Securities Lawyers Blog
According to BrokerCheck records kept by The Financial Industry Regulatory Authority (FINRA) former Newbridge Securities Corporation (Newbridge Securities) broker Edward Klug (Klug) left the securities industry in May 2018 after disclosing several large tax liens in the prior years. Klug has made seven financial related disclosures and lists four customer complaints. The customer complaints against Klug allege churning or excessive trading.
In March 2018 Klug disclosed a $141,711 tax lien against him. In May 2017, Klug disclosed a $482,714 tax lien against him. Prior to that, in April 2016 Klug disclosed a $44,229 tax lien against him. Such disclosures on a broker’s record can reveal a financial incentive for the broker to recommend high commission products or services. FINRA discloses information concerning a broker’s financial condition because a broker’s inability to handle their own personal finances has also been found to be material information in helping investors determine if they should allow the broker to handle their finances.
When brokers engage in excessive trading, sometimes referred to as churning, the broker will typical trade in and out of securities, sometimes even the same stock, many times over a short period of time. Often times the account will completely “turnover” every month with different securities. This type of investment trading activity in the client’s account serves no reasonable purpose for the investor and is engaged in only to profit the broker through the generation of commissions created by the trades. Churning is considered a species of securities fraud. The elements of the claim are excessive transactions of securities, broker control over the account, and intent to defraud the investor by obtaining unlawful commissions. A similar claim, excessive trading, under FINRA’s suitability rule involves just the first two elements. Certain commonly used measures and ratios used to determine churning help evaluate a churning claim. These ratios look at how frequently the account is turned over plus whether or not the expenses incurred in the account made it unreasonable that the investor could reasonably profit from the activity.