The Financial Industry Regulatory Authority (FINRA), the largest independent regulator for all securities firms in the United States, on Monday filed charges against a New York-based broker-dealer who allegedly engaged in excessive trading on the accounts of a 77-year old blind widow to obtain unlawful commissions of nearly $250,000, according to a FINRA statement.
The complaint alleges that Hank Mark Werner of Northport, New York, engaged in a deceptive and fraudulent scheme by churning the widow’s accounts over a three-year period to maximize his compensation. Churning is considered a species of securities fraud. The elements of the claim are excessive transactions of securities, broker control over the account, and intent to defraud the investor by obtaining unlawful commissions.
FINRA found that from October 2012 to December 2015, Werner excessively traded and churned the accounts of his customer, generating more than $243,000 in commissions. At the same time, the excessive trading activity in these accounts resulted in over $184,000 in customer losses.
According to regulatory documents, Werner placed over 700 trades in more than 200 different securities, and charged the widow either a markup or commission on every purchase and sale. He initially charged a markup or commission between 2.50 percent and 3.00 percent, but later increased commissions on her trades to 3.75 to 4.25 percent, an increase of over 40 percent.
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According to the complaint, Werner began aggressively trading the victim’s accounts a few weeks after the customer’s husband passed away. He had been the elderly customer’s broker – and that of her blind husband until his 2012 death – since 1995.
Possible remedies include fines
FINRA’s complaint triggered by ‘red flags’ in Werner’s trading at his former firm. These included large numbers of trades where commissions exceeded 3 percent, the high turnover rates and cost-to-equity ratios which ranged from 64.40 percent to 97.73 percent. The claim stated further examples such as recommending an unsuitable variable annuity exchange in July 2015 to earn a commission of more than $10,000 on the transaction.
According to the regulator: “The issuance of a disciplinary complaint represents the initiation of a formal proceeding by FINRA in which findings as to the allegations in the complaint have not been made, and does not represent a decision as to any of the allegations contained in the complaint.”
“Under FINRA rules, a firm or individual named in a complaint can file a response and request a hearing before a FINRA disciplinary panel. Possible remedies include a fine, censure, suspension or bar from the securities industry, disgorgement of gains associated with the violations and payment of restitution,” the statement further stated.