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

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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

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San Diego, CA – May 5, 2025 — In a decision set to reverberate across the financial industry, a FINRA Arbitration Panel has found Charles Schwab & Co., Inc., along with 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 instance 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 fraud on its customers.

The case centers on Schwab’s post-merger operations under the TD Ameritrade Institutional brand between 2020 and 2022, during which the firm granted Mathew Werthe—a solo RIA with a known history of regulatory issues—direct access to establish and manage Schwab/TD client accounts. Despite multiple red flags in Werthe’s FINRA BrokerCheck record, Schwab permitted him to operate on its platform with minimal oversight. These accounts became the vehicle for a cherry-picking scheme in which Werthe diverted profitable trades to his own accounts while systematically assigning losses to clients.

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According to SEC court 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 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 a total near $350,000 including compensatory and punitive damages, along with additional costs and interest, while none of the other affected customers have been compensated. Although Claimants requested a detailed written “Explained Decision,” Schwab blocked the arbitration panel from issuing an opinion detailing the fraud—a tactic frequently used in FINRA arbitration to prevent disclosure of brokerage firm misconduct to the public and regulators.

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“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.”

 

The Broader Impact: A System Designed for Abuse

This FINRA Arbitration 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 originating in Greenwich, Connecticut involving another RIA operating on Schwab’s custodial trading platform. While the SEC has been actively tracking down RIA fraudsters, regulatory action against the brokers in cherry-picking fraud cases has been largely absent.

What distinguishes this case is not merely the advisor’s misconduct, but Schwab’s direct role in allowing, concealing, and profiting from it—despite Schwab’s clear legal and regulatory obligations to supervise RIAs using its infrastructure and to disclose material facts, such as cherry-picking fraud, to affected Schwab client account holders. The FINRA Award 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 to the Brokerage and facilitated through their own technology and systems. The “clearing broker” or “custodial broker shields” are time-worn and false defenses utilized by the industry, which should never have been tolerated and will hopefully never again be allowed.

 

NOTICE TO CHARLES SCHWAB AND TD AMERITRADE “INSTITUTIONAL ACCOUNT” HOLDERS 

If you invested through a Schwab or TD-Ameritrade Institutional account managed by an RIA between 2019 and 2023, and suspect Investment Advisor impropriety, unusual losses, suspicious trading, or portfolio losses, you may have been unknowingly affected. Legal remedies may still be available. Additional investigations are ongoing concerning the cases of Mathew Werthe, Jonathan Vincent Glenn, and other cherry-picking Investment Advisors.

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