Articles Posted in Churning

Stoltmann Law Offices is investigating cases where brokers have traded excessively and churned their clients’ accounts. FINRA, the U.S. securities industry regulator,  reached a settlement with R.W. Baird for allegedly overcharging commissions on thousands of stock trades in 2019 and 2020. The firm will pay more than $416,000 in fines and restitution.

FINRA alleged “a substantial failure to supervise the commissions the firm was collecting, citing a minimum-commission policy of $100 per trade that resulted in inappropriately large fees for clients who made smaller transactions,” Barron’s reported. FINRA cited one case involving a Baird client who “purchased two shares of Apple stock for $772 and paid the $100 commission, amounting to 13% of the principal transaction.”

FINRA cited three rules that Baird allegedly violated in its trading activity, including FINRA Rule 2121, which sets terms for fair prices and commissions. That rule offers guidance that firms should cap commissions at 5%, but notes that percentage “is a guide, not a rule. FINRA urges brokers to think of the 5% threshold as a ceiling, not a floor, noting that other factors might render a commission at that level too high.”

Chicago-based Stoltmann Law Offices represents investors who’ve suffered losses as a result of their broker excessively trading and churning their accounts. Brokers have been known to take advantage of clients who have margin accounts and give them permission to trade at will. Although investors place a great deal of trust in their broker-advisors, sometimes this confidence is abused.

FINRA, the federal securities regulator, found in a recent report that brokers don’t always pay attention to customers’ risk tolerance and violate FINRA rules on risk monitoring. To say this is no surprise to the attorneys at Stoltmann Law Offices, who have fifty years of combined experience representing investors in claims against brokerage firms, is an understatement. According to FINRA, “Firms are required to monitor the risk of the positions held in these accounts during a specified range of possible market movements according to a comprehensive written risk methodology,” which has a stack of rules governing the conduct of brokers and the firms that supervise them.

FINRA’s guidelines on informing clients on portfolio risk include the following:

Chicago-based Stoltmann Law Offices is investigating claims by investors in connection with financial advisors who switch clients into more expensive investments that trigger unnecessary fees. Overtrading in a brokerage account or “churning” has long been an industry abuse. But some brokers take churning to new limits.

FINRA, the US securities industry regulator, has suspended a former Edward Jones broker for six months and fined him $7,500 for allegedly making more than 800 transactions in four of his clients’ accounts without their authorization or consent, according to thinkadvisor.com.

From December 2017 to November 2018, Albert L. DeGaetano “executed 470 securities transactions in the accounts of a fundraising organization for a charitable hospital without its authorization or consent,” according to the FINRA letter. The 823 securities transactions in all, which included 389 purchases of exchange-traded fund (ETF) bonds, had a total principal value of about $7.2 million and generated approximately $113,000 in total trading costs, according to FINRA.

Chicago-based Stoltmann Law Offices is representing investors who’ve suffered losses from dealing financial advisors and brokers who’ve churned their accounts. FINRA, the U.S. securities industry regulator, suspended and fined broker Sebastian Wyczawski, while he was registered with Joseph Stone Capital of Manorville, New York, between June 2016 and January 2017. The broker allegedly engaged in “excessive and unsuitable trading” in the account of an unidentified customer, according to Financialadvisoriq.com.

In addition, between September 2016 and September 2017, Wyczawski also allegedly engaged in excessive and unsuitable trading in the account of another customer FINRA identifies as “Customer 2,” placing 45 trades. FINRA and other regulators consider turnover rates of six or more and cost equity ratios of 20% (an industry metric measuring overtrading) or more as conclusory evidence of excessive trading. Wyczawski consented to a five-month suspension and to pay a $5,000 fine as well as restitution of $21,644 plus interest, all without admitting or denying the findings, FINRA stated.

Two months ago, Wyczawski left Joseph Stone for VCS Venture Securities, in Mineola, New York, according to BrokerCheck, which also notes Wyczawski has two customer disputes on his record, both settled. One, from 2004, sought $75,000 for allegations of unauthorized transactions and was settled for half that amount. The second, from 2018, sought $250,000 over allegations of negligence, unsuitability and overconcentration, among other violations, and was settled for $17,500, according to BrokerCheck.

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 fa-mag.com.

“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.

Chicago-based Stoltmann Law Offices has represented investors who’ve suffered losses from brokers who churn customer accounts. One of the most perennial abuses in the brokerage industry is when broker-adviser “churn” accounts to generate extra commissions or fees. When that happens, it’s difficult for clients to make money because their accounts are consumed by transaction fees.

Marc Augustus Reda, a registered representative for Spartan Capital Securities in New York City, was recently charged by FINRA, the securities industry regulator, with overcharging clients some $2 million. “From 2017 through 2019,” reports fa-mag.com, “Reda, among other things, recommended unsuitable investments to his clients and traded excessively in those accounts, the FINRA complaint said. His activities resulted in 66 clients paying a total of $952,764 in commissions and fees, while incurring total net losses of $934,482,” FINRA said.

Reda generated the excessive fees through an “active trading” strategy in which he made trades without his clients’ specific permission. FINRA noted that “Reda failed to consider that the substantial commissions and costs associated with his investment strategy made it unlikely his customers could make any profits.”

Chicago-based Stoltmann Law Offices has represented investors who’ve suffered investment losses at the hands of financial and investment advisers who churned and burned their accounts. One of the most prevalent abuses in the securities industry is excessive trading, or “churning” client accounts. This practice, which is forbidden by industry regulators like FINRA and the SEC, is done to generate commissions, almost always at the expense of the client. As the stock market swings wildly during the Covid-19 pandemic, brokers take advantage by trading their clients’ accounts to generate commissions.

Brokers can open the door to churning by asking customers if they want an “active” trading strategy, which gives brokers discretionary ability to trade at will. Unless clients give specific directions on how and when to trade, brokers may take the opportunity to trade excessively and charge needlessly high commissions.

Churning has been the subject of numerous regulatory actions over several decades. Broker Frank Venturelli, a representative for First Standard in Red Bank, New Jersey, was cited by FINRA for excessive trading between 2016 and 2018. According to FINRA settlement, clients lost more than $373,000 during that period. Venturelli was suspended from the industry for 11 months and ordered to pay partial restitution of $30,000 to his clients.

This week the Financial Industry Regulatory Authority (FINRA), which oversees brokers fined Milwaukee based brokerage firm Robert W. Baird & Co. $150,000 and censured the firm for failing to disclose a conflict of interest arising from the interview where there was substantial likelihood that a reasonable investor would have considered the conflict important to his or her investment decision. In a consent decree, Baird neither admitted nor denied the charges.

Here’s the story: Six years ago, the CEO of a company being followed by a research analyst at Robert W. Baird, a broker, asked the professional if he or she would like to come in for a job interview with the company’s chief and its chief financial officer. The interview came off favorably.

The meeting escalated into a conflict of interest that drew the attention of FINRA when the CEO told senior Baird management about the interview; that the chances were good it could lead to the analyst jumping ship for the company he or she  was writing on and asked Baird if the firm had any objections.  When the analyst told management at his brokerage about the interview, he was told he could still write about the company he was interviewing at and following, but try to avoid learning about any material, non-public  information.

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.

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