SEC Bars Three Brokers for “Churning” Client Accounts
Many securities brokers work on commission. This generally means the broker receives a payment for each trade he or she executes on a customer’s behalf. While this is perfectly ethical, some brokers cross the line and engage in an illegal practice known as “churning.” As explained in a 1986 federal appeals court decision, there are three required elements of churning: “(1) the trading must be excessive in light of the customer’s investment objectives; (2) the broker must exercise control over the account; (3) the broker must act with intent to defraud or with willful and reckless disregard of the customer’s interests.”
SEC v. Calabro, et al.
The U.S. Securities and Exchange Commission recently imposed civil penalties against three securities brokers for churning. In a May 29 opinion, the SEC said Ralph Calabro, Jason Konner and Dimitrios Koutsoubos, all formerly of the Atlanta-based brokerage J.P. Turner & Company, illegally churned customer accounts. The SEC’s opinion affirmed the earlier findings of an administrative law judge.
In Calabro’s case, the SEC said he churned the account of a retired, 70-year-old client. Although the client was a retired professor of statistics and business, he did not consider himself a sophisticated investor and “relied entirely on his broker to select transactions for him.” After the client’s longtime broker retired, he moved his account to J.P. Turner with Calabro as his new broker. While Calabro initially maintained the client’s conservative investment practices, he soon began to rely on frequent short sales and options trading. The client had no input into these decisions, instead deferring to Calabro’s judgment. Ultimately, Calabro’s frequent trading led to a decline in the value of the client’s portfolio from about $2 million to $500,000, while Calabro earned nearly $250,000 in commissions.
Similarly, Jason Konner took advantage of an Iowa farmer who trusted J.P. Turner with over $200,000. The farmer trusted Konner to the point where he admitted excusing “a lot” of unauthorized trades on his behalf. Konner also relied on an aggressive trading strategy despite his client’s limited net worth and stated desire for a low-risk portfolio.
Finally, Dimitrios Koutsoubos, who worked out of J.P. Turner’s Fort Lauderdale office, churned the account of a Mississippi small business owner. Like the other two clients discussed above, the small business owner had little investment experience and relied on his broker’s experience. But as with Konner, Koutsoubos frequently engaged in unauthorized trades that proved costly to the client. During 2008 alone, Koutsoubos’s excessive trading generated losses of $190,000 for the client—and $47,000 in commissions for the broker.
The SEC barred all three men from working as securities brokers, ordered disgorgement of their ill-gotten commissions and imposed additional civil penalties.
Are You a Victim of Churning?
Churning does not mean your broker is responsible if you choose to fully participate in a risky investment strategy. As the above case illustrates, churning occurs when a broker takes advantage of a risk-averse client’s trust. If you have lost money—and paid high commissions—due to a broker’s reckless or excessive trading without your consent, it is important you seek out independent legal advice from an experienced Florida securities fraud attorney. Contact Gregory Tendrich, P.A., today.