Excessive buying and selling of securities in an investor's account, also known as churning, is not only unethical, but also violates securities laws.  Most, if not all, churning stems from the broker's desire to generate commissions that benefit the broker.  For churning to occur, the broker must exercise control over the investment decisions in the account.  Such control can be through a formal written agreement or de facto, aka the circumstances show that the broker controlled the account despite a lack of formal written agreement.

A recent FINRA disciplinary action illustrates churning.  In FINRA Case #2017054755206, Daniel Gordon Maughan (CRD #2561363, Los Angeles, California) accepted an Offer of Settlement in which he was barred from association with any FINRA member in all capacities.  Maughan was associated with Financial West Group from May 2010 until October 2019.  FINRA found that Maughan exercised de facto control over two customers' trust account by making all investment decisions in the account, including what securities to buy and sell, the quantities of the securities to buy and sell, and when each transaction would occur.  Incredibly, FINRA found that Maughan executed trades in the trust account with a principal value of all purchases and sales in excess of $70 million.  Maughan's excessive trading generated commissions and costs totaling approximately $841,000 while causing the trust account to incur realized and unrealized losses of approximately $812,000!

Similarly, brokers recently have entered into a Letter of Acceptance Waiver and Consent (“AWC”) by which they agree to a permanent bar from association with any FINRA member in all capacities, because the brokers refused to cooperate with FINRA's investigation regarding possible excessive trading in customer accounts.  These brokers include, for example:

• Stuart Blake Nichols (CRD #4932310, Birmingham, AL) – Nichols most recently was associated with Raymond James & Associates, Inc., from February 2013 through October 2019. See FINRA Case #2018060875701.
• Philip Joseph Sparacino (CRD #3243960, Staten Island, NY) – Sparacino most recently was associated with First Standard Financial Company, LLC, from July 2014 through October 2019.  See FINRA Case #2019063631801.

While FINRA has barred these brokers from association with FINRA member firms, that does not mean FINRA or the member firms who previously employed these brokers will investigate your account or seek to pay you restitution for any misconduct that may have occurred in your account.  If you were a customer of Maughan, Nichols, or Sparacino, and suspect you may have been a victim of excessive trading or other misconduct, contact Farrar Law PLLC for a free consultation.  Farrar Law PLLC represents investors (including individuals, trusts, corporations, and institutions) on a contingency basis in claims against brokerage firms, investment advisors, clearing firms, banks, and insurance companies.