SEC Charges Long Island Brokers with Churning, Excessive Trading
Churning and excessive trading are back, the Securities and Exchange Commission said Monday.
The regulator charged two brokers in Long Island, New York, with fraud for perpetrating an in-and-out trading strategy that generated more in commissions than the customers had in their accounts while working at now-defunct J.D. Nicholas & Associates.
It also issued an alert to help investors detect and report excessive trading, and urged them to clearly state their goals and risk tolerances to their brokers.
In a lawsuit filed in federal court in Manhattan, the SEC alleged that brokers Gregory T. Dean and Donald Fowler racked up some $800,000 in fees and commissions on $1 million in revenue for 27 clients who realized “substantial losses” of $1.4 million. “The impact of the costs that arose from the excessive trading doomed any possibility of even a minimal profit,” the SEC wrote, noting that trades were made on average every 10 days at a per-trade fee of up to 3.5% of the transaction value.
Fowler, who now works at Worden Capital Management in Syosset, New York, declined to comment. Dean, who works with him at Worden, did not return a call for comment.
“This case marks another chapter in the SEC’s pursuit of brokers who deploy excessive trading as a strategy in customer accounts to enrich themselves at customers’ expense,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office and Co-Chair of the Enforcement Division’s Broker Dealer Task Force.
The complaint filed in a federal court in New York City also said the brokers churned the accounts of three retirees, booking some $67,000 while creating $105,400 of losses.
Fowler bought more than $1.7 million of stock for a 70-year-old customer whose account had average equity of just under $55,000, while Dean made more than $701,000 of purchases for a 60-year-old customer whose average equity was just over $11,000. Purchases were held in each account for less than 11 days, creating turnover ratios of 52.89 and 43.50, respectively and cost-to-equity ratios of 90.9% and 150.5%, the SEC said.
Dean, who is 35, has received nine customer complaints or arbitration filings and Fowler, 30, ten such actions, according to the complaint. One customer complaint against Dean was denied but the others against both brokers were either settled through payments to customers or are still pending.
The lawsuit follows the Financial Industry Regulatory Authority’s announcement last week that it making identification and monitoring of recidivist brokers an examination priority this year.