Churning (Excessive Trading)

Brokerage Firm Spotlight: Investor Claims of Churning Against Rockwell Global Capital

January 13, 2015 | by Staff Attorney

The law offices of Gana Weinstein LLP is investigating Rockwell Global Capital LLC (Rockwell) after having filed a complaint on behalf of an investor. We have posted on several previous occasions that brokers at Rockwell have been alleged by dozens of investors in recent years of churning client accounts. In Three Rockwell Global Capital Brokers Accused of Securities Misconduct by Customers we wrote about three brokers, Robert E. Lee Jr. (Robert Lee), Douglas Guarino (Guarino), and Lawrence Lee (Lee) that have been the subject of at least 29 combined customer complaints. All three brokers have been accused by clients of churning their accounts and making unsuitable investment recommendations.

Recently, an arbitration panel awarded a customer and ordered Rockwell to pay $119,000 in compensation together with costs and attorneys fees due to claims that included excessive trading.

What is “churning”? This type of securities misconduct includes investment trading activity that serves no reasonable purpose for the investor and is transacted in order for the broker to generate commissions. The elements that an arbitration panel will look at to establish a churning claim, a species of securities fraud, are excessive transactions of securities, broker control over the account, and intent to defraud the investor by obtaining unlawful commissions. A similar claim, excessive trading, under FINRA’s suitability rule involves just the first two elements.

Illinois Secretary of State Brings Action to Ban James B. Markoski from Selling Securities in Illinois

December 27, 2014 | by Staff Attorney

On September 29, 2014, Jesse White, the Secretary of State for Illinois recently announced it set a hearing for November 6, 2014 to determine whether James B. Markoski should be banned from offering or selling securities in the State of Illinois.

According to the action, Mr. Markoski “has a storied history of securities fraud, having victimized at least eight customers during his employment at Merrill Lynch which resulted in millions in losses to his victims and for which Merrill Lynch paid restitution.” According to FINRA’s BrokerCheck, Mr. Markoski was registered with Merrill Lynch from 1971 – 1991 and at least 6 customer complaints were lodged against Mr. Markoski during that time.

After Mr. Markoski was terminated from Merrill Lynch, he moved to David A. Noyes & Company, where at least one additional complaint was filed against him, according to Illinois, . Mr. Markoski worked at David A. Noyes until June 2010 when he moved to Birkelback Investment Securities, Inc. Mr. Markoski currently works at Forest Securities Inc. In total, nine customer complaints have already been brought against Mr. Markoski and his employers and more are expected after Illinois’ regulatory action.

Securities America Broker James McLaughlin Sanctioned Over Churning Allegations

December 22, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently sanctioned Securities America, Inc. (Securities America) broker James McLaughlin (McLaughlin) alleging that between October 2010, through October 2012, McLaughlin: (i) engaged in excessive trading (churning) in four customers’ accounts; (ii) recommended unsuitable short-term trading of mutual funds in four customers’ accounts; (iii) engaged in unauthorized trading in three customers’ accounts and; (iv) exercised discretion in one customer’s account without having written authorization.

McLaughlin was registered as a broker from 1989 until October 2012. McLaughlin was registered with Securities America from October 2000, until October 2012. On October 29, 20l2, Securities America terminated McLaughlin’s registrations for violating firm policies and procedures relating to excessive trading.

FINRA alleged that McLaughlin excessively traded at least four customers’ accounts. By analyzing the number of trades, turnover rate, and cost-to-equity ratio for these accounts FINRA determined that across a two-year relevant period from October 2010, through October 2012 that the accounts were excessively traded. In one account 286 purchase and sale transactions occurred resulting in a turnover rate of 47.63 and a cost-to-equity ratio of 228.03%. In a second account 459 purchase and sale transactions occurred resulting in a turnover rate of 15.86 and a cost-to-equity ratio of 69.54%. In a third account FINRA alleged that McLaughlin executed 140 purchase and sale transactions resulting in a turnover rate of 6.79 and a cost-to-equity ratio of 32.74%. Finally, in fourth customer’s account FINRA found McLaughlin executed 111 purchase and sale transactions resulting in a turnover rate of 8.75 and a cost-to-equity ratio of 44.50%.

FINRA Sanctions Essex Securities for Failing to Supervise Mutual Fund Switching

December 4, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA), in an acceptance, waiver, and consent action (AWC), sanctioned brokerage firm Essex Securities, LLC (Essex Securities) alleging that from February 2010, through March 2011, Essex Securities through one of its brokers violated industry rules by engaging in a pattern of unsuitable mutual fund switching, a form of churning, in the accounts of seven customers. Further, FINRA found that Essex Securities violated FINRA’ supervisory rules by failing to establish and maintain a supervisory system reasonably designed to prevent unsuitable mutual fund switching.

Essex has been a FINRA member broker-dealer since 1998, is headquartered in Topsfield, MA, and conducts a general securities business with approximately 50 brokers out of 26 branch offices.

FINRA alleged that an Essex Securities broker engaged in a pattern of unsuitable mutual fund switching in seven customer accounts by not having reasonable grounds for believing that such transactions were suitable for those customers due to the frequency of the transactions and the transaction costs incurred. Part of the suitability rule requires brokers to take into consideration the cost consequences of the transactions and ensure that there is a reasonable basis for the incurring of such costs. In this case, FINRA found that on at least 29 occasions, the broker recommended that customers sell mutual funds within only one to thirteen months after purchasing them. Essex Securities was found to have earned commissions of approximately $60,000 on these switch transactions and broker himself was paid approximately $54,000.

FINRA Sanctions Genworth Financial for Failing to Supervise Churning of Customer Accounts

December 3, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) in an acceptance, waiver, and consent action (AWC) sanctioned brokerage firm Genworth Financial Securities Corporation (Genworth) n/k/a Cetera Financial Specialists, LLC (Cetera) concerning allegations that from July 2009, through June 2012, the firm failed to establish a supervisory system and enforce written supervisory procedures designed to identify and prevent unsuitable excessive trading and the churning of customer funds.

FINRA alleged that although Genworth’s written supervisory procedures explicitly provided for the monthly review of an Active Account Report, no such report actually existed. Further, FINRA found that Genworth had no other systems in place that would monitor active accounts for excessive trading. According to FINRA, the firm’s failure to have systems in place and the failure to enforce written supervisory procedures allowed at least one registered representative to churn a customer’s account in violation of anti-fraud rules.

Churning is considered a type of securities fraud because the broker places his own interests ahead of his customer and induces transactions in the customer’s account that are excessive in size and frequency in order to generate commissions for himself. In order to show that churning took place an investor must demonstrate that the broker exercised control over the account, that the broker engaged in excessive trading considering the objectives and nature of the account, and that the broker acted with intent.

Illinois Files Churning Complaint Against James Markoski

November 18, 2014 | by Staff Attorney

James Markoski (Markoski) recently had a complaint filed against him from the State of Illinois, Securities Department. According to the complaint Markoski has a history of churning accounts, or engaging in excessive trading that is designed to generate huge commissions at the expense of the customer.

Markoski’ entered the financial industry in the early 1970’s and until 1991, Markoski worked for Merrill Lynch, Pierce, Fenner & Smith, Inc. (Merrill). Thereafter, from September 1991, through June 2010, Markoski was a registered representative of David A Noyes & Company. From June 2010, through April 2012, Markoski worked for Birkelbach Investment Securities, Inc. Finally, Markoski currently is associated with Forest Securities, Inc. Markoski has been subject to 9 customer arbitrations throughout his career. Virtually all of the customer complaints involve claims of churning and excessive trading activity in the customer’s account. It is rare for a broker to have a complaint filed against them. It is even more rare for a broker to have more than 2 complaints filed against them.

The Illinois Secretary of State alleged that Markoski alleged that Markoski has a penchant for targeting widows and senior women to engage in his fraudulent churning conduct. In one of the alleged churning instances, Markoski inherited a client’s account from one of his colleagues. The complaint alleges that upon inheriting the client’s account, Markoski began selling off the client’s bond holdings that the client was relying upon the income from. The selling of the bonds before maturity allegedly resulted in $175,000 in losses.

Stifel Nicolaus Broker Robert Head Terminated and Barred for Unauthorized Trading

November 14, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) in an acceptance, waiver, and consent action (AWC) and barring former Stifel, Nicolaus & Company, Inc. (Stifel Nicolaus) broker Robert Head (Head) concerning allegations that between August 2013, and October 2013, Head exercised discretion, aka unauthorized trading, in the account of a customer without obtaining the customer’s prior written consent in violation of NASD Conduct Rule 2510(b) and FINRA Rule 2010. In addition, FINRA alleged that Head recommended transactions to the same customer between January 2010, and October 2013, that were qualitatively and quantitatively unsuitable for the customer.

From August 2008, until January 2014, Head was registered with Stifel Nicolaus. Since that time, Head has not been registered with any brokerage firm. In December 2013, Head was discharged from Stifel Nicolaus for alleged violation of the firm’s policy regarding exercising discretion in a client’s account without written authorization.

According to FINRA, Head managed a Stifel Nicolaus trust account for a customer from August 2008, until October 2013. The customer was retired with an original account application listing investment objectives of “Growth and Income” and “Speculation / Active Trading / Complex Strategies.” FINRA found that in November 2009, the account’s investment objective was changed to identify only ”Speculation / Active Trading / Complex Strategies.” FINRA found that the customer never gave Head written authorization to exercise his own discretion for her account.

Gana LLP Investigates Investor Claims of Churning at Global Arena Capital and Whitewood Group

November 12, 2014 | by Staff Attorney

The law office of Gana Weinstein LLP is investigating a string of securities arbitration cases involving brokers associated or formerly associated with Global Arena Capital Corp (Global Arena) and Whitewood Group, Inc (Whitewood Group). Two such brokers include Mark Lisser (Lisser) and Benjamin Brown Jr. (Brown).

FINRA recently brought an action against Brown alleging that between October 19, 2012, and December 10, 2012, while registered with Whitewood Group, Brown effected 30 transactions while exercising discretion without written authorization in a customer’s account. From August 2011, until November 2011, Brown was associated with Global Arena. Thereafter, from February 2012, through May 2013, Brown was registered with Whitewood Group. Finally, from May 2013 until December 2013, Brown was associated with Salomon Whitney LLC. Brown has had two customer complaints filed against him, both alleged churning and unsuitable investments.

In FINRA’s action against Brown, it is against the industry’s rules for a registered representative to exercise any discretionary power in a customer’s account unless such customer has given prior written authorization and the account has been accepted by the member in writing. FINRA found that between October 19, 2012, and December 10, 2012, Brown effected 30 option transactions while exercising discretion in one customer’s account without the customer’s prior written authorization to exercise discretion to engage in discretionary trading.

Broker Stephen Campbell Sanctioned Over Churning Claim

October 31, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned broker Stephen Campbell (Campbell) concerning allegations that the broker engaged in churning in a client account. Campbell has been a broker since 1978. From November 12, 2004 through November 12, 2013, Campbell was registered with Oppenheimer & Co., Inc. (Oppenheimer).

Investment churning is trading activity characterized by purchasing and selling activity that is excessive and serves no practical purpose for the investor. Brokers engage in churning solely to generate commissions without regard for the client’s interests. In order to establish a churning claim the investor must show that the trading was first excessive and second that the broker had control over the investment strategy. Certain commonly used measures and ratios used to determine churning help evaluate a churning claim. These ratios look at how frequently the account is turned over plus whether or not the expenses incurred in the account made it unreasonable that the investor could reasonably profit from the activity.

In Campbell’s case, FINRA found that one of his customers was a 55 year old single mother who initially opened an account with Campbell in 2000. FINRA alleged that from January 2009, through September 2011, while exercising control over her accounts, Campbell excessively and unsuitable traded her accounts inconsistently with her investment objectives, financial situation and needs. FINRA determined that the trading activity resulted in an annualized turnover ratio of 15 and an annualized cost-to-equity ratio of 59% in her IRA account, and an annualized turnover ratio of 21 and an annualized cost-to-equity ratio of 120% in her individual account. During this period, FINRA determined that Campbell’s improper trading resulted in a collective loss of approximately $62,000, while generating total gross commissions of approximately $64,000.

Choosing the Right Securities Arbitration Attorney

September 29, 2014 | by Staff Attorney

When to Call a Securities Arbitration Attorney

Securities arbitration attorneys, sometimes referred to as investment attorneys, FINRA attorneys, or securities attorneys, should be contacted whenever an investor believes he or she has been a victim of broker misconduct. An investor may have cause to retain a securities fraud attorney to file a lawsuit or arbitration claim if his or her broker failed to create a suitable investment strategy. An investor may also want to contact an attorney case if a broker made false or misleading statements about a security or omitted negative information about the risk of a security in order to persuade the investor to invest.

An investor may also want to seek legal counsel the investor’s broker bought or sold securities without prior consent (unauthorized trading) or excessively traded securities for the purpose generating commissions (churning).