excessive trading

FINRA Sanctions Felt & Company Broker Timothy O’Brien Over Discretionary Trades

February 17, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently sanctioned broker Timothy O’Brien (O’Brien) alleging that O’Brien exercised discretion in two customers’ accounts without obtaining prior written authorization from the customers. O’Brien is associated with brokerage firm Felt & Company.

The FINRA rules provide that registered representatives shall not exercise discretionary power in a customer’s account unless the customer has given prior written authorization to a stated broker and the account has been accepted by the member on that basis. FINRA found that O’Brien was the registered representative for two Felt customers. FINRA determined that in handling the customers’ accounts O’Brien periodically discussed trading strategies with these two customers. However, FINRA alleged that these customers did not give O’Brien written authorization to exercise discretion in their accounts nor did Felt approve these accounts as discretionary accounts. From July 2012, through February 2013, FINRA found that O’Brien used discretion to execute approximately 171 transactions in these customers’ accounts.

Often times unauthorized discretionary trading goes hand and hand with churning, trading that broker engages in solely to generate commissions at the client’s expense. In order to establish a churning claim the investor must show that the trading was first excessive and second that the broker had control over the investment strategy. 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 and whether or not the expenses incurred in the account made it unreasonable that the investor could reasonably be expected to profit from the activity.

WFG Investments Sanctioned Over Failure to Review Transactions for Suitability Part II

February 9, 2015 | by Staff Attorney

This article continues our prior post concerning The Financial Industry Regulatory Authority (FINRA) recent sanctions of brokerage firm WFG Investments, Inc. (WFG) alleging a host of supervisory failures from March 2007, through January 2014.

In one supervisory failure example involving suitability, FINRA found that between 2009, and 2013, a broker by the initials “MC” (1) traded with discretion in several of his customers’ accounts without their written authorization; and (2) also excessively traded in at least one of his customer’s accounts in light the customer’s investment objectives and risk tolerance. FINRA also alleged that many of the securities traded were also qualitatively unsuitable in light of the customers’ age, objectives, risk tolerance, and financial situation. In addition, several of the customer’s accounts were charged both commissions and management fees and this problem was not identified or corrected even after it was detected.

FINRA also alleged that MC used unapproved charts and provided consolidated statements to a customer without the firm’s knowledge or approval. Moreover, allegedly there were exception reports that highlighted the problem trading activity in several of these accounts that were simply not reviewed or not properly processed. In fact, FINRA found that one of the customers who complained about unsuitable activity in her accounts was not contacted by the firm until after she had complained despite the fact that her accounts had appeared on numerous exception reports. Similarly, FINRA found that broker SGD was also permitted by the WFG to engage in unsuitable trading in one of his customer’s accounts which included the recommendation and sale of numerous high risk equity and ETF purchases for a retired client with a conservative risk tolerance.

FINRA Sanctions WFG Investments $700,000 for Supervisory Failures Part I

February 6, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently sanctioned brokerage firm WFG Investments, Inc. (WFG) alleging a host of supervisory failures from March 2007, through January 2014. FINRA alleged that WFG failed to commit the necessary time, attention, and resources to critical regulatory obligations in supervising registered representatives including: (1) failure to conduct appropriate due diligence on a private placement offering that was sold by a broker away from the firm; (2) failure to supervise the private securities transactions of one of its brokers that were executed through the representative’s investment advisory firm; (3) failure to maintain a supervisory system to ensure customer transactions were suitable; (4) failure to enforce its written supervisory procedures regarding the sale of alternative investments; (5) failure to supervise statements made by one broker on his weekly radio broadcast; and (6) failure to timely report customer complaints and update the Forms U4 and U5 of its brokers.

WFG has been a FINRA member since 1988, conducts a general securities business, and is headquartered in Dallas, Texas. WFG currently has about 280 brokers operating out of 102 branch offices.

FINRA alleged that in 2007, a WFG broker by the initials “SGD” provided notice to the firm that he intended to sell a private placement offering FINRA called “ATMA” to his customers. ATMA was designed to offer an income stream to investors based revenues form automated teller machines (ATMs). In evaluating a selling agreement with SGD, FINRA alleged that WFG assigned its compliance officer known by the initials “TS” to conduct due diligence on ATMA. TS owned a 5% interest in ATMA and SGD was the 90% owner and the operator of ATMA, had no prior experience in structuring and offering private placement investments. FINRA found that the entity that was to provide the ATM machines to ATMA was engaged in fraudulent business practices and most of the ATMs were fictional. FINRA found that WFG declined to enter into a selling agreement with SGD, but permitted him SGD to sell interests in ATMA as private securities transactions.

Brokerage Firm Spotlight: Investor Claims of Churning Against Rockwell Global Capital

January 13, 2015 | by Staff Attorney

The law offices of Gana Weinstein LLP is investigating Rockwell Global Capital LLC (Rockwell) after having filed a complaint on behalf of an investor. We have posted on several previous occasions that brokers at Rockwell have been alleged by dozens of investors in recent years of churning client accounts. In Three Rockwell Global Capital Brokers Accused of Securities Misconduct by Customers we wrote about three brokers, Robert E. Lee Jr. (Robert Lee), Douglas Guarino (Guarino), and Lawrence Lee (Lee) that have been the subject of at least 29 combined customer complaints. All three brokers have been accused by clients of churning their accounts and making unsuitable investment recommendations.

Recently, an arbitration panel awarded a customer and ordered Rockwell to pay $119,000 in compensation together with costs and attorneys fees due to claims that included excessive trading.

What is “churning”? This type of securities misconduct includes investment trading activity that serves no reasonable purpose for the investor and is transacted in order for the broker to generate commissions. The elements that an arbitration panel will look at to establish a churning claim, a species of securities fraud, 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.

FINRA Sanctions Essex Securities for Failing to Supervise Mutual Fund Switching

December 4, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA), in an acceptance, waiver, and consent action (AWC), sanctioned brokerage firm Essex Securities, LLC (Essex Securities) alleging that from February 2010, through March 2011, Essex Securities through one of its brokers violated industry rules by engaging in a pattern of unsuitable mutual fund switching, a form of churning, in the accounts of seven customers. Further, FINRA found that Essex Securities violated FINRA’ supervisory rules by failing to establish and maintain a supervisory system reasonably designed to prevent unsuitable mutual fund switching.

Essex has been a FINRA member broker-dealer since 1998, is headquartered in Topsfield, MA, and conducts a general securities business with approximately 50 brokers out of 26 branch offices.

FINRA alleged that an Essex Securities broker engaged in a pattern of unsuitable mutual fund switching in seven customer accounts by not having reasonable grounds for believing that such transactions were suitable for those customers due to the frequency of the transactions and the transaction costs incurred. Part of the suitability rule requires brokers to take into consideration the cost consequences of the transactions and ensure that there is a reasonable basis for the incurring of such costs. In this case, FINRA found that on at least 29 occasions, the broker recommended that customers sell mutual funds within only one to thirteen months after purchasing them. Essex Securities was found to have earned commissions of approximately $60,000 on these switch transactions and broker himself was paid approximately $54,000.

FINRA Sanctions Genworth Financial for Failing to Supervise Churning of Customer Accounts

December 3, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) in an acceptance, waiver, and consent action (AWC) sanctioned brokerage firm Genworth Financial Securities Corporation (Genworth) n/k/a Cetera Financial Specialists, LLC (Cetera) concerning allegations that from July 2009, through June 2012, the firm failed to establish a supervisory system and enforce written supervisory procedures designed to identify and prevent unsuitable excessive trading and the churning of customer funds.

FINRA alleged that although Genworth’s written supervisory procedures explicitly provided for the monthly review of an Active Account Report, no such report actually existed. Further, FINRA found that Genworth had no other systems in place that would monitor active accounts for excessive trading. According to FINRA, the firm’s failure to have systems in place and the failure to enforce written supervisory procedures allowed at least one registered representative to churn a customer’s account in violation of anti-fraud rules.

Churning is considered a type of securities fraud because the broker places his own interests ahead of his customer and induces transactions in the customer’s account that are excessive in size and frequency in order to generate commissions for himself. In order to show that churning took place an investor must demonstrate that the broker exercised control over the account, that the broker engaged in excessive trading considering the objectives and nature of the account, and that the broker acted with intent.

Broker Stephen Campbell Sanctioned Over Churning Claim

October 31, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned broker Stephen Campbell (Campbell) concerning allegations that the broker engaged in churning in a client account. Campbell has been a broker since 1978. From November 12, 2004 through November 12, 2013, Campbell was registered with Oppenheimer & Co., Inc. (Oppenheimer).

Investment churning is trading activity characterized by purchasing and selling activity that is excessive and serves no practical purpose for the investor. Brokers engage in churning solely to generate commissions without regard for the client’s interests. In order to establish a churning claim the investor must show that the trading was first excessive and second that the broker had control over the investment strategy. 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.

In Campbell’s case, FINRA found that one of his customers was a 55 year old single mother who initially opened an account with Campbell in 2000. FINRA alleged that from January 2009, through September 2011, while exercising control over her accounts, Campbell excessively and unsuitable traded her accounts inconsistently with her investment objectives, financial situation and needs. FINRA determined that the trading activity resulted in an annualized turnover ratio of 15 and an annualized cost-to-equity ratio of 59% in her IRA account, and an annualized turnover ratio of 21 and an annualized cost-to-equity ratio of 120% in her individual account. During this period, FINRA determined that Campbell’s improper trading resulted in a collective loss of approximately $62,000, while generating total gross commissions of approximately $64,000.

Broker Lorene Fairbanks Alleged to Have Made Unauthorized Trades in Client Accounts

October 14, 2014 | by Staff Attorney

According to broker Lorene Fairbank’s (Fairbank) Financial Industry Regulatory Authority (FINRA) BrokerCheck records the representative was recently sanctioned concerning allegations that From August 2006, through February 2012, she effected approximately 57-69 discretionary transactions for seven firm customers without written authorization from the customers or approval from the firm. In addition, Fairbanks was alleged to have mismarked approximately 54-70 order tickets as being “unsolicited” orders when the trades were “solicited” causing the firm to maintain inaccurate books and records.

Fairbanks entered the securities industry in 1996. From August 2006, to March 2012, she was registered Merrill Lynch. Pierce, Fenner & Smith Incorporated (Merrill Lynch). In February 2012, Merrill Lynch terminated Fairbanks and disclosed in a filing that she was discharged for taking discretion in client accounts and mismarking client orders. Since June 2012, Fairbanks has been associated with Ameriprise Financial Services, Inc. In addition, at least five customer complaints have been filed against Fairbanks alleging unsuitable investments, unauthorized trading, and excessive trading (churning).

NASD Rule 2510 prohibits brokers from exercising any discretionary power in a customer’s account unless there is written authorization and the account has been accepted by the member. NASD Rule 3110 and FINRA Rule 4511 provide that members must preserve books and records. FINRA alleged that Fairbanks was not approved by her firm to exercise discretion in any customer accounts but nonetheless effected approximately 57-69 discretionary transactions for seven customers. Also, FINRA alleged that Fairbanks mismarked approximately 54-70 order tickets in the same customers’ accounts as “unsolicited” meaning that the customer asked the broker to make the trade, when the trades were solicited, meaning that the broker brought the investment to the client’s attention.

Broker Spotlight – Mark Lisser Accused of Churning by at Least Three Customers

August 27, 2014 | by Staff Attorney

The law office of Gana Weinstein LLP is investigating a string of securities arbitration cases involving broker Mark Lisser (Lisser) which generally allege securities violations including churning, excessive use of margin, churning, unsuitable investments, and breach of fiduciary duty. All the cases have been filed before The Financial Industry Regulatory Authority (FINRA).

Lisser was registered with Prestige Financial Center, Inc. from February 2008, until November 2010. Thereafter, he was an associated person with Global Arena Capital Corp.

As a background “churning” occurs in a securities account when a dealer or broker, acting in his own interests and against those of his customer, induces transactions in the customer’s account that are excessive in size and frequency in light of the character of the account. In order to show that churning took place a claimant must demonstrate that the broker-dealer exercised control over the account and that the broker engaged in excessive trading considering the objectives and nature of the account.

Gana LLP Represents Seven Former Clients of Sean Sheridan Against JP Turner (Part II)

August 18, 2014 | by Staff Attorney

Continuing our prior post, the law office of Gana Weinstein LLP recently filed securities arbitration case on behalf of a group of seven investors against J.P. Turner Company, L.L.C. (JP Turner), Ridgeway & Conger, Inc. (Ridgeway), and Newbridge Securities, Corp. (Newbridge) concerning allegations that Sean Sheridan (Sheridan) churned claimants’ accounts through the use of excessive and unreasonable mutual fund switches, among other claims.

In addition to specifically finding that Sheridan committed fraud and made unsuitable recommendations in Claimants accounts, FINRA also found that JP Turner general sales practice with regard to non-traditional ETFs and mutual funds was inappropriate. On December 4, 2013, FINRA released a Letter of Acceptance, Waiver, and Consent (AWC) concerning JP Turner’s non-traditional ETFs sales practices and excessive mutual fund switches and fined the firm $707,559.53. FINRA v. J.P. Turner & Company, L.L.C., AWC No. 2011026098501 (FINRA, January 2013). According to FINRA’s investigation, JP Turner failed to establish and maintain supervisory systems related to leveraged and inverse ETF sales and mutual fund purchases.

In another churning related action, on November 8, 2013, the SEC issued a similar order against JP Turner finding that Michael Bresner (Bresner), as head of supervision, failed to properly supervise firm employees. The SEC Order found that JP Turner employed an Account Activity Review System (AARS) to monitor customer accounts for signs of churning. The SEC found that the average number of accounts flagged by the AARS system for churning was shockingly high for each quarter in 2008-2009 and was between 300 and 325 accounts and included more than 100 JP Turner registered representatives. In sum, the SEC discovered that no one at JP Turner was willing to take responsibility in determining whether churning took place in a client’s account – a problem that directly affected the claimants in this case.