Sec Charges Long Island Brokers with Churning, Excessive Trading

January 2017
Issue: 
7

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. The malpractices by the duo have gone a long way in benefitting them in terms of fees as well as other substantial commissions. In one case, Cold Spring Advisory, through intensive forensic analysis, uncovered for a client who lost a total of $125,965 with commissions exceeding $131,000. The client endured a turnover of 42.73 and cost maintenance factor of 65.09%, meaning the client would have to maintain over 65% profit per year just to stay at breakeven. At the end of the day, the client was put into a no-win situation with this strategy. “It’s nice to see Finra and the SEC take a page out of Cold Spring’s playbook by doing a detailed analysis to bring out the broker abuse. When you see extremely high turnover ratio’s and CMF (Cost Maintenance Factors), it becomes overwhelmingly evident how customers cannot possibly make money in the market with transactional brokers, no matter how well the markets are performing”, said one Cold Spring Advisory representative.

On the other hand, for the customer who entrusted Fowler and Dean for their supposed expertise in stock-picking, enormous losses has been the hallmark. Close to about 27 accounts belonging to customers has been affected. In particular, part of the evidence that was presented showed how Dean and Fowler engaged in high cost and excessive trading that enabled them to acquire benefits wrongfully as the customers’ funds wasted away progressively. Both partners were reported to be in violation of the antifraud provisions aligned with the federal securities laws.

Both of the accused have a long negative history with regard to disciplinary actions by regulatory authorities. Several of Dean’s clients filed Financial Industry Regulatory Authority (FINRA) complaints or arbitrations against him. Most of the complaints levied against him resulted in penalty through payments to the victim customers. Fowler has faced a similar backlash by FINRA in terms of payments to the clients as other arbitrations are still pending as well.

Dean and Fowler’s fraudulent mechanisms were similar for the 27 accounts belonging to customers. They basically bought stock extensively and resold the same after just a couple of weeks. Price movements did not affect the quick sales that were generated. The principle behind it was repetition in the customers’ accounts. The two representatives did not have a formidable foundation for their investment strategy.

Their approach lacked an understanding of the looming risks and rewards; no due diligence was carried. They duped customers into believing they were savvy and experienced stock pickers and that their strategy would do very well in the market. The both of them used called calls to reach out to prospective customers. Tiny mention was made of costs and fees, and that was instrumental in making the customers believe that the duo's strategy would outperform the market and result in significant profits.

The two representatives either disregarded or were negligent of the fact that buying and selling of securities in the short term repeatedly would, most certainly, outdo any potential profits in the accounts. Due to the aforementioned irregularities, the SEC is seeking to have both Dean and Fowler enjoined from adding, committing and engaging in conduct likely to make them liable for the infringements of security laws. Moreover, the regulator is also seeking to have the two representative pay civil monetary penalties as well as to disgorge any fraudulently gains obtained. Both Dean and Fowler have had a bad history with SEC and their credibility in the stock exchange market has been challenged immensely.