Silver Law Group is currently suing a Long Island-based brokerage firm, which recently went out of business, on behalf of an elderly client who alleges his account was used by the firm’s brokers to generate over $200,000 in commissions via unapproved trades.
The so-called churning scheme took place over a yearlong period in which over 70 trades were executed, many at values incongruous with the assets held in the account. “The account would have had to make over 100 percent annually just to break even,” Scott Silver said of the misconduct.
The small brokerage firm has now collapsed amid reports of many unpaid Financial Industry Regulatory Authority (FINRA) awards to harmed investors. The brokerage’s owner and CEO has been barred from the securities industry and is the subject of 11 pending investor complaints. Meanwhile, the brokerage firm has failed to pay $1.25 million in FINRA judgements. Many of the brokerage’s victims were elderly, unsophisticated retail investors who were targeted via cold calls. Once the client was signed up, the churning scheme could begin.
The firm’s actions went beyond the common conception of high-risk, speculative trading, Silver explained. “They’re engaging in nonsensical trading because the fees and costs make it virtually impossible for the Investor to ever make a profit.”
Despite a raft of customer complaints, FINRA did not sanction the firm until 2020, when it was fined $350,000. “It’s not hard for FINRA to spot these kinds of firms and identify this kind of an operation,” Silver said, of FINRA’s failure to intervene earlier.
Unfortunately, investor-victims are now unlikely to recoup their losses in civil court either. “There is nothing there for the investors to bring a claim that there’s an insurance policy to cover these types of claims. There is also no requirement for these firms to have any net capital that would be able to satisfy these claims,” Silver said. “At the end of the day, once these firms close up, the likelihood of collecting any of the improper losses becomes virtually impossible.”
InvestmentNews singled out the firm and its collapse in highlighting a continuing trend in 2020: an increase in FINRA arbitration awards against brokers and securities firms that have gone unpaid. A recent report by the Public Investors Advocate Bar Association (PIABA) that nearly 30% of arbitration awards against broker-dealers went unpaid in 2020. This included 19 customer awards totaling $5 million.
According to InvestmentNews, “Management’s 12-year history is littered with brokers who failed clients. A search of FINRA’s website reveals that more than a dozen brokers have been barred or suspended from the industry, primarily for allegations of excessive trading and churning.”
On the InvestmentNews podcast, Silver said that, given these red flags, FINRA should have caught the misconduct much earlier in the company’s run, when there was still time to recoup the financial harm the firm was causing.
“There’s certainly a theme in the brokerage industry that bad brokers seem to keep moving to smaller and smaller brokerage firms to avoid detection,” Silver said. “But in this era, where everything is about data and the ability to mine this kind of information, it should be at FINRA’s fingertips as the complaints were piling up against the firm.”
Silver Law Group represents investors in securities and investment fraud cases. Our lawyers are admitted to practice in New York and Florida and represent Investors nationwide to help recover investment losses due to stockbroker misconduct. If you have any questions about how your account has been handled, call to speak with an experienced securities attorney. Most cases are handled on a contingent fee basis, meaning that you won’t owe us until we recover your money for you. Contact us today at (800) 975-4345 and let us know how we can help.