Securities Lawyers Blog
According to BrokerCheck records kept by The Financial Industry Regulatory Authority (FINRA) broker Joseph Cotter (Cotter) has been subject to two customer complaints, two employment terminations for cause, and one regulatory action. Cotter was formerly registered with Next Financial Group, Inc. (Next Financial). In March 2016 Next Financial terminated Cotter claiming that the firm conducted an internal review of the trading activity in a customer’s accounts and found the level of trading activity to be excessive (excessive trading) in light of the customer’s profile and the character of the account.
Thereafter, FINRA investigated Cotter and found that Cotter engaged in excessive, unsuitable trading in the accounts of one customer. FINRA found that Cotter exercised de facto control over an IRA account and a second account of a customer. FINRA determined that Cotter used this control to excessively trade the accounts in a manner that was inconsistent with the customer’s investment objectives, financial situation, and needs. The trading generated commissions of $100,549 while the client lost $391,893.
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.