RELEVANT DISCIPLINARY HISTORY

In April 2005, Phillips entered into an AWC with NASD in which he was suspended for 10 business days and fined $20,000 for creating and distributing written communications that failed to adequately disclose material facts regarding investment products and strategies, or made exaggerated, unwarranted or misleading statements or claims regarding those products, or both.

In October 2006, Phillips was sanctioned in a proceeding brought by the State of Illinois based on the above-referenced NASD action. As a result, he was prohibited from serving as a principal in Illinois for two years and required to pay $1,000 for the costs of the investigation.

FACTS AND VIOLATIVE CONDUCT

From January 2010 through August 2010, Phillips, through PKS, purchased products - including Steepener Notes, Steepener CDs, Floating Rate Notes, Principal Protected Notes and Municipal Securities - for certain of his investment advisory clients. Phillips added a markup to these transactions. Phillips then allocated the marked-up products to his clients' investment advisory accounts, where Phillips charged advisory fees on the same products for which he had previously charged a markup. By assessing both a markup and an investment advisory fee on the same products, Phillips overcharged his clients in violation of FINRA Rule 2010 and MSRB Rule G-17.

Respondent TPG, an investment adviser formerly registered with the Commission, through its sole owner and principal Respondent Phillips, engaged in fraudulent trade allocations - "cherry-picking." From at least January 2010 to at least August 2014, TPG and Phillips unfairly and systematically allocated profitable trades to a set of accounts while other accounts were harmed by the allocation of unprofitable trades.

RESPONDENTS' CHERRY-PICKING SCHEME

TPG's Trade Allocation Policies

4. TPG's Forms ADV Part 2A, which were provided to clients, stated that TPG sought "to allocate trade executions in a most equitable manner possible" through "consistently non-arbitrary methods of allocation." All ten Forms ADV Part 2A filed by TPG from February 2011 through May 2015 used the same language. TPG's internal written policies and procedures required equitable trade allocation. Specifically, TPG's compliance manual states: "TPG will not allocate trades in such a way that TPG's own or affiliated account(s) (including those of supervised persons) or selected Clients receive more favorable treatment than TPG's other Client accounts." TPG's compliance manual also states that in any aggregated trade, "[n]o advisory Client will be favored over any other Client," and that the adviser would "prepare, before entering an aggregated order, a written statement (Allocation Statement) specifying the participating Client accounts and how it intends to allocate the order among those Clients." To ensure that no account was favored, the compliance manual stated that "[p]eriodic reviews should be conducted to ensure no accounts are being systematically disadvantaged."

TPG and Phillips Favored Certain Accounts

5. Contrary to TPG's Forms ADV Part 2A and internal policies and procedures, Phillips did not allocate equities and options trades equitably. From at least January 2010 to August 2014, Phillips unfairly allocated a disproportionate number of profitable equity and options trades to at least six favored accounts held by at least four favored clients and allocated unprofitable trades to certain other, disfavored client accounts. Phillips had personal connections to the favored clients, which included (1) Phillips' lifelong family friend; (2) Phillips' cousin; (3) a long-standing, high-net worth client with a background in the entertainment industry; and (4) a client whom Phillips had served for over twenty years and whose mother had also been a longtime client of Phillips.

6. TPG's client accounts are held in custody by a third-party broker. TPG and Phillips traded securities initially in a master account without allocating the trade to a specific client account. If a security could be bought and sold in a day for a profit, then TPG and Phillips usually allocated those profitable "day trades" to favored accounts. To do so, the position would be closed in the master account, a positive gain would be realized on the trade and that profitable day trade would then be allocated to one of the favored accounts. But if the security could not be closed for a gain on the day it was purchased, the security was not sold and was usually allocated to one of the disfavored accounts. TPG's favored clients received first-day profits on day trades that were virtually impossible to have achieved by chance.

7. Certain accounts had a large proportion of day trades, while other accounts had almost none. For the six most-favored accounts, more than 90% of the trades were day trades and more than 90% of the trades in the account had single-day profits. By contrast, in at least eleven accounts in which only a small proportion of the trades were day trades, the vast majority of trades had unrealized losses in the first day.

8. The performance in each of the six most-favored accounts is a statistical anomaly. The likelihood that their profitability originated from random chance is less than 1%. Similarly, the performance in each of the eleven harmed accounts is also a statistical anomaly. Random chance would have provided them with better performance with a probability exceeding 99%.

9. By disproportionately allocating the more favorable trades to the favored accounts through this cherry picking scheme, TPG and Phillips provided a benefit to the favored clients and inflicted harm on the disfavored clients.

10. TPG and Phillips had been expressly warned about their allocation process by the third-party broker that maintained custody of the accounts. Between March 2010 and January 2015, the third-party broker's trade allocation surveillance system flagged TPG for suspicious trade allocations at least twenty-one times. From August 2010 to December 2012, the broker's employees called Phillips at least five times about TPG's allocation practices, each time making suggestions that Phillips disregarded. The broker's employees instructed Phillips to trade directly in the clients' accounts instead of the master accounts, but Phillips failed to follow the broker's instructions. The broker also suggested, and Phillips appeared to agree, that the accounts receiving the profitable day trades at issue be moved to another master account so they could be identified as day-trading accounts, but Phillips failed to comply with that suggestion. While TPG has multiple master accounts, only one is used regularly and no master account appears to be limited to the daytrading clients.

• barred from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization;
• barred from participating in any offering of a penny stock, including: acting as a promoter, finder, consultant, agent or other person who engages in activities with a broker, dealer, or issuer for purposes of the issuance or trading in any penny stock or inducing or attempting to induce the purchase or sale of any penny stock; and
• prohibited from serving or acting as an employee, officer, director, member of an advisory board, investment adviser or depositor of, or principal underwriter for, a registered investment company or affiliated person of such investment adviser, depositor, or principal underwriter.