The U.S. Securities and Exchange Commission has issued an investor alert about “auto-trading”, and filed civil charges against a firm and an individual who allegedly provided misleading projections about the performance of automated trading programs.

The SEC issued an Investor Alert, “All About Auto-Trading,” which lists the steps investors should take to thoroughly check out any auto-trading program before they hand over access to their accounts. The alert explains auto-trading, arms investors with questions to ask, and provides time-tested tips for avoiding costly mistakes.

The commission explains that auto-trading is a relatively new, but rapidly spreading, investment vehicle in which subscribers to online investment newsletters open designated auto-trading accounts at brokerage firms selected by the newsletters.

The auto-trading clients sign an agreement with the brokerage firm giving the online adviser authority to automatically direct trades in the client’s personal brokerage account. The newsletters usually require subscribers to pay a fee to auto-trade in addition to the subscription fee for the newsletter. Once the brokerage account is established, the online adviser sends specific trading instructions directly by e-mail or fax to the broker-dealer. These instructions are timed to take advantage of market events, and the client learns of the trades only after they have been executed by the broker.

In addition to the alert, the SEC filed charges against Terry’s Tips Inc., a Vermont corporation, and Terry Allen for violations related to their operation of “auto-trading” programs. The commission alleges that Terry’s Tips and Allen used misleading performance projections in marketing the auto-trading programs to clients. These allegations have not been proven.

The complaint filed in the District of Vermont alleges that Terry’s Tips and Allen have had more than 1200 clients who have invested through its auto-trading programs. The complaint also charges that Terry’s Tips and Allen published performance projections in which they stated subscribers could expect annualized returns of 100% by following Allen’s trading strategies, while at the same time portfolios following these strategies were actually experiencing substantial losses.

In this action, the Commission seeks permanent injunctive relief, disgorgement of illegal profits with prejudgment interest and civil monetary penalties. “The filing of this case illustrates once again that an investor should exercise care and appropriate skepticism before giving another person authority to direct trading in his account, particularly where that person claims to provide unrealistically high returns to the investor,” noted Ken Israel, district administrator of the commission’s Salt Lake District Office.