 2d 1275, 1302-09 (S.D.

Fla. 2007) (same); see also SEC v. Aletheia Research & Mgmt. Inc., No. CV 12-10692, 2015

WL 13404306, at *2 (C.D. Cal. May 11, 2015) (Section 10(b), Rule 10b-5, and Sections

206(1)-(2)); see also Joseph C. Buchanan, Exchange Act Release No. 5329, 2019 WL

4033999, at *1-3 (Aug. 26, 2019) (Section 10(b), Rule 10b-5, and Sections 206(1)-(2)); Fin.

Sherpa, Inc., Exchange Act Release No. 5324, 2019 WL 3933686, at *1, *4 (Aug. 20, 2019)

(same); J.S. Oliver Cap. Mgmt., L.P., Securities Act Release No. 5236, 2019 WL 2160136,

at *7 (May 16, 2019) (Section 10(b) and Rule 10b-5); Welhouse & Assocs., Inc., Exchange Act

Release No. 4132, 2015 WL 3941618, at *1, *5-6 (June 29, 2015) (Section 10(b), Rule 10b-

5, and Sections 206(1)-(2)); cf. Moross Ltd. P’ship v. Fleckenstein Cap., Inc., 466 F.3d 508,

515-17 (6th Cir. 2006) (state securities-fraud statutes).

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profitable trades to certain accounts, an adviser is “stealing from one

customer to enrich himself,” Dratel, 2016 WL 1071560 at *1, and thus the

practice implicates a conflict of interest. See Laird v. Integrated Res., Inc., 897

F.2d 826, 835 (5th Cir. 1990) (“[W]e hold that for the purpose of rule 10(b)-

5, an investment adviser is a fiduciary and therefore has an affirmative duty

of utmost good faith to avoid misleading clients. This duty includes

disclosure of all material facts and all possible conflicts of interest.”).

Furthermore, cherry-picking occurs “in connection with the purchase

or sale of any security” (Rule 10b-5) and “in the offer or sale of any

securities” (Section 17(a)). It is not necessary for a specific trade or a specific

purchaser or seller to be identified to satisfy the in-connection-with element.

See Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 85 (2006)

(explaining the broad interpretation of the “in connection with” phrase, and

holding that “it is enough that the fraud alleged ‘coincide’ with a securities

transaction—whether by the plaintiff or by someone else”). Moreover,

placing trades with a broker satisfies the in-the-offer-or-sale element because

the terms cover “the entire selling process, including the seller/agent

transaction.” United States v. Naftalin, 441 U.S. 768, 772-73 (1979). 6

2.

Nor are we persuaded by the argument that the SEC needed to

introduce direct evidence of cherry-picking to prove its claims, rather than

relying on statistical evidence. Statistical evidence, like all evidence, “is a

6

Though Perkins and World Tree argue before us that the in-the-offer-or-sale

element of Section 17(a)(1) is not met because “the SEC excluded all sales transactions

from [its] analysis and relied exclusively on unrealized gains and losses, which is inherently

before a sale occurs,” they do not point to where they raised this argument before the

district court. Accordingly, the argument is waived and we do not address it. See In re

Deepwater Horizon, 857 F.3d 246, 250-51 (5th Cir. 2017).

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means to establish or defend against liability” and “[i]ts permissibility turns

not on the form a proceeding takes—be it a class or individual action—but

on the degree to which the evidence is reliable in proving or disproving the

elements of the relevant cause of action.” Tyson Foods, Inc. v. Bouaphakeo, 577

U.S. 442, 454-55 (2016). District courts have “considerable leeway in

deciding in a particular case how to go about determining whether particular

expert testimony is reliable.” Kumho Tire Co. v. Carmichael, 526 U.S. 137, 152

(1999). Statistical evidence can be useful in securities cases, and its admission

is no novelty. 7

Because cherry-picking is “difficult to detect,” determining whether

it has occurred “often requires drawing inferences from a pattern of

behavior, irregularities, and trading data.” Dratel, 2016 WL 1071560, at *2.

Here, Niden opined that there was “less than a one in one million chance”

that the patterns could have occurred if the allocations were made without

regard to first-day return. 8

7

See, e.g., United States v. Khalupsky, 5 F.4th 279, 294 (2d Cir. 2021) (noting in a

criminal securities-fraud case, the “government’s pretrial disclosures of exhibits about the

trades it intended to rely upon and of the vast data set underlying its statistical analysis of

his trading activity”); In re BP P.L.C. Sec. Litig., No. 10-md-2185, 2013 WL 6388408, at

*15 (S.D. Tex. Dec. 6, 2013) (noting “statistical regression analys[e]s that examine[] the

effect of an event on a dependent variable, such as a corporation’s stock price,” are

“commonly used in securities fraud class actions” (citations omitted)); In re Enron Corp.

Sec., Derivative & ERISA Litig., 586 F. Supp. 2d 732, 798-801 (S.D. Tex. 2008) (assessing

statistics on “class action settlements involving ‘mega fund’ recoveries” to determine fee

award); In re Cendant Corp. Sec. Litig., 109 F. Supp. 2d 225, 229 (D.N.J. 2000) (holding

statistical evidence created fact question on negative causation defense); Schindler v.

Stockley, No. 83 Civ. 2186, 1985 WL 2338, at *4-5 (S.D.N.Y. Aug. 16, 1985) (holding, after

bench trial in churning case, that “the overwhelming objective statistics outweigh[ed]”

defendant’s explanations for overtrading); 7 Alan R. Bromberg et al., Bromberg

& Lowenfels on Securities Fraud § 13:114 (2d ed.), Westlaw (database updated

May 2022).

8

See K.W. Brown, 555 F. Supp. 2d at 1304 (finding it “more likely than not” that

defendants engaged in cherry-picking because “market forces” could not explain their

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Of course, “a statistical analysis is only as reliable as the assumptions

beneath it.” Nat’l Ass’n of Gov’t Emps. v. City of San Antonio, 35 F.3d 560,

1994 WL 499782, at *5 (5th Cir. 1994) (per curiam). Perkins and World Tree

challenge Niden’s analyses on several grounds: she used “unrealized ‘first

day results,’ which show only unrealized gains and losses”; she did not use a

“comparator”; she disregarded differences between Favored and Disfavored

accounts; she employed a result-driven approach; and she did not use all

available information. These arguments, however, revisit Theriot’s trial

critique of Niden’s analyses. Defendants do not assert that their expert’s

testimony was improperly restricted in any way. Instead, the district court

considered each expert’s account and found that Theriot failed to rebut key

points of Niden’s analyses. The district court found that Niden’s analyses

showed Perkins “allocated an overwhelming proportion of positive trades to

Favored-Perkins and Favored-Client accounts and an overwhelming

proportion of negative trades to the Disfavored accounts.” While Theriot’s

testimony “explain[ed] some of the disproportionate results,” it “did not

alter the Court’s conclusion that the only plausible explanation for the

disproportional losses in the Disfavored accounts and gains in the Favored

accounts is cherry-picking.” Importantly also, the court heard Perkins’

explanations for the allocation patterns firsthand, yet found them

“implausible or largely beside the point.” It “did not believe him when he

claimed that he did not engage in cherry-picking.” 9

receipt of “more than 90% of the winners while investors received nearly 90% of the

losers”); Fin. Sherpa, Inc., 2019 WL 3933686, at *2 (finding “difference in the returns [to

be] statistically significant”); Joseph C. Buchanan, 2019 WL 4033999, at *3 (finding trade

data “statistically significant in that the likelihood of these same-day profitable trades being

randomly allocated . . . are less than one in one billion”).

9

In addition to close credibility assessment of all parties’ experts and Perkins

himself, we note that the district court made further supportive findings which did not rest

on expert statistical analysis: (1) the court heard testimony from Moore describing the

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We “may not second-guess the district court’s resolution of

conflicting testimony or its choice of which expert[] to believe.” Grilletta v.

Lexington Ins. Co., 558 F.3d 359, 365 (5th Cir. 2009); see Luwisch, 956 F.3d at

329. Perkins and World Tree have not convinced us that there is error, clear

or otherwise, in the district court’s reasoning or fact-finding. 10 Where, as

here, “there are two permissible views of the evidence, the factfinder’s

choice between them cannot be clearly erroneous.” Guzman, 808 F.3d at

1036 (quoting In re Luhr Bros., Inc., 157 F.3d 333, 338 (5th Cir. 1998)).

3.

Finally, as other courts have pointed out, cherry-picking can satisfy

the scienter element because it involves the knowing conduct of picking

certain accounts over others. RRBB, 2021 WL 3047081, at *3. The “scheme

cryptic documentation of allocations and the response he received that the information

about allocations was deleted every day after the allocation process was complete; the court

found that Moore’s “concerns regarding the Perkins’ allocations practices and their

response to his investigation were reasonable and well-founded”; and (2) the court

observed Matthew LeBlanc and credited his testimony that he “did not want to lose money

with his World Tree investments, either for tax purposes or any other reason, and that he

never directed, authorized, or expected Wesley Perkins to disproportionately allocate

losses to his accounts.”

10

Perkins and World Tree cite to SEC v. Slocum, Gordon & Co., 334 F. Supp. 2d

144 (D.R.I. 2004), a case in which the district court held that the SEC failed to show cherry-

picking through statistical evidence. In that case, however, the court credited the

defendants’ testimony that trades represented legitimate client strategies. Id. at 172-73

(observing that the SEC’s statistics showed defendants’ “trading strategy in operation”).

The court also credited the testimony of a nonparty employee who “was involved with

processing the paperwork on virtually every trade” and concluded “no cherry picking

scheme could have taken place . . . without her knowledge.” Id. at 175-76. Here, conversely,

the district court found Perkins not credible and his allocation explanations “implausible.”

And where the evidence is in “equipoise, making critical the question of credibility,” and

the district court adopts one party’s version of the facts based on a credibility

determination, we defer to its factual finding. Gann, 565 F.3d at 939; see also Guzman, 808

F.3d at 1036 (noting factual findings based on credibility determinations “can virtually

never be clear error” (quoting Anderson v. Bessemer City, 470 U.S. 564, 575 (1985))).

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require[s] specific preparation and the deliberate allocation of a

disproportionate number of profitable trades.” Id. (quoting James C. Dawson,

Advisers Act Release No. 3057, 2010 WL 2886183, at *5 (July 23, 2010));

K.W. Brown, 555 F. Supp. 2d at 1305 (finding scienter in cherry-picking

where trader “knowingly . . . allocate[d] profitable day trades to an account

in which [accomplice] had a personal financial interest”); see also Dratel,

2016 WL 1071560, at *11 (finding scienter where broker “controlled all of the

trading and allocation decisions [and] therefore knew that he was trading in

the same securities as his customers and . . . favoring his own account over

theirs”).

Perkins and World Tree argue that, without direct evidence of cherry-

picked allocations, the SEC cannot show scienter. However, it is well settled

that “scienter may be established by circumstantial evidence.” SEC v. Fox,

855 F.2d 247, 253 (5th Cir. 1988) (first citing Dirks v. SEC, 463 U.S. 646, 663

(1983); and then citing Herman & MacLean v. Huddleston, 459 U.S. 375, 390

n.30 (1983)); United States v. Ruggiero, 56 F.3d 647, 655 (5th Cir. 1995)

(noting that “in proving scienter in fraud cases, ‘circumstantial evidence can

be more than sufficient’” (quoting Huddleston, 459 U.S. at 390 n.30)). Here,

the district court (1) observed that cherry-picking “necessarily involves

knowing and intentional conduct,” (2) found that scienter was “confirmed

by the testimony of Wesley Perkins,” and highlighted other facts, such as the

daily deletion of allocation documentation, and (3) further found that “the

facts of this case provide strong evidence of scienter on the part of Wesley

Perkins.” We hold that this constituted adequate circumstantial evidence to

find that Perkins engaged in cherry-picking and acted with scienter.

Accordingly, there being no clear error in the district court’s finding

that Perkins and World Tree engaged in fraudulent cherry-picking, we affirm

their liability under Section 10(b), Rule 10b-5, Section 17(a)(1), and Sections

206(1) and (2).

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B.

The district court also found that Defendants misrepresented their

trading practices by trading in the same securities as their clients despite

stating in their Forms ADV that they did not, in violation of Section 10(b),

Rule 10b-5(b), Section 17(a)(2), and, with respect to Perkins and World Tree

only, Sections 206(1) and (2). 11 Defendants dispute this finding on appeal,

arguing that the Forms ADV allowed them to trade in the same securities as

their clients—thus, according to Defendants, they made no misleading or

material statements with scienter.

Defendants find no support in the record. The Forms ADV, Part 2A,

Item 11 specifically represented that “Access Persons,” i.e., Perkins and

Gilmore, would not personally trade in the same securities at the same time

as their clients. World Tree’s compliance manual, or code of ethics,

contained a similar restriction. Moreover, it is undisputed that Perkins

allocated to his and Gilmore’s personal accounts the same securities from the

block trades in which their clients participated. The only qualifier to this

language 12 came in August 2015—after Schwab began its investigation. At

11

The district court also found that Perkins and World Tree misrepresented their

allocation practices by telling clients they were allocating block trades fairly and equitably,

in violation of Section 10(b), Rule 10b-5(b), Section 17(a)(2), and Sections 206(1) and (2).

Perkins and World Tree have waived any challenge to this finding by failing to brief it.

Tenny v. Dretke, 416 F.3d 404, 407 (5th Cir. 2005).

12

Though Defendants argue that the Forms ADV expressly permitted them to

trade in the same securities as their clients, they do not cite to any language giving them

such permission. They point instead to the firm’s Discretionary Investment Management

Agreement with clients, but that document only notes, broadly and in passing, that “[t]o

the extent that we aggregate client orders for the purchase or sale of securities, including

securities in which our Advisory Affiliates may invest . . . .” Defendants also argue that the

prohibitory language in Item 11 of the Forms ADV includes a qualifier: “Unless specifically

permitted in World Tree’s Code of Ethics.” But this qualifier does not help Defendants

where they cannot, and do not, point to any language in the code of ethics permitting such

trading. In fact, the code of ethics restricted such trading. Defendants also point to Item 11,

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that point, World Tree changed its Form ADV to allow concomitant trading,

amending Item 11 to provide: “the Firm’s Supervised Persons are permitted

to buy or sell securities that it also recommends to clients if done in a fair and

equitable manner that is consistent with the Firm’s policies and procedures.”

Until this language was added, Perkins and Gilmore were restricted from

trading concomitantly with their clients—a restriction that Defendants

defied.

Defendants’ misrepresentations were material. Materiality is a “fact-

specific inquiry,” Basic Inc. v. Levinson, 485 U.S. 224, 240 (1988), and

assessing “the significance of the inferences a reasonable investor would

draw from a given set of facts is peculiarly within the competence of the trier

of fact,” Steadman, 603 F.2d at 1130. Here, the district court found that a

reasonable investor would consider important whether Defendants traded in

the same securities as their clients. This is logical: an adviser who participates

in block trades with his clients has a greater incentive to place his interests

ahead of theirs. See, e.g., Capital Gains, 375 U.S. at 196 (explaining an investor

is entitled to evaluate “overlapping motivations, through appropriate

disclosure, in deciding whether an adviser is serving two masters or only one,

especially if one of the masters happens to be economic self-interest”

(cleaned up)); Vernazza, 327 F.3d at 858-59 (“We have no trouble

concluding that the petitioners made materially false statements when they

claimed not to recommend securities in which they had an ownership or sales

interest, not to receive economic benefits in connection with giving advice to

clients, and not to recommend securities in which they had a financial

which provides that “World Tree and persons associated with World Tree (‘Associated

Persons’) are permitted to buy or sell securities that it also recommends to clients

consistent with World Tree’s policies and procedures.” Again, however, World Tree’s

policies and procedures restricted personal trades in the same securities at the same time

for access persons.

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interest. It is undisputable that potential conflicts of interest are ‘material’

facts with respect to clients and the Commission.”). Defendants argue that

LeBlanc did not care if they invested in the same securities as him. However,

the standard for materiality is objective and the SEC was not required to

prove that any investor actually relied on Defendants’ misrepresentations.

SEC v. Life Partners Holdings, Inc., 854 F.3d 765, 779 (5th Cir. 2017); SEC v.

Blatt, 583 F.2d 1325, 1331-32 (5th Cir. 1978). Regardless, LeBlanc testified

that he would have wanted to know that his investment advisers were block

trading in the same securities.

Finally, Defendants argue that the district court erred in finding that

they misrepresented their trading practices with scienter. However, this

claim was premised on their argument that they were permitted to trade in

securities concomitantly with clients, which, as discussed above, is not true.

In any event, the district court did not err; Perkins and Gilmore reviewed,

understood, and authorized the Forms ADV and World Tree’s compliance

manual. They were aware of the prohibition in these documents against

trading the same securities that Perkins and World Tree were trading for

clients. Furthermore, they knew Perkins was doing just that. We hold that

the record supports the district court’s finding of scienter. See SEC v. Sethi,

910 F.3d 198, 206-08 (5th Cir. 2018) (affirming district court’s finding of

material misstatements where there was evidence the defendant knew he did

not have relationships with major oil companies but repeatedly represented

such relationships to entice investors).

C.

The district court ordered that Perkins and World Tree, jointly and

severally, disgorge $347,947 in ill-gotten gains, as well as $36,355.98 in

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prejudgment interest. 13 Perkins and World Tree raise several objections to

the disgorgement award. Disgorgement “is an equitable remedy meant to

prevent the wrongdoer from enriching himself by his wrongs.” Allstate Ins.

Co. v. Receivable Fin. Co., 501 F.3d 398, 413 (5th Cir. 2007) (quoting SEC v.

Huffman, 996 F.2d 800, 802 (5th Cir. 1993)). District courts ordinarily have

“broad discretion” in determining a disgorgement award. Huffman, 996 F.2d

at 803 (citing CFTC v. Am. Metals Exch. Corp., 991 F.2d 71, 76 (3d Cir. 1993));

see also SEC v. AMX, Int’l, Inc., 7 F.3d 71, 73 (5th Cir. 1993).

Here, the SEC approximated Perkins and World Tree’s profits with

Niden’s analysis. The district court summarized Niden’s analysis in its

opinion, writing that Niden “determined the overall first-day profits and

first-day rates of return for all trades in the omnibus account, and then

hypothetically apportioned them in a fair manner (pro rata) among the

different account types.” Niden “then calculated the difference between

what each group would have received in the hypothetical fair allocation and

the actual performance of each group.” The district court found reasonable

Niden’s method and estimation of the excess first-day profits Perkins and

World Tree derived from the cherry-picking scheme.

Perkins and World Tree argue to this Court that the disgorgement

amount is improperly based on the Disfavored accounts’ unrealized first-day

losses and thus the amount is larger than actual net profits from wrongdoing

and amounts to unjust equitable relief to the victim; they also claim that the

disgorgement award improperly includes Schwab’s commission fee. Perkins

and World Tree base their arguments on Liu v. SEC, 140 S. Ct. 1936, 1940

(2020), a case in which the Supreme Court held that “a disgorgement award

13

Though the district court also imposed civil penalties against each Defendant,

Defendants do not brief any challenges to the civil penalties and thus waive any related

issues. See, e.g., United States v. Scroggins, 599 F.3d 433, 446-47 (5th Cir. 2010).

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that does not exceed a wrongdoer’s net profits and is awarded for victims is

equitable relief permissible under [15 U.S.C.] § 78u(d)(5).” Liu additionally

held that “courts must deduct legitimate expenses before ordering

disgorgement under § 78u(d)(5)” to “ensure that any disgorgement award

falls within the limits of equity practice while preventing defendants from

profiting from their own wrong.” Id. at 1950. Liu is a seminal case that has,

and will continue to, shape disgorgement awards. See also SEC v. Blackburn,

15 F.4th 676, 681-82 (5th Cir. 2021) (assessing challenge to a disgorgement

remedy post-Liu); SEC v. Hallam, No. 21-10222, 2022 WL 2817119, at *15

(5th Cir. July 19, 2022) (laying out the question of whether Liu requires the

SEC to “satisfy the requirements of a traditional equitable remedy” when

successfully requesting a disgorgement remedy, or whether the only

limitations on disgorgement remedies are those explicitly set out in the Liu

opinion itself).

In this case, however, Perkins and World Tree did not challenge the

SEC’s proposed disgorgement amount in their pretrial or posttrial

submissions—instead, they argued only that there was no “basis for

disgorgement.” 14 Nor did Perkins and World Tree propose specific

deduction amounts, either before the district court or to this court. See SEC

v. Fowler, 6 F.4th 255, 267 (2d Cir. 2021) (“Fowler failed to identify any

additional ‘legitimate’ business expenses that, consistent with Liu, should

have been deducted from an otherwise reasonable disgorgement amount. Yet

it was his burden to do so. We therefore decline to remand to the District

14

A legitimate business expense deduction argument was available at the time. Liu

was decided on June 22, 2020, and the district court’s opinion in this case came down

January 15, 2021. Additionally, the Tenth Circuit has observed that even before Liu was

decided, “an argument by defendants to secure a deduction of business expenses from a

disgorgement amount, was available,” and, indeed, was “hardly novel.” SEC v. GenAudio

Inc., 32 F.4th 902, 949-50 (10th Cir. 2022).

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Court on this issue.”). Liu does not require the district court to conduct its

own search for business deductions that defendants have not identified.

Accordingly, we hold that the district court did not abuse its discretion in

ordering disgorgement. 15

IV.

For the foregoing reasons, we AFFIRM the judgment of the district

court.

15

Perkins and World Tree also challenge the imposition of joint and several liability

under Liu. However, Liu allows for such liability where “partners engaged in concerted

wrongdoing”—exactly the situation here. See Liu, 140 S. Ct. at 1949 (“The common law

did, however, permit liability for partners engaged in concerted wrongdoing. The historic

profits remedy thus allows some flexibility to impose collective liability.” (internal citation

omitted)). Of note, the district court here carefully determined that “the SEC did not

establish that [Gilmore] participated in the cherry-picking scheme” and thus concluded

that, where Gilmore and Wesley Perkins did not marry until years after the period of

misconduct, and where “no wrongful profits resulted directly from [Gilmore]’s

violations,” she was not personally nor jointly and severally liable for the disgorgement.

23