Merrill Lynch has paid $40,000,000 to settle a case involving Boston financial advisor Charles Kenahan. According to his FINRA BrokerCheck Report, two other clients have pending claims, one for over $42,000,000. These cases all allege that, for many years, Charles Kenahan excessively traded and churned their accounts, resulting in extraordinary losses. Pursuant to an article published in InvestmentNews, one of those clients was the former New Hampshire governor, Craig Benson.
Churning or excessive trading is an all too common tactic used by unscrupulous brokers and financial advisors to generate commissions. Especially in consistently “up” stock markets like the one currently being experienced, clients may not notice the deleterious impact this volume of trading has on their accounts. Churning/Excessive trading is considered a fraudulent act under state securities statutes.
Whether an account has been churned or excessively traded starts with the numbers. The two key components are turnover rate – meaning the rate at which the balance of the account is traded on an annualized basis. The second important number is the cost/equity ratio, which is the rate of return your account must generate simply to cover fees and commissions. Courts traditionally look to the “2-4-6” rule to determine firstly whether trading is in fact excessive. The higher the number, the more likely a trier of fact will determine the account has been churned. Similarly, the higher the cost/equity ratio, the more likely there could be a finding of churning. If your account has to generate 15% returns just to pay your broker, chances are you’re being churned.