On January 6, 2017, the Financial Industry Regulatory Authority filed a Complaint against broker Kelly Clayton Althar, a former registered representative of Financial West Group (“FWG”). The Complaint alleges that between April 2011 and March 2014, Althar made unsuitable investment recommendations and engaged in excessive trading (often referred to as “churning”) in two customer accounts. According to the Complaint, the commission-to-equity ratio in one of the accounts was approximately 32%, meaning that a 32% return on investment would have been required just to break even. It is further alleged that Althar concentrated approximately 60% of the customer’s total portfolio value in a single business development company.
What is churning?
Churning occurs when a stock broker engages in excessive trading of securities in a client’s account for the primary purpose of generating commissions. In some cases, the churning goes undetected for months and even years. By that time, the damage can be substantial, both in terms of excessive commissions and associated tax liability.
Is churning illegal?
In addition to being fraudulent and unethical, churning is specifically prohibited under securities laws and regulations, including FINRA’s “quantitative suitability” standard, which provides that a broker must “have a reasonable basis for believing that a series of recommended transactions . . . . are not excessive and unsuitable for the customer . . .” Investors can bring claims to recover damages when their accounts have been churned.
What is excessive concentration?
Excessive concentration is the opposite of diversification. The benefits of diversification are well established. By diversifying between asset classes (e.g. stocks, bonds) and within asset classes, investors can reduce risk, without decreasing the expected return on their portfolio. Investors who suffer losses as a result of excessive concentration can bring claims to recover damages.
If you have suffered losses as a result of churning, over-concentration, or any other type of unsuitable investment strategy, we may be able to help you recover some or all of your losses. Call investor rights attorney Dan Broxup of Mika Meyers, PLC at (616) 632-8059 for a free, no-obligation consultation.