SEC Charges NY-Based Brokers with Fraud, Excessive Trading

The US Securities and Exchange Commission is charging two brokers with securities fraud. The regulator claims that Donald J. Fowler and Gregory T. Dean fraudulently employed an in-and-out trading strategy that was not suitable for customers so that they could make more in commissions. Because of their actions, 27 customers alleged lost substantial amounts of money. Fowler and Dean are accused of violating the Securities Act of 1933 and the Securities Exchange Act of 1934, and Rule 10-B5.The Commission said that they examine trading patterns involving over two dozen of the brokers’ customer accounts.

The SEC contends that the two men did not engage in any due diligence to figure out whether their investment strategy could help customers obtain even the smallest profit. With their strategy, they engaged in the frequent purchase and sale of securities, which would both take place within a two-week or shorter timeframe. They charged customers a commission for every transaction. Meantime, Fowler and Dean were the only ones who had a chance of making a profit.

SEC Warns Investors to Look Out for Excessive Trading, Churning

Along with its announcement of this securities case, the SEC put out an Investor Alert cautioning the public about churning and excessive trading. In its alert, the regulator warned about red flags that may be signs of these types of fraud, including trading that a customer did not authorize, which is known as unauthorized trading, trading that happens more often than seems reasonable for a customer’s investment objectives and/or the level of risk that the portfolio can handle, and suspicious and/or unusually high fees.

Usually a broker will make a commission or some other fee for every sale or purchase of a security. When a broker takes part in excessive selling and buying while trading securities in a customer’s account but does not factor in that client’s goals and degree of risk that the investor can handle, churning may be taking place.

The SEC recommends asking your broker about all fees, as some of these may not appear on your account, statements, or trade confirmation. The Commission also says that it is important to inquire about any trades that you didn’t authorize. There may even be an increase in our account’s balance even though excessive trading or churning is taking place.

Contact Shepherd Smith Edwards and Kantas, LTD LLP if you suspect that your investment losses are due to excessive trading or churning.

The SEC Complaint (PDF)
The Investor Alert (PDF)