FINRA Arbitrators Find Major Brokerage Liable to Investors for Punitive Damages in Cherry-Picking Fraud Scheme Run by Outside Advisor

First-of-Its-Kind Ruling Holds Charles Schwab & Co., Inc. Liable to Investors for Facilitating and Concealing RIA Fraud; Skipp Cook and Raymond McCleary vs. TD Ameritrade, Inc., TD Ameritrade Clearing, Inc., and Charles Schwab & Co., Inc., FINRA Arbitration Case No. 23-03586

SAN DIEGO, CALIFORNIA / ACCESS Newswire / May 6, 2025 / In a decision set to reverberate across the financial industry, a FINRA Arbitration Panel has found Charles Schwab & Co., and its affiliated clearing and custodial entities, liable to investors in a multi-year cherry-picking fraud scheme orchestrated by a third-party investment advisor. The ruling marks the first known case in which a major brokerage firm has been held accountable to investors for a fraudulent scheme executed by a Registered Investment Advisor (RIA) operating on its platform, and the first time Schwab has been hit with punitive damages for committing fraud against its customers.

The case centers on Schwab's post-merger operations under the TD Ameritrade Institutional brand between 2020 and 2022, when the firm granted Mathew Werthe - a solo RIA with a known history of regulatory issues - access to operate and manage client accounts on its platform with minimal oversight. These accounts became the vehicles for a cherry-picking scheme in which Werthe diverted profitable trades to his own accounts while systematically assigning losses to clients.

"This case underscores a systemic risk embedded in the custodial model used by major brokerage firms that benefit from lucrative RIA business while refusing responsibility for misconduct - even when the fraud is known and facilitated through their own technology and systems," said Bradd Milove, attorney for the investors.

According to SEC filings, Schwab became aware of Werthe's cherry-picking activity in or before May 2021. According to the FINRA complaint, Schwab not only failed to supervise and stop the embezzlement of customer funds, but knowingly concealed the misconduct and profited from it, collecting advisory, custodial, and transaction fees on fraudulent trades. Schwab never disclosed Werthe's fraudulent cherry-picking activity to the scores of affected Schwab/TD account holders despite quietly severing its relationship with Werthe in April 2022. Investors did not learn of any problems until the SEC filed suit against Werthe in mid-2023.

The FINRA Panel ordered Schwab to pay Claimants Skipp Cook and Raymond McCleary nearly $350,000 including compensatory and punitive damages, along with additional costs and interest, while other affected customers go uncompensated and uninformed. Although Claimants requested a detailed written "Explained Decision," Schwab blocked the FINRA Panel from detailing the fraud - a tactic frequently used in FINRA arbitration to prevent disclosure of brokerage firm misconduct to the public and regulators.

"This ruling is a landmark for investor protection," said Bradd L. Milove, attorney for the Claimants. "For the first time, a major financial institution has been held accountable for facilitating advisory firm fraud on its trading and custodial platform. We believe there are hundreds, if not thousands, of other Schwab clients affected by this same pattern of fraud and concealment."

This Award follows the March 12, 2025, civil judgment in SEC v. Werthe (3:23-cv-00815), where Werthe and HSR Wealth Management were found liable for cherry-picking fraud by the U.S. District Court for the Southern District of California. This case echoes SEC v. Glenn, a contemporaneous criminal cherry-picking fraud scheme from Greenwich, Connecticut, involving RIA manipulation of Schwab/TD custodial trading platforms.

SOURCE: Bradd Milove