Melhado, Flynn & Associates (“MFA”), a broker-dealer and investment advisor registered with the former National Association of Securities Dealers, pled guilty this afternoon to conducting a long-running securities fraud before United States District Judge Arthur D. Spatt. George Motz, MFA’s co-defendant, CEO, and Chairman of the Executive Committee pled guilty to the same crime late Tuesday evening. The defendants were scheduled for trial on October 20, 2009.

MFA admitted that Motz conducted a fraudulent trade allocation scheme, known as “cherry-picking,” to benefit the firm from approximately November 2000 through June 2005. The scheme generated approximately $2.2 million in risk-free profits for MFA’s proprietary trading account and two hedge fund trading accounts Motz controlled at the expense of MFA discretionary clients.

As part of the charged scheme, Motz typically submitted large stock “buy” orders to the MFA trading desk in the morning, without indicating the accounts to which those purchases should be allocated. Later in the day – often shortly before the close of the market – Motz decided whether to sell the position and book the profit in either MFA’s proprietary trading account or the two hedge fund accounts, or to allocate the securities that depreciated in value during the day to MFA’s discretionary client accounts. While Motz carried out his scheme, MFA’s discretionary account clients were falsely assured that, to the extent MFA engaged in proprietary trading on the firm’s behalf, the firm’s account would not be favored over the clients’ accounts.

“MFA put its financial self-interest ahead of that of its clients and compounded its crime by not bringing this conduct to light once it became apparent,” stated United States Attorney Benton J. Campbell. “Such corporate misdeeds have no place in our securities markets and will be vigorously prosecuted.” Mr. Campbell extended his grateful appreciation to the Federal Bureau of Investigation, New York Field Office, the agency responsible for conducting the government’s investigation.

Under the sentencing guidelines, MFA faces a fine of up to $184 million when sentenced by United States District Judge Arthur D. Spatt.

The government’s case is being prosecuted by Assistant United States Attorneys Roger Burlingame and William Schaeffer.

The Defendant: