SEC Charges Brokers Over Excessive Trading
The SEC has charged two brokers for excessive trading the same day it issued an alert warning investors about the practice.
The regulator alleges that Gregory Dean and Donald Fowler failed to perform adequate due diligence in understanding the risks and rewards of a frequent trading strategy in 27 customer accounts that yielded the brokers around $800,000 in revenue.
The brokers, who worked at J.D. Nicholas from January 2007 through November 2014, also allegedly failed to discuss fees and costs when pitching prospective clients on their strategy and engaged in churning in at least three of the 27 accounts, claims the regulator.
Both Dean and Fowler have had numerous customer complaints filed with Finra, some of which have been settled though payments while others are still pending, according to the SEC. In 2010, Finra found that J.D. Nicholas failed to properly supervise churning and excessive trading and telemarketing activities, the SEC says. The firm, which was registered as a broker-dealer with Finra from 1997 through July 2015, had paid hundreds of thousands of dollars in fines and censures to Finra and several state regulators for the practices, according to the SEC.
In its alert on excessive trading, the SEC warns investors to watch out for unauthorized trading within their accounts, frequent buying and selling of securities inconsistent with their risk tolerance and investment goals, and excessive fees. It also explains the practice of churning and suggests that investors study what varying types of investment goals imply for their portfolios.
The SEC also recommends that investors who notice high volumes of trading in their accounts contact their brokers’ manager or compliance department, or submit complaints to the SEC or Finra.
In a separate case, the SEC has barred John Rafal, former president and chief executive of Essex Financial Services, for concealing a $50,000 annual fee he paid an attorney for referring him a client with $100 million in funds.
The lawyer involved was allegedly supposed to become an RIA in order to collect the referral payment but failed to do so, the SEC says. Rafal allegedly disguised the payments as false bills for legal services, according to the regulator. He also allegedly lied to his clients about the SEC’s investigation. The regulator ordered Rafal to pay $577,297 in penalties, disgorgement and interest.