SEC Issues Churning Alert, Then Charges Brokers in Scheme

Alert notes red flags of excessive trading, churning

(Photo: Diego M. Radzinschi/NLJ) (Photo: Diego M. Radzinschi/NLJ)

The Securities and Exchange Commission issued an investor alert on Monday warning investors about excessive trading and churning in brokerage accounts the same day it charged two New York brokers with enriching themselves in such a scheme.

The SEC’s complaint alleges that Gregory Dean and Donald Fowler performed no reasonable diligence to determine whether their investment strategy involving frequent buying and selling of securities could deliver even a minimal profit for their customers.

The brokers were charged with fraudulently using an “in-and-out” trading strategy that was unsuitable for customers in order to generate hefty commissions. Their strategy, which generally involved selling the securities within a week or two of purchase and charging customers a commission for each transaction, allegedly resulted in substantial losses for 27 customers, according to the complaint.

Dean and Fowler also engaged in churning with regard to at least three of the 27 customer accounts.

Both Dean and Fowler have disciplinary histories. Nine of Dean’s customers filed Financial Industry Regulatory Authority arbitrations or complaints against him. Five arbitrations are pending; one customer claim was denied; and three claims were settled through payments to the customers. Ten of Fowler’s customers filed FINRA arbitrations or complaints against him. Except for two arbitrations, which are pending, the arbitrations and complaints were settled through payments to the customers.

“Investors should be wary of unauthorized trading, frequent sales and purchases, or excessive fees in their brokerage accounts,” said Lori Schock, director of the SEC’s Office of Investor Education and Advocacy, in a statement. “If you do not know why a trade was made or why a fee was charged, ask your broker to explain it to you.”

The investor alert told investors to look for these red flags that may indicate excessive trading:

       Unauthorized Trading – Be alarmed if you become aware of trades in your account that you did not authorize your broker to make.

       Frequent Trading – Be wary of frequent in-and-out purchases and sales of securities that don’t seem consistent with your investment goals and risk tolerance.

       Excessive Fees – Be suspicious if the total amount of fees seems high or if one segment of your portfolio consistently generates high fees.

The alert also points out that excessive trading can occur even if the overall account value increases, and that if account statements, trade confirmations, and online accounts do not disclose all fees, investors can find more information by asking their broker.

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