The Securities and Exchange Commission (SEC) recently found that broker Ralph Calabro (Calabro) churned the brokerage account of Dudley Williams (Williams). The SEC decision ordered Calabro to: (1) cease and desist from committing fraud in violation of Section 17(a) of the Securities Act of 1933 (Securities Act) and Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5; (2) be barred from association with a broker, dealer, investment adviser, (3) disgorge $282,000 plus prejudgment interest, and (4) pay civil penalties of $150,000. In addition, at least six customer complaints have been initiated against Calabro alleging churning, unsuitable investments, fraud, and breach of fiduciary duty.
The SEC allegations against Calabro also involved several other J.P. Turner & Company, LLC (JP Turner) registered representatives including Michael Bresner (Bresner), Jason Konner (Konner), and Dimitrios Koutsoubos (Koutsoubos). The SEC alleged that Calabro, Konner, and Koutsoubos between January 1, 2008, and December 31, 2009, churned the accounts of seven customers by engaging in excessive trading for their own gains in disregard of their clients’ investment objectives and risk tolerances. The SEC alleged that Calabro, Konner, and Koutsoubos generated commissions, fees, and margin interest totaling approximately $845,000, while the clients suffered aggregate losses of approximately $2,700,000.
JP Turner is a registered broker-dealer headquartered in Atlanta, Georgia, with two majority owners. From 2008 to 2009, JP Turner had between 180 and 200 branch offices, most of which were small or one-person offices. There were approximately five hundred registered representatives in JP Turner’s offices in 2008 and 2009. Calabro joined JP Turner in 2004 and left in 2011. Thereafter, Calabro became associated with National Securities Corp. (National Securities) as a registered representative but not a securities principal. While at JP Turner, Calabro acted as a principal and registered representative in JP Turner’s Parlin, New Jersey office. Calabro’s customer base increased from ten in 2004 to seventy by 2010.
Churning occurs when a broker buys and sells securities for a customer’s account, without regard to the customer’s investment interests and instead trades for the purpose of generating commissions. The three elements of churning are: (1) control of the account by the broker, including de facto control through acquiescence, trust, or reliance; (2) excessive trading; and (3) scienter or intent to defraud. While there is no single precise formula for determining when excessive trading has occurred measures such as turnover rate and cost to equity ratio (also known as the breakeven ratio), commission to equity ratio, and the number of days a security is held have been used to evaluate account trading.
During the litigation, Calabro argued that Williams had the intellect and business experience to understand and make decisions on Calabro’s investment recommendations. Specifically, Calabro argued that Williams’ educational background and thirty years of investment experience evidenced that Williams maintained control of his JP Turner account. The SEC administrative law judge disagreed stating that Williams lacked investment experience and sophistication, had full trust and confidence in Calabro, followed his advice and investment strategy, and Calabro engaged in unauthorized trading in Williams’ account.
The judge found that Williams’ M.B.A and teaching business classes focused on economics, marketing, and accounting and did not relate to finance or investments. In addition, the judge found that even though Williams performed his own analysis of his account holdings cannot be interpreted as securities trading experience and did not imply the ability to pick stocks. Further, Williams’ understanding of the short selling strategy was beside the point because Calabro unilaterally devised the investment strategies for Williams’ account and Williams merely acquiesced to Calabro’s recommendations.
The judge also found Calabro’s trading in Williams’ account to be excessive. Calabro argued that Williams’ investment objectives were speculation and that his risk tolerance was aggressive and that these objectives were confirmed in a handwritten letter to Calabro and on various forms. In rejecting Calabro’s arguments the judge relied upon Williams’ testimony where he stated that his risk tolerance was moderate or conservative and that he had limited general investment knowledge. Calabro also argued that Williams’ former brokerage firm account documents show that Williams’ investment objective was speculation and his risk tolerance was aggressive. However, the judge found that the prior investment account was not traded actively or aggressively and Williams did not consider its holdings to be risky or speculative and Williams consistently testified that his JP Turner account forms contained inaccurate information, including his investment objectives and risk tolerance.
As for the excessive trading measurements, the judge found that short positions are much more risky than long positions and as a result the churning turnover rate of six should be lower for short positions than for long positions. Nonetheless, the court found that the turnover rate in Williams’ account was 6.6, which is conclusive of churning. The court concluded that Williams’ account had an annualized turnover rate of eight and a cost equity factor of 22.9% proving that Calabro engaged in excessive trading.
The attorneys at Gana LLP are experienced in investigating claims of 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.