The Financial Industry Regulatory Authority (FINRA) suspended broker James Glenn Tallant (Tallant) for three months and fined him $15,000 including the disgorgement of $8,560.44 in commissions. FINRA alleged that Tallant exercised discretionary trading authority without written authorization in four securities accounts in violation of NASD Conduct Rule 2510(b) and FINRA Rule 2010. In addition, FINRA found that Tallant engaged in excessive trading and quantitatively unsuitable in violation of NASD Conduct Rule 2310 and IM-2310-2.
Tallant has been a registered representative with Morgan Stanley from 2005 through July 2013. FINRA alleged that Tallant’s securities violations involved a 49 years old woman, divorced, and with two children. The client owned and operated a women’s boutique clothing store and had an annual income of approximately $140,000 and an estimated net worth of approximately $300,000.
The client’s IRA account investment objectives capital appreciation and aggressive income. FINRA found that between March 2009, and March 2010, Tallant executed 39 purchase and sale securities transactions in the client’s individual account amounting to $147,366.50 with gross commissions totaling $8,739.56. In the client’s three other accounts Tallant’s trading totaled between $99,000 and $261,000 over the same time period. In 2009 alone, Tallant’s total gross commissions were $200,927.
FINRA alleged that many of the trades evidenced “short term” or “in-and-out trading.” Many of the stock positions in the accounts were purchased one month only to be sold the next. FINRA also found that Tallant exercised discretion in the accounts and made trades without written authorization from or the acceptance of the accounts as discretionary by the firm. FINRA found that Tallant’s actions and conduct constitute violations of NASD Conduct Rule 2510(b) and FINRA Rule 2010.
FINRA found that Tallant exercised de facto control because the client routinely followed Tallant’s advice. FINRA concluded that Tallant’s trading was unsuitable and excessive in size and frequency in view of the client’s financial situation and needs. In determining whether trading has been excessive, two metrics often used are the account’s turnover ratio and the cost-to-equity ratio. The turnover ratio tells how many times the account has been completely traded during the relevant time period. Excessively traded or churned accounts typically will experience turnover ratios in the 3 to 6 range. The cost-to-equity ratio measures how expensive the trading strategy was in the account. If the annual cost-to-net equity ratio is 5% the account would need to earn a 5% profit just to breakeven.
Tallant’s trading resulted in turnover ratios between 7 to 15 and cost-to-equity ratios between 44 and 87%. In other words, the client’s four accounts would have had to make an investment return of between 44% and 87% simply to break even on their investment. Due to FINRA’s finding that Tallant exercised discretionary control over the account and executed excessive trades, the regulator concluded that Tallant violated the securities laws and industry practices.
The attorneys at Gana Weinstein 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.