account churned

How Do I Know If My Account Was Churned?

Jun 8, 2020

What Is churning?  Although most stockbrokers and investment professionals act with the utmost professionalism, unfortunately, there are always a few “bad apples” who are in it just for themselves. When a broker is trading your account simply to make commissions on the trading, this is called churning. As an investor, you need to be able to detect whether your brokerage account has been or is still being churned, and know what to do about it if you suspect you have been the victim of this activity. According to the Securities and Exchange Commission (“SEC”) churning occurs when a broker engages in excessive buying and selling of securities in a customer’s account chiefly to generate commissions that benefit the broker. For churning to occur, the broker must exercise control over the investment decisions in the customer’s account, such as through a formal written discretionary agreement, although a broker can be deemed to have control without such an agreement-especially if the customer always accepts the broker’s investment recommendations. Frequent in-and-out purchases and sales of securities that don’t appear necessary to fulfill the customer’s investment goals may be evidence that your account is being churned.  Churning is both illegal and unethical. Churning violates both the Federal and state securities laws, as well as FINRA industry regulations and standards. Such conduct may also violate a myriad of other laws, such as those requiring that brokers act as fiduciaries and always put their client’s interests first. Churning also violates FINRA’s suitability rules. What Does Churning Stocks Mean? Churning Stocks There are a number of types of churning investors should watch for. The most common is when a broker makes excessive trades in stocks. Excessive trading generates commissions for the broker but provides very little if any, the benefit to the investor.  One way churning is measured is by how many times the equity in the account is traded in a year. This is called the “turnover ratio” The turnover ratio can be calculated a number of ways. The simplest turnover measure divides total security purchases by the average month-end equity balance and then annualizes the turnover ratio by dividing it by the number of years covered in the analysis. More simply put, if the average yearly value of your securities account is 100,000 and a broker executed 300,000 worth of trading in a year, the turnover ratio would be 3x. The other measure of churning is called the cost-to-equity ratio. Cost-to-equity ratios are calculated by dividing the costs such as commissions, fees, margin charges, mark-ups, and mark-downs incurred in an account by the average yearly equity. In this measure, cost-to-equity ratios calculate the portion of the average equity in the account that is eaten up by the trading costs. A simple example would be if the average equity of the account was 100,000 but the costs of the trading in the account were 10,000. In this example, the cost-to-equity ratio would be 10%–meaning that the customer would have to earn at least 10% on the trading before breaking even.  Churning Bonds, Mutual Funds, Annuities, and Life Insurance While most people think of churning in the […]

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charles kenahan churning case

Charles Kenahan Churning Case settled by Merrill Lynch for 40 million

Jul 30, 2019

Charles Kenahan was fired by Merrill Lynch in July 2019. Kenahan, who previously worked in the Boston, Massachusetts office, was terminated regarding allegations that he churned his customers’ accounts as well as making unsuitable investments for his customers. Merrill recently settled his claims for 40 million.  According to FINRA broker check, Kenahan has been the subject of 4 customer complaints, all of which were filed within the last two years. FINRA Rule 2111 and its predecessor, NASD Rule 2310, require brokerage firms and their brokers to have a reasonable basis to believe that a recommended securities transaction is suitable in light of the customer’s investment profile. Recommended securities transactions may be unsuitable if, when taken together, they are excessive, the level of trading is inconsistent with the customer’s investment profile, and the registered representative exercises control over the customer’s account. No single test defines when trading is excessive, but factors such as the turnover rate and the cost-to-equity ratio are considered in determining whether a member firm or associated person has violated FINRA’s suitability rule. If you believe your brokerage account has been excessively traded or that unsuitable investments have been sold to you, you may have a claim for damages. Call us today for a free consultation. Former Wall Street Attorney Melanie S. Cherdack represents investors in the United States and the Caribbean in claims against brokers and brokerage firms for wrongdoing. If and have experienced investment losses, please call us at 888-768-2499 or complete our contact form for a free consultation.

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Boca Raton Based Summit Brokerage Services Fined For Broker’s Excessive Trading

Jul 5, 2019

Boca Raton Based Summit Brokerage Services Fined For Broker’s Excessive TradingFINRA announced this week that it fined Summit Brokerage Services, Inc. approximately $880,000 for supervisory failures, including about $558,000 in restitution to customers whose accounts were excessively traded by a former broker of the firm barred by FINRA. FINRA Press Release FINRA found that between January 2012 through March 2017, Summit, which had over 700 brokers, failed to review certain automated trade alerts used to identify excessive trading. One representative identified as “CJ,” was singled out by FINRA for excessively trading securities in the accounts of 14 customers. Most egregiously, FINRA found that CJ placed 533 trades for a retiree over a three-year period, causing her to pay more than $171,000 in commissions. FINRA also fined Summit for inadequate supervision of its brokers. Although CJ’s trading for 14 customers generated more than 150 alerts for potentially excessive trading,  FINRA found that Summit did not review them. Summit agreed to pay restitution to affected customers in the amount of the commissions they were charged as a result of the excessive trading in their accounts. FINRA previously barred CJ in a separate disciplinary action. In the  FINRA AWC FINRA found that from June 2015 through March 2018, Summit failed to reasonably supervise its representatives’ use of “consolidated reports,” documents provided to customers summarizing the customer’s financial holdings, including assets held away from the firm. FINRA found that one such report sent by a registered representative of the firm to a customer materially misstated the value of the customer’s investment. FINRA Rule 2111 and its predecessor, NASD Rule 2310, require brokerage firms and their brokers to have a reasonable basis to believe that a recommended securities transaction is suitable in light of the customer’s investment profile. Recommended securities transactions may be unsuitable if, when taken together, they are excessive, the level of trading is inconsistent with the customer’s investment profile, and the registered representative exercises control over the customer’s account. No single test defines when trading is excessive, but factors such as the turnover rate and the cost-to-equity ratio are considered in determining whether a member firm or associated person has violated FINRA’s suitability rule. If you believe your brokerage account has been excessively traded or that unsuitable investments have been sold to you or a loved one, you may have a claim for damages. Please call us at 888-768-2499 or complete our contact form for a free consultation. Former Wall Street Attorney Melanie S. Cherdack represents investors in the United States and the Caribbean in claims against brokers and brokerage firms for wrongdoing.

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