Aegis Capital Nailed by FINRA for Brokers’ Churning and Burning Clients

Chicago-based Stoltmann Law Offices is investigating financial advisors and brokers who trade excessively in client accounts.  “Churning,” or trading excessively to generate broker commissions, is one of the perennial abuses in the securities industry. Investors have been losing millions due to these practices.

FINRA, the U.S. securities industry regulator, said it has ordered New York City-based Aegis Capital Corp. to “pay approximately $2.8 million, including $1.7 million in restitution to 68 customers whose accounts were potentially excessively and unsuitably traded by the firm’s representatives.” FINRA also imposed a $1.1 million fine for Aegis’s supervisory violations, according to

“Aegis supervisors failed to detect or act on information that eight Aegis reps excessively and unsuitably traded customer accounts over a period of more than four years, generating $2.9 million in trading costs that would have required the investments to generate more than 71% returns to offset costs,” FINRA stated. FINRA found that “from July 2014 to December 2018, Aegis failed to implement a supervisory system reasonably designed to comply with FINRA’s suitability rule. As a result, Aegis failed to identify and address its representatives’ potentially excessive and unsuitable trading in customer accounts, including trading by eight Aegis representatives who excessively traded 31 customers’ accounts,” the regulator said.

Aegis apparently had knowledge of broker churning reports, FINRA noted. “The firm failed to act on more than 900 `exception reports’ generated by its clearing firm that identified potentially unsuitable trading and more than 50 complaints from customers alleging excessive and unsuitable or unauthorized trading in their accounts,” FINRA found. Aegis, which was founded in 1984, has 37 compliance and enforcement disclosures on the BrokerCheck database for sales and best execution violations, fa-mag reported.

“Recognizing and responding to red flags is the hallmark of proper supervision, and a critical component in preventing excessive and unsuitable trading in customer accounts,” said Jessica Hopper, executive vice president and head of FINRA’s Department of Enforcement. Aegis and two of its supervisors agreed to “accept and consent to the entry of FINRA’s findings without admitting or denying them,” the regulator said.

All investors should be vigilant about excessive trading in their accounts. Traditionally, churning is determined using two metrics.  The first is referred to as the “2-4-6” rule.  Courts and regulators have used this metric for many years. What is means is, if your account is turned-over (meaning total trades amount to the total equity in the account being traded or turned-over 1 time), two times in a year, there is an “inference” of churning.  If the account is turned-over four times a year, there is a “presumption” of churning; and if your account is turned-over six times or more in a year, that is “conclusive” of churning.  The cost-equity ratio is also something courts and regulators consider.  Simply put, the historical rate of return of the S&P 500 is about 13% per year.  If your account has to earn 13% just to cover the cost of trading, you are being ripped off.

If you invested with a broker-advisor and lost money as a result, you may have a claim to pursue through FINRA Arbitration. Please contact Stoltmann Law Offices, P.C. at 312-332-4200 for a free, no obligation consultation with a securities attorney. Stoltmann Law Offices is a contingency fee law firm which means we do not get paid until you do!

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