By Howard Haykin

Let’s begin with a primer on risks associated with a dishonest broker:

• Churning:  a term applied to the practice of a broker conducting excessive trading in a customer’s account mainly to generate commissions. Churning is an unethical and illegal.

• ‘De Facto’ Control:  a term applied to situations where the broker essentially has unlimited control over a customer’s account, where the customer routinely (and blindly) follows the broker’s advice because the customer is unable to evaluate the broker’s recommendations and exercise independent judgment.

WHAT THE CUSTOMERS ASKED FOR.    Upon receiving the inheritance, the couple started out doing and saying all the right things. They placed the assets in a trust and, in 2010, opened a brokerage account. At that time, they instructed the broker to invest the funds with the objective of generating “income” and “growth” while maintaining a conservative approach (i.e., “preservation of capital”). However, their wishes and desires were never met because they lacked a basic understanding of investments, securities markets and their inherent risks.

WHAT THE DISHONEST BROKER DID INSTEAD.    Rather than just coding the couple's account for ‘income” and “growth,” the broker added “trading profits” and “speculation” as investment objectives. He also listed the couple’s risk tolerance as “aggressive,” rather than “conservative.” The broker also set up the account for options trading, and later for margin. These unauthorized actions, which ran contrary the customers’ investment objectives and risk tolerances, enabled the broker to engage in transactions that exposed the customers to enormous risk and abuse. 

The broker immediately proceeded to churn and churn and churn the accounts. Over a 4-1/2 year period, he executed 1,648 trades - an average of 383 trades a year. By the time the couple closed the account in early 2015, the broker’s violative conduct had cost the customers over $1.65 million- , including $812,000 in trading losses, $612,000 in commission, and $193,000 in margin interest.

LOST OPPORTUNITIES.    Had the $1.6 million inheritance been placed with an honest broker, and had an independent financial watchdog been employed to watch over investments, the couple would have seen their nest egg grow to more than $2.8 million by 2015. That's because, while the dishonest broker was taking his customers ‘to the cleaners’ for $1,653,000, the stock market was rising 79%.

Who ya gonna call when you receive an inheritance?

[For further details, click on FINRA Case #2017054755206.]