by Howard Haykin

In a recent FINRA case, an investor, 73, responded to a cold-calling broker from Worden Capital Management by opening a margin account with an initial deposit of $26,000. Over the next 18 months, the broker churned the account by executing 152 trades while generating nearly $76,000 in commissions and $56,000 in trading losses. For his violative conduct, the broker was suspended 11 months, fined $7,500 and ordered to compensate the customer for his losses. [Little chance the customer will ever see that lost money.]

In another FINRA case, an investor, 79, lost nearly $70,000 when his broker (first with Dawson James Securities and then with Spartan Capital Securities) conducted similar ‘in-and-out’ trading. In both cases, the customers relied entirely on the broker’s recommendations – meaning the broker had actual or de facto control over the customer account. This broker was only suspended 5 months and ordered to partially reimburse $2,500 of the losses.

INVESTORS TAKE NOTE.    Brokerage customers don’t need to be sophisticated investors to recognize when a broker is taking unfair advantage of them. They just need to look out for tell-tale signs, including …

• The broker has actual or de facto control over the customer’s account – meaning the customer accepts all of the broker’s recommendations.
• The broker exercises unauthorized discretion – meaning the broker initiates trades without the customer’s knowledge or consent.
• The broker excessively trades in the customer’s account – as measured by 'turnover ratio'. ^{[See NOTE]}
• The broker recommends frequent in-and-out trading – meaning the buying and selling of the same stock, over and over and over again - often to generate large commissions.

Two final thoughts. First, a cold-calling broker needs to reel in just 1 or 2 "fish" in order to make a figurative 'killing'. Second, once a customer is entrapped in such a situation, it can be difficult to escape. Here’s how one investor described his experiences with a ‘Cold-Calling’ Firm:

“Beware! Beware! Beware! These guys are long on talk and short on return. Most disturbingly, if you finally salvage your money after realizing the error that you've made, they will continue to harass you with call, after call, after call, in the middle of your workday. Some junior lackey stuck with the responsibility of cold calling from their master list of possible rubes will try and sell you the same spiel you ran screaming from in the first place. You're just a meat bag with money. These guys are sharks.”

[For further details, click on … FINRA Case #2019063442701 and FINRA Case #2018057302701.]