Securities Lawyers Blog
The law office of Gana Weinstein LLP has recently filed securities arbitration case on behalf of a group of seven investors against J.P. Turner Company, L.L.C. (JP Turner), Ridgeway & Conger, Inc. (Ridgeway), and Newbridge Securities, Corp. (Newbridge) concerning allegations that the firms failed to supervise and prevent Sean Francis Sheridan (Sheridan) from churning claimants’ accounts through the use of excessive and unreasonable mutual fund switches and generally making unsuitable recommendations to the clients. Both FINRA and the SEC have brought actions against JP Turner and the firm’s brokers on numerous and repeated occasions concerning the firm’s failure to protect its clients from the type of unscrupulous sales practices alleged in the complaint
As discovered by FINRA, from at least January 2007, through December 2009, Sheridan recommended approximately 205 unsuitable mutual fund switch transactions in the accounts of eight customers, including some of the Claimants in the filed case. See Department of Enforcement v. Sean Francis Sheridan, Disciplinary Proceeding No. 2009019209204, (FINRA, Feb. 12, 2013) (Sheridan Action). FINRA found that Sheridan recommended the unsuitable mutual fund switches in customers’ accounts and as a result of Sheridan’s activities in claimants’ and other customers’ accounts, FINRA barred Sheridan from the financial industry.
FINRA found that Sheridan only recommended Class A mutual fund shares that require customers to pay sales charges with each new purchase when Sheridan intended to effect the switches on a short-term basis. FINRA found that the average holding period for the mutual funds Sheridan sold was just four to five months. FINRA found that Sheridan exclusively recommended Class A mutual fund shares that charged front-end sales loads of 4-5% with each new purchase, an enormous cost. FINRA also found that Sheridan would randomly switch customers between fund categories such as Growth, Natural Resources, Gold, Emerging Markets, Science and Technology without a reasonable basis for doing so.
FINRA found that Sheridan’s customers were unsophisticated investors and had maintained their accounts with Sheridan for several years. The investors did not understand the risks associated with mutual fund trading/switching and relied on Sheridan to guide them. FINRA also brought charges of fraud against Sheridan and found that he never disclosed to customers that they could avoid new sales charges through the use of “Free Exchanges,” which enable the exchange of mutual fund shares within the same fund family at no additional cost. FINRA found that the failure to disclose that customers could avoid additional sales charges was material information that the customer would want to know in evaluating decisions to switch mutual funds. By omitting this information, FINRA found that Sheridan committed fraud.
Finally, FINRA found that Sheridan falsified firm records by falsely identifying the mutual fund switches as “unsolicited” when in fact they were all “solicited” transactions thereby causing his firm’s records to be inaccurate.
As a result of Sheridan’s unsuitable switches and trading of mutual funds, FINRA concluded that customers incurred unnecessary sales charges and suffered losses of approximately $1,048,856. In addition, FINRA found that Sheridan received commissions of approximately $267,000 through this activity.
See Part II for more.