Securities Lawyers Blog
The Securities and Exchange Commission (SEC) recently found that broker Dimitrios Koutsoubos (Koutsoubos) churned the brokerage account of Teddy Bryant (Bryant). The SEC’s decision ordered Koutsoubos to: (1) cease and desist from committing fraud; (2) be barred from association with a broker, dealer, investment adviser, (3) disgorge $30,000 plus prejudgment interest, and (4) pay civil penalties of $130,000.
The SEC allegations against Koutsoubos also involved several other J.P. Turner & Company, LLC (JP Turner) registered representatives including Michael Bresner (Bresner), Ralph Calabro (Calabro), and James Konner (Konner). 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 claimed that Calabro, Konner, and Koutsoubos generated fees and commissions totaling around $845,000, for their benefit 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 approximately 200 small or one-person branch offices. Koutsoubos joined JP Turner in 2000 and left in 2009. Thereafter, Koutsoubos became employed with Caldwell International Securities Corporation.
Churning occurs when a broker buys and sells securities for a customer’s account for the purpose of generating commissions and not in accordance with the investor’s objectives. The three elements in a churning claim are: (1) broker control of the account, including de facto control through acquiescence, trust, or reliance; (2) excessive trading; and (3) scienter or intent to defraud. The court found that Koutsoubos’s conduct met all three elements in Bryant’s account.
The SEC found that Bryant is not a sophisticated investor and his experience with the securities markets is limited. Bryant’s understanding of investing in the securities markets was to purchase one stock, hold it, sell it for a profit, and then purchase another one. The court found that Koutsoubos recommended nearly 99% of all trades in Bryant’s JP Turner account and Bryant agreed to allow Koutsoubos to trade without first getting approval.
Koutsoubos argued that Bryant retained control of his JP Turner account at all times because Bryant was an experienced investor capable of exercising his right to say no. Koutsoubos asserted that he spoke with Bryant often about investment ideas and that Bryant rejected recommendations as well as made his own investment recommendations.
The court rejected Koutsoubos’ arguments as unpersuasive finding that the fact that Bryant was a business owner with three brokerage accounts does not make him an experienced investor nor did Bryant exercise control over his JP Turner account merely by rejecting recommendations by Koutsoubos or by making his own recommendations. The court found that the evidence showed that Bryant followed the direction and recommendations made by Koutsoubos and eventually allowed Koutsoubos to trade without advanced approval. Further, the court found that Koutsoubos exercised influence over Bryant by acting as a cheerleader, encouraging a day trading investment strategy, and assured Bryant that he would regain lost profits
The court also found that Koutsoubos engaged in excessive trading in Bryant’s account. The court found that only after Koutsoubos Bryant’s broker that his investment objectives changed to speculation and his risk tolerance to aggressive. Other than the form itself, there is no evidence to suggest that Bryant desired this drastic change. The court found that it was standard practice for Koutsoubos to send Bryant completed forms with stars where Bryant should sign and that Koutsoubos took care of the rest.
Koutsoubos argued that the court had to evaluate the claim within the four corners of the documents Bryant signed stating Bryant’s aggressive risk tolerance and desire to aggressively trade. Further, Koutsoubos argued that Bryant’s opening of a margin account prior to Koutsoubos’ becoming his registered representative and his knowledge of the risks associated with such an account show that Bryant wanted to take higher risks.
The court rejected Koutsoubos’ arguments finding that Bryant’s account changes occurred when Koutsoubos took over managing Bryant’s account and there was no plausible explanation for such drastic changes. The court then found that Koutsoubos engaged in excessive trading of Bryant’s JP Turner account because the annualized turnover rate of fifty-six was nine times the rate presumed to indicate excessive trading and the account had a breakeven ratio of 73.3%,
The court also found it irrelevant that Bryant was contacted by JP Turner and acknowledged that Bryant was aware of the active trading. The court stated that, as an unsophisticated investor relying on the recommendations of Koutsoubos and having no experience with actively traded accounts, Bryant cannot be expected to have understood or appreciated active trading let alone have provided consent through such an acknowledgement.
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.