Securities Fraud and Mismanagement

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Excessive Trading or “Churning”

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Churning by a broker puts the broker’s interests ahead of the investor’s.

Jeffrey Pederson is an attorney who represents investors for a wide variety of violations, such as churning, and other violations committed by stock brokers and financial advisors.  Probably the most widely known violation is the act of excessive trading or “churning.”

If you believe you have been a victim of churning, unauthorized trading or excessive trading by a financial advisor call 1-866-817-0201.  Initial consultations with an attorney are free and confidential.

Churning of securities accounts occurs when a broker acting in his or her own interest, induces transactions in the customer’s accounts which are excessive in size and frequency in light of the character of the account.  Such actions are considered to be a form of fraud. There is no set standard under FINRA, the Financial Industry Regulatory Authority, rules as to when trading is excessive, but it is looked at as being excessive in light of the investors objectives. A certain level of trading may be fine for a speculative investor but would be excessive for a conservative investor.

Douglas Rosenberg of Joseph Stone Capital in December 2021 entered into a regulatory settlement which includes a seven month suspension.   Between June 2017 and May 2020, the regulator alleged, Rosenberg excessively and unsuitably traded three customers’ accounts, in violation of FINRA churning rules.

In November 2021, Sebastian Wyczawski of Joseph Stone entered into a regulatory settlement concerning churning in 2016 and 2017.  Annualized turnover in the account approached 17.  Cost-to-equity, the amount that the portfolio needed to make to be profitable, approached 65%.  Wyczawski agreed to a fine and a five month suspension.

Also in November 2021, and also with Joseph Stone, Michael James May.  May regulators alleged that he made trades in an investors account that had a cost-to-equity of 20%.  The turnover in this account was approximately six.  This happened during the time period of June 2017 and May 2018.  May received a three month suspension.

In June 2021, Marc R. Lippman of Folger Nolan entered into a settlement with regulators for unauthorize trading.  Lippman place $80,000 worth of trades in an account of an investor that Lippman knew was dead.

In March 2021, FINRA Department of Enforcement issued a ruling concerning Kishan Prikh of Aegis Capital.   FINRA has alleged Parikh controlled the trading in the Customers’ accounts and, during the Relevant Period, executed 442 trades with a total principal value of approximately $31.1 million. Parikh’s excessive and unsuitable trading in the Customers’ accounts resulted in annualized turnover rates ranging from 10.9 to 199.8 and annualized cost-to-equity ratios ranging from 27.5% to 59.7%, and caused combined losses of more than $33,000. At the same time, Parikh’s trading generated gross sales credits and commissions of $179,112, of which Parikh received at least $89,000.

In January 2021, FINRA reported that Coastal Equities, Inc. entered into a regulatory settlement to pay $270,000 for supervisory lapses.  These lapses allowed excessive trading and churning by its brokers.  Supervisors were aware of “multiple indicia” of churning and the recommendation of unsuitable trades.  The target of the fraud included senior and retired investors, but was likely widespread.

Also in January 2021, Steven Robert Luftschein, aka Steven Lerner entered into a settlement agreement with FINRA regulators.  Allegations concerned churning.  Regulators found that Lerner had annualized turnovers in some of his accounts that ranged from 12 to 93 annually.  His career spanned terms with 10 different brokerages, including Joseph Stone and Aegis.  Over his career he had been the subject of 18 different disclosure events.  Disclosure events are significant events that negatively reflect a broker’s ability to handle the funds of others.  For Lerner, these included a large number of lawsuits concerning his actions as a broker and a regulatory action.

Further in January 2021, Angel Bardeche entered into a settlement with regulators for churning.  Her investors paid in excess of $450,000 in unnecessary commissions and costs due to the trading of Bardeche.  Not only did Bardeche unnecessarily trade in and out of mutual funds, a high commission product that is designed to be held for a long period of time, a process called “switching,” Bardeche made the trades without sufficient authorization from the investor.  The switching was to purchase A share mutual funds, a class of fund with up-front commissions and costs, and to quickly sell and purchase new A share funds with new commissions and costs.  The process enriched her at the unnecessary expense of her investors.  Angel Bardeche spent most of her career with Ameriprise in Cincinnati.

In 2019, regulators increased their policing of churning and unauthorized trading.  The number of cases filed by the regulators reflect not just the increase in such activity by brokers, but also reflects the seriousness in which regulators view such actions.  As such, you have seen cases such as  in re Spolar, where a broker where FINRA instituted a 15-month suspension for a broker for making four unauthorized securities transactions and attempting to state that the transactions were the idea of the investor.

Recently, Stephen Allen Kelbick, formerly of Wells Fargo and operating in Blue Bell and Villanova, PA was suspended for 15 days for making 40 unauthorized trades in an investor account.

While the rule gives no standard, turnover in the account is commonly looked at to determine churning. Disciplinary actions in front of the SEC have determined that turnovers as low as between two and four are high enough that they could be presumed to be churning depending upon the customer’s objectives.

investingstockphoto 1However, setting a fixed level of turnover as churning is problematic in an investing world comprised of more than stocks and bonds, and where differing investment vehicles can pay a broker widely disparate commissions. One answer to this is comparing the cost of the transactions against the equity in the account. For example, two buys and sells of a high-commission investment product per year could result in a cost equal to 5% or greater of the portfolio’s worth, an entire portfolio of low-commission investment products could be turned over four times at a cost of only 2% of the portfolio’s worth.

In the first example, the person must make at least 5% from his investments just to break even. So if a person needs a 3% return to support themselves, and need only take a small amount of risk to get that return, that person must now take a substantial increase risk commensurate with a person seeking an 8% return just to receive 3%, or else go more than a year without seeing a return.

Another example is the short term trading of long-term investments.  Kevin Scott Gunnip of Morgan Stanley engaged in such activity.  Gunnip accepted a bar from the securities industry for engaging in such activity and faced three different lawsuits.

Individuals charged with such unauthorized trading in 2020 include Sylvester Knox of Merrill Lynch, who has a history of other regulatory problems, Serge Parakhnevich of PHX Financial,  and Yvonne Nirelli of Cadaret Grant.  Stephen Florio was suspended for 10 days for exercising discretion without written authorization, despite having oral authorization.   Bryan Mazliach was the subject of a suit for alleged trading turnover ranging from 12 to 50.   FINRA accused Lawrence Goldstein of excessive trading and he simply did not contest the charge.   Ivan Shore is alleged to have engaged in excessive UIT trading.   Likewise, Kurt Jason Gunter of Lakeway, Texas is alleged to have excessively sold UITs.

For more information, please call the number above.  Jeffrey Pederson is a private attorney who can help you understand your rights and whether you have been a victim of investment fraud.