The SEC has sued an adviser, its affiliated broker-dealer, and its principal for fraudulently inducing clients through a scheme that involved inflating values through undisclosed cross-trades.  The adviser advertised a cash management strategy that depended on a liquid market for preferred utility stocks.  When the market became illiquid, the SEC alleges that the Adviser maintained inflated values through cross-trades made using the affiliated broker-dealer.  The SEC noted its long-standing position that cross-trades require prior client notice and consent before each transaction.

OUR TAKE: We don’t often see cases alleging violation of the cross-trading rules.  This is a reminder that cross-trades require client consent before each transaction. 

 http://www.sec.gov/litigation/complaints/2011/comp21812.pdf