Greed vs. Doing the Right Thing
Recently, in a settlement with the Securities and Exchange Commission (SEC), Paul George Chironis, a Long Island, N.Y.-based broker, agreed to pay a $100,000 penalty and $250,000 in disgorgement. The money will be placed in a fair fund and distributed to the Sisters of Charity, a congregation of mostly elderly nuns. As part of the settlement, Mr. Chironis agreed to a bar from further registration or employment in the securities industry. In January 2007, Mr. Chironis was a registered representative at now-defunct broker/dealer by the name of Capital Growth Financial Inc. While he was registered at that firm in Boca Raton, Florida, Mr Chironis was the account executive for the nuns’ accounts. The nuns established the accounts to cover the assisted living facility expenses for members of the congregation and to assist them in meeting other charitable goals.
The SEC alleged that even though Mr. Chironis did not have discretion over the activity in the accounts that he recommended to the charity’s financial officer the frequent purchase and sale of mortgage backed securities such as those issued by Fannie Mae, Freddie Mac, and Ginnie Mae, along with closed end bond funds.
The frequency of the trading apparently that took place within an approximate one year period unjustly enriched the firm and Mr. Chironis because of substantial markup and markdown costs. The markups and markdowns were in excess of the loss suffered by the nuns by about $300,000. To put it another way, Mr. Chironis basically caused the nuns’ loss because of the charges he created relative to their accounts.
What happened to the nuns can be categorized as churning, by using an unsuitable investment strategy, in a hybrid type of account, with excessive activity designed solely to generate markups and markdowns (commissions) for the brokerage firm and the account executive. For a more complete discussion of a hybrid account, follow the link. It is very interesting reading as it has been my experience over the years that this is the type of account relationship that most unsophisticated investors have with their account executive.
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