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Articles Posted in Churning

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Stock fraud lawyers are investigating potential claims on behalf of investors of Securities America who may have suffered significant losses as a result of life insurance investment twisting and churning.

Arbitration Claim Filed Against Securities America for Churning

Investment fraud lawyers say churning is a common problem in the securities industry. According to the S.E.C., “Churning refers to the excessive buying and selling of securities in your account by your broker, for the purpose of generating commissions and without regard to your investment objectives.” In short, churning is a form of broker misconduct in which the broker performs excessive trading to generate personal profit. For more information on churning, see the previous blog post, “Investment Churning: A Slippery Slope of Broker Misconduct.

A Financial Industry Regulatory Authority arbitration claim was recently filed on behalf of an 81-year-old Peoria, Illinois resident. The claimant, a retired widow, was sold various life insurance policies and annuities. These investments were allegedly held for only a short period of time before being liquidated. According to the claim, the investments’ proceeds were then rolled into other annuity contracts and policies. Allegedly, most of these transactions incurred surrender charges and fees that were charged to the claimant. As an example detailed by the Statement of Claim, the funds of a Lincoln Annuity, purchased on August 20, 2003 and surrendered two years later, were rolled into a 15-month Fidelity Annuity. The proceeds of this transaction were rolled, on the same day of the sale, into a Hancock Annuity. The Hancock Annuity was held for just over two years. When it was sold, its proceeds were rolled into a Jackson Annuity.

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Sometimes losing money in the stock market and yelling “Fraud!” is a little like smelling smoke and yelling “Fire!” Just as smelling smoke might only mean dinner’s burning, losing money doesn’t always mean stock broker fraud has occurred. It is important for investors to be able to tell the difference between losses resulting from fraud and plain old bad luck. To that end, here are some common types of broker misconduct and tips on how to tell if you’ve been a victim:

Stock Broker Misconduct: When Losses are the Result of Fraud

  1. Unauthorized Trading: Unauthorized trading occurs when a broker makes trades without permission. This is surprisingly common and brokers will often defend their actions by saying that the investor either agreed to the trade or ratified it by raising no objection when they received a confirmation.
  2. Unsuitable Investments: Surprisingly, it is common for brokers to be unable to accurately measure risk. As a result, investors may have a portfolio that is far more risky than is appropriate. Brokers must, by law, take into account the risk tolerance and investment objectives of each client and make suitable recommendations based on those criteria. Unsuitable investments include investments that carry a risk that is not in keeping with the investor’s risk tolerance, as well as inadequate diversification and improper asset allocation. Churning, which generates excessive commissions through excessive trading, is also a form of unsuitable investments. Investors who suspect the trading on their account is excessive will most likely have to consult an investment attorney for an analysis of their portfolio.
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Mutual funds are popular with investors because they consist of multiple stocks, meaning if one stock does poorly in the market, it doesn’t necessarily lower the entire mutual fund portfolio. Even so, mutual fund portfolios can be designed to be either very conservative or very risky. Mutual funds can include a variety of stock types or can be organized into specific industries like technology, healthcare, etc.

Mutual Fund Fraud

Two ways investors can be victims of fraud through mutual funds are churning and break point fraud:

  1. Churning: As market condition change, a stockbroker may suggest switching to a different mutual fund. If the new fund is within the same company as the old one, the investor usually doesn’t have to pay a commission. However, if the new fund comes from a different company, the investor must pay commissions and fees on the transaction. If the stockbroker encourages switching to a different company despite suitable options within the same company or attempts to generate commissions by encouraging the investor to switch multiple times to different companies, they may be “churning.”
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Former broker Debbie Saleh and her former employer, Wedbush Inc., must pay $2.9 million to Southern California investor Rick Cooper. Saleh drained Cooper’s account between 2004 and 2009 through a process called “churning.” The churning generated a significant amount in commissions through the unauthorized purchasing and selling of annuities. According to the arbitration panel, Saleh’s broker misconduct included lying about the value of Cooper’s investments, sending false statements and forging his signature.

Ex-broker and wedbush inc. Ordered to pay $2.9 million

Cooper began investing with Saleh after his mother trusted her with her own finances. According to arbitration proceedings, Saleh had been invited into his mother’s home and she received gifts from Cooper at Christmas. Cooper, now living in a mobile home, expressed his thoughts of suicide when he lost everything and could not make payments on his condominium. The arbitration panel expressed its disgust by ordering Saleh to pay a $500,000 emotional distress payment and a $1 million elder abuse payment, a rarity for securities arbitration. In addition, Wedbush itself was ordered to pay $300,000, and its chairman another $200,000, for emotional distress. Together, Wedbush and Saleh will pay $390,000 for Cooper’s attorney fees and $471,000 in compensatory damages.

Wedbush failed to supervise and curb Saleh’s wrongdoing, making the firm partially responsible for her actions.

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William Bailey, a former broker for NEXT Financial Group Inc., was suspended for two years in Financial Industry Regulatory Authority (FINRA) securities arbitration. Bailey’s official cause for suspension, according to FINRA, was “unsuitable and excessive trading of mutual funds and variable annuities.” In addition, Bailey was charged with discretionary trading without prior written approval.

FINRA Ruling, Ex-Broker William Bailey Suspended for Two Years

Bailey’s broker misconduct took place over the span of nearly two years, from January 2006 to December 2007. His misconduct affected seven investors between the ages of 66 and 93. In addition, three customers were convinced by Bailey to hold their variable annuities for only a short time before switching them to new ones. FINRA determined that this was a violation to the broker’s suitability standard because it did not improve their financial situations and was not in keeping with their needs and financial objectives.

During this time period, Bailey recommended 484 “short-term mutual fund switch transactions,” according to FINRA. The average turnover for Bailey’s trades was only 60 days — a practice known as "churning." Sales charges and trading fees for these 484 transactions amounted to $147,000 and Bailey’s commissions for these transactions amounted to more than $120,000. Currently, there is no mention of financial restitution and Bailey did not admit or deny wrongdoing.

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The nature of “churning” within an investor’s account is difficult to prove. According to the S.E.C., “churning refers to the excessive buying and selling of securities in your account by your broker, for the purpose of generating commissions and without regard to your investment objectives.” In short, churning is a form of broker misconduct in which the broker performs excessive trading to generate personal profit. If an investor feels they may be a victim of churning, he should check his monthly statements for numerous stock trades and then contact a stock broker fraud attorney. If you believe you are a victim of churning, contact the law office of Christopher J. Gray, P.C. for information and guidance.

Investment Churning: A Slippery Slope of Broker Misconduct

Although churning is clearly prohibited in both the Securities Exchange Act of 1934, Section 10(b) and the Securities Exchange Commission Regulation 10(b)(5), proving it in arbitration can be a challenge. Two critical factors of determining if churning has occurred are time and frequency of transactions. In addition, the broker must be acting willfully and not in the best interests of the investor. Finally, the broker must be in control of the trades that occurred. If the account is a discretionary account or if the broker is recommending most, or all, of the trades to the customer, the broker is said to be in control of the trades.

A case against churning is one in which the entire picture must be taken into account. A stock broker fraud attorney must analyze a large amount of data because of the high number of trades that occur in churning. Furthermore, the attorney must look at the Annualized Turnover Ratio, the Commission/Equity Ratio, the Total Cost/Equity Ratio, the commissions of the broker and factors that affect broker motivation. Above all, the trades must be done for the benefit of the broker, rather than the investor.

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