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.
“[I]t was virtually impossible for any of these customers to earn a profit,” FINRA said. “In addition to the excessive trading, the trades were unsuitable for the customers’ investment profiles,” the regulator stated. Venturelli accepted the settlement without admitting nor denying the findings.
How do you know if a broker is churning your account? Regulators generally use guidelines like “turnover rate” and “cost to equity ratio.” The first metric is an annual percentage of change in a portfolio’s composition. A 100% turnover rate, for example, would mean that all of the contents of a portfolio were either bought or sold within a year. The rate also applies to mutual fund portfolios.
Cost-to-equity ratio is a little more complicated and is calculated by dividing commissions and mark-ups by average equity. As a general rule, when this ratio is above 20% — combined with a high turnover rate — it usually indicates churning. Another fed flag indicating excessive trading is that the trades are unsuitable for clients, who may want secure, buy and hold or conservative investment strategies. Brokers are legally obligated to reduce risk for such clients and operate in their best interests. Brokers who exploit a client’s lack of sophistication in investing or intellectual deficits could be guilty of selling unsuitable investments – in addition to churning. Often these abuses are egregious.
Last year, FINRA barred two Florida brokers from the securities industry – Ami Forte and Charles Lawrence – for their involvement in churning the account of a 79-year-old customer who had dementia.
“FINRA found that from September 2011 through June 2012, the Forte Group, an entity Forte established in 2001, which Lawrence joined at its inception, effected more than 2,800 trades in the client’s accounts, generating approximately $9 million in commissions,” the regulator stated in a press release.
“Over half of these transactions involved short-term trading in long-maturity bonds, including municipal bonds, intended for customers with long-term investment horizons. This unsuitable and excessive trading continued until shortly before the client’s death.”
“Churning the account of an elderly customer who suffered from severe cognitive impairment is an egregious violation of the high ethical standards to which FINRA holds all associated persons,” stated Jessica Harper, FINRA senior vice president. FINRA is the primary regulator of the securities industry. The brokers accepted FINRA’s findings without admitting nor denying the charges.
If you invested with a broker 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!