Articles Posted in Excessive Trading

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.

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.

CNBC
FOX Business
The Wall Street Journal
Bloomberg
CBS
FOX News Channel
USA Today
abc NEWS
DATELINE
npr
Contact Information