Securities Lawyers Blog
The Securities and Exchange Commission (SEC) recently found that broker Jason Konner (Konner) churned the brokerage account of James Carlson (Carlson). The SEC decision ordered Konner to: (1) cease and desist from committing fraud; (2) be barred from association with a broker, dealer, investment adviser, (3) disgorge $55,000 plus prejudgment interest, and (4) pay civil penalties of $150,000. In addition, at least three customer complaints have been initiated against Konner alleging churning, unsuitable investments, fraud, and breach of fiduciary duty.
The SEC allegations against Konner also involved several other J.P. Turner & Company, LLC (JP Turner) registered representatives including Michael Bresner (Bresner), Ralph Calabro (Calabro), and Dimitrios Koutsoubos (Koutsoubos). The SEC alleged that Calabro, Konner, and Koutsoubos between January 1, 2008, and December 31, 2009, churned the accounts of seven customers by engaging in excessive trading for their own gains in disregard of their clients’ investment objectives and risk tolerances. The SEC claimed that Calabro, Konner, and Koutsoubos generated charges totaling approximately $845,000, for their benefit while the clients suffered aggregate losses of approximately $2,700,000.
JP Turner is a registered broker-dealer headquartered in Atlanta, Georgia, with two majority owners. From 2008 to 2009, JP Turner had approximately 200 small or one-person branch offices. Konner joined JP Turner in 2006 and left in December 2011. Thereafter, Konner became employed with DPec Capital.
The three elements in a churning claim are: (1) broker control of the account, including de facto control through acquiescence, trust, or reliance; (2) excessive trading; and (3) scienter or intent to defraud. The SEC decision found that Konner’s conduct met all three elements.
The SEC administrative law judge found that Carlson was not a sophisticated investor as he spent most of his adult life working as a self-employed grain farmer. Further, all of Carlson’s accounts were managed conservatively without active trading. The SEC found that Carlson relied on Konner’s direction and recommendations. The court found that Konner frequently contacted Carlson to inform him about recommended trades but Carlson very seldom reached out to Konner. Thus, the court found it highly unlikely that the trading activity would have taken place without Konner’s active contact.
Konner disputed that he exercised control over Carlson’s account claiming that Carlson ran his own farming business, prepares his own tax returns, has experience with numerous investment accounts, and has sufficient intelligence and understanding of the securities market to evaluate trade recommendations. The court rejected Konner’s arguments finding that the ability to run a farm business does not automatically translate into an ability to understand and evaluate financial markets. The SEC further supported its decision by finding that Carlson lacked familiarity with the companies invested in his account and Carlson testified that he did not reject Konner’s trade recommendations. The judge concluded that Carlson lacked the general investment knowledge and sophistication to control his account leaving Konner in de facto control.
The judge also concluded that Carlson’s account was excessively traded. First, the judge concluded that the account application form was filled out by Konner and misstated Carlson’s financial information and/or investment objectives and risk tolerance. The judge, while not clear on the reason why the account application was inaccurate, concluded that Konner probably failed to explain the various types of investment objectives and that Konner listed incorrect financial information to avoid the attention of the compliance department.
Konner disputed the court’s finding arguing that Carlson intended to use his JP Turner account for speculation and aggressive trading. In addition, Konner argued that Carlson had opportunities to speak with compliance and management at JP Turner about the frequency of trading in his account but failed to complain. The court was not persuaded by Konner’s arguments finding that compliance and management personnel could not specifically recall speaking with Carlson and instead insisted that because the general practice was to contact clients it must have done.
The SEC found that the account had an annualized turnover rate of seventeen, nearly triple the rate presumed to indicate excessive trading, a cost equity factor of 34.6%, and in excess of 250 purchase and sales transactions for the period. Finally, the court found that Konner acted with scienter or intent to defraud due to his inconsistent explanations of Carlson’s net worth, as documented in JP Turner’s account forms. The court found that Konner was strikingly inconsistent when questioned about the source and accuracy of Carlson’s net worth figures and that the only plausible explanation for Konner’s shifting explanations was that he was making it up during the hearing as he went along.
The attorneys at Gana Weinstein LLP are experienced in investigating claims of excessive trading and churning. Our attorneys can help you detect and uncover suspicious activity in your accounts. Our consultations are free of charge and the firm is only compensated if you recover.