The Securities and Exchange Commission has slammed two rogue registered representatives with lawsuits owing to their misconduct. Gregory T. Dean and Donald J. Fowler are the latest victims of the commission’s whip on issues pertaining excessive trading by brokers in clients’ accounts predominantly to generate commission. This issue has been the cornerstone of many Cold Spring Advisory cases including many case involving these two brokers. The two are accused of inappropriately recommending high-cost trading strategy involving excessive buying and selling of stocks to customers.
In our last newsletter, "Inside the Wolves' Den," we explained how low-tier, "transactional" brokerage firms make their money and how the brokers at these firms strive to be the next Gordon Gecko or Jordan Belfort. We also promised that our next newsletter would reveal the sales pitch brokers at these firms use to bully investors to open accounts with them.
Who are the people you trust your investments with? Is it a stranger who cold-called you from out of the blue from a brokerage firm you've never heard of? Did this broker tell you he is one of the best traders on Wall Street and he could get you returns much higher than you ever thought possible?
In this newsletter, Cold Spring Advisory will reveal the inner workings of these broker-dealers and expose the interests, motivations and backgrounds of the brokers who work at them. You will see that the phrase "caveat emptor" -- Latin for "let the buyer beware" -- could not be more appropriate.
At Cold Spring Advisory Group, one of the more blatant forms of stockbroker abuse we see is the flagrant disregard for FINRA’s Suitability Rule (Rule 2111). The purpose of the Rule is to ensure brokerage firms and brokers deal with their clients fairly, ethically and professionally. The Rule obligates the firms and their brokers to provide reasonably based, quantitatively suitable, and customer specific recommendations based on the client’s investment profile, and to act in the best interest of the client.
Excessive Margin is another tool used by “transactional” broker dealers to make money at the expense of their clients. Unlike markups and markdowns, which leech money from an investors account over time, excessive margin can swiftly cause severe to total loss before the investor realizes what is happening. In our opinion, the goal of these broker dealers is to get as many of their clients on margin as possible. They do this by burying a margin agreement in the stack of new account forms an investor receives when they open an account.
Stockbrokers commonly joke with each other that using mark-ups and markdowns is like having a license to steal. After taking your order or solicitation, your broker makes a conscious decision to either execute your trade on an agency basis, which shows his commission directly on your trade confirmation, or execute the trade on a riskless principal transaction basis. The latter allows your broker to charge a mark-up when buying stock, or a markdown when selling stock, and effectively hide the amount of profit he earns on the trade.