In April 2013, the Financial Industry Regulatory Authority (FINRA) requested that Eric Foster (Foster) provide information concerning possible securities laws violations. By July 2013, Foster failed to respond to FINRA’s requests and imposed a permanent bar from the securities industry.
The FINRA bar isn’t the first time Foster has been sanctioned by FINRA. In February 2012, Foster settled charges that he violated FINRA Rule 2110 by effecting unauthorized transactions in the account of a deceased customer. In so doing, Foster exercised discretion in the customer’s account without written authorization. The settlement resulted in a $12,471 fine and restitution and a three month suspension. In December 2011, Foster settled charges brought by Illinois Securities Department concerning allegations that he churned the account of a senior citizen earning large commissions for himself while reducing the equity in the account to zero
Foster was a registered representative of Halcyon Cabot Partners, Ltd. from July 2010 through June 2012. Previously, Foster was associated with Arjent Services, LLC from October 2010, until July 2010. Foster was also associated with Maxim Group LLC from October 2002 until October 2008.
In addition to regulatory allegations, several customer complaints filed against Foster alleging unauthorized transactions, churning, and unsuitable investments. “Churning” is essentially investment trading activity that serves little useful purpose or is inconsistent with investors’ objectives and is conducted solely to generate commissions for the broker. Churning is also a type of securities fraud.
NASD Rule 2310(a) provides that in recommending securities, a member shall have reasonable grounds for believing that the recommendation is suitable for such customer based upon the customer’s financial situation and needs. Included in this rule is the obligation of “quantitative suitability,” which focuses on whether the number of transactions within a given time frame is suitable in light of the customer’s financial circumstances and investment objectives.
To demonstrate excessive trading the broker must have control over the account and second excessive trading activity inconsistent with the customer’s financial circumstances and investment objectives. Both excessive trading and churning are independent violations of the FINRA rules. As to the first element of control, a broker exercises control over an account if the broker has either discretionary authority or de facto control over the account. Brokers may exercise trading discretion where the securities selected for purchase or sale and the amounts purchased and sold are made without the customer’s knowledge or approval.
As for evidence of excessive trading, factors such as turnover rate, cost-to-equity ratio, and use of “in-and-out” trading in an account may provide a basis for a finding of excessive trading. “In-and-out trading” is where securities in an account are sold and there is a reinvestment of the sales proceeds in other securities followed by the sale of the newly acquired securities. While there is no clear line indicating what trading is excessive, courts have found that turnover rates between three and five have triggered liability for excessive trading.
The attorneys at Gana LLP are experienced in investigating claims of suitability, excessive trading, and churning. Our attorneys can help you detect and uncover suspicious activity in your accounts. Our consultations are free of charge and the firm is only compensated if you recover.