South Florida Arbitration & Litigation Lawyer Blog
Unauthorized and Excessive Trading FINRA Arbitration and Litigation Attorney, Russell L. Forkey, Esq.
November, 2011:
J.P. Turner & Company, LLC (CRD #43177, Atlanta, Georgia) and James Edward McGrath (CRD #1582846, Registered Principal, Brick, New Jersey) submitted an Offer of Settlement in which the firm was censured and fined $20,000. McGrath was fined $5,000 and suspended from association with any FINRA member in any principal capacity for 10 business days. Without admitting or denying the allegations, the firm and McGrath consented to the described sanctions and to the entry of findings that McGrath failed to reasonably supervise a registered representative who recommended and effected unsuitable and excessive trading in a customer’s account. The findings stated that McGrath had supervisory responsibility over the registered representative and was responsible for reviewing his securities recommendations to ensure compliance with member firm procedures and applicable securities rules. The findings also stated that McGrath failed to reasonably supervise the registered representative by, among other things, failing to enforce firm account procedures and failing to respond to red flags regarding the registered representative’s trading activity in the customer’s account. The findings also included that the firm’s supervisory procedures required McGrath to review account transactions, such as the registered representative’s recommended transactions in the customer’s account, on a daily and monthly basis for, among other things, general suitability, excessive trading and churning, in-and-out trading and excessive commissions and fees; the firm’s procedures also required that McGrath review all exception reports related to the individuals who he supervised and take appropriate measures as necessary.
FINRA found that through these required reviews, McGrath was aware of red flags of possible misconduct in the customer’s account, including frequent short-term trading, excessive commission and margin charges, high turnover and cost-to-equity ratios, and substantial trading losses, and the account frequently appeared on the firm’s exception reports; McGrath failed to reasonably respond to and address the red flags in the customer’s account. FINRA also found that McGrath never spoke with the customer despite the fact that the firm’s compliance department sent several emails to McGrath advising him that the customer’s account needed customer contact as required by the firm’s WSPs; McGrath never spoke with the customer directly to confirm that he was aware of the activity level in his account or that such activity was appropriate in light of his financial circumstances and investment objectives. In addition, FINRA determined that McGrath failed to ensure that an Active Account Suitability Supplement and Questionnaire was sent to the customer within the time frame the firm’s WSPs required. Moreover, FINRA found that months after the registered representative began trading in the customer’s account, McGrath instructed the registered representative to curtail the short-term trading in the account and hold positions for a longer period; that was the only time McGrath spoke to the registered representative about the customer’s account. Furthermore, FINRA found that McGrath reduced the registered representative’s commissions for purchases in the customer’s account, but this measure did not have the desired impact; the registered representative actually increased the number of purchases and frequency of short-term trading to offset the effects of the commission reduction until the customer closed the account after suffering losses of approximately $120,000. The findings also stated that McGrath failed to take any action against the registered representative based on his failure to comply with his instructions; among other things, McGrath never restricted the trading in the customer’s account, spoke to the customer, placed the registered representative on heightened supervision, recommended disciplinary measures against him to address these concerns, or spoke with the firm’s compliance department regarding the supervision of the registered representative. The findings also included that the firm allowed the registered representative to effect transactions in the customer’s account for months without obtaining a signed and completed new account form from the customer, and failed to enforce its review of active accounts as the WSPs required. FINRA found that the firm failed to send a required suitability questionnaire to the customer until almost a year after the account had been opened and suffered significant losses, failed to qualify his account as suitable for active trading and failed to perform a timely quarterly review of the account.
McGrath’s suspension was in effect from October 3, 2011, through October 14, 2011. (FINRA Case #2009016612701).