Articles Posted in Excessive Trading

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 losses from dealing with brokers who have failed to recognize their clients’ need for lower-risk portfolios. It’s no secret that the COVID pandemic has made the stock and bond markets more volatile. When the outbreak first hit markets, it triggered a massive sell-off in everything from blue chip stocks to municipal bonds.

Yet many broker-advisers failed to protect their clients, keeping them in high-risk portfolios that lost money. Even though they constantly make claims to the contrary, almost no advisor can time markets to fully protect investors. Few saw the pandemic coming, or the devastating impact it would have on the world economy.

After the stock market peaked on February 19, 2020, it dropped 34% in a month, hitting a bottom on March 23. But by June, the market had bounced back, surging 39%. Then, on Oct. 28, the Dow dropped more than 900 points as COVID cases again surged worldwide in a second, record-setting wave. Who could have predicted such stomach-churning volatility? Investors who were risk averse and needed to protect principal – and were overexposed to stocks – got burned the most.

Chicago-based Stoltmann Law Offices has been representing investors nationwide against unscrupulous brokerage firms and their financial advisors for more than fifteen years. Sometimes one of the best ways to avoid bad brokers is to do a little homework. Doing a simple background check can reveal a number of red flags that will help you steer clear of bad actors. All broker records are publicly accessible through the regulator FINRA’s website on a service called BrokerCheck.

What does BrokerCheck tell you? While it may not give you a complete background profile, it will show you if they have been disciplined or fined by FINRA, the US Securities and Exchange Commission (SEC) and other agencies. A pattern of multiple violations is a sure signal that you should avoid them. BrokerCheck will also give you an employment history and information on the firms that employed them. Although it’s not unusual for brokers to jump from one firm to another, repeated employment disruptions may be a warning sign as well.

As the prime securities brokerage regulator, FINRA can fine, sanction and bar brokers from the industry. Complaints about brokers must be investigated – and recorded – by FINRA. If brokers refuse to cooperate with the regulator, they can lose their securities licensing and be expelled from the business.

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.

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