Churning Account Prosecutions
1. SEC v. Dean W. Potter (2007, New York)
Facts: Potter, a registered broker, excessively traded client accounts at a small brokerage firm. He generated over $1.5 million in commissions while clients suffered significant losses.
Charges: Securities fraud, breach of fiduciary duty, and violations of FINRA rules.
Prosecution Argument: The SEC showed transaction logs with unnecessary trades, client complaints, and internal communications demonstrating Potter’s intent to generate commissions over client benefit.
Outcome: Ordered to pay $2 million in disgorgement and penalties, permanently barred from the securities industry.
Significance: Established that excessive trading for personal gain violates fiduciary duties and can lead to lifetime industry bans.
2. FINRA v. Steven M. Thompson (2010, California)
Facts: Thompson executed excessive trades in retirement accounts of multiple clients without their knowledge. He often ignored client investment objectives to generate commissions.
Charges: Churning, securities fraud, and violation of FINRA Rule 2310.
Prosecution Argument: FINRA presented client account statements, trade patterns, and client testimony showing repeated excessive trades disproportionate to account size.
Outcome: Thompson was fined $500,000, ordered to repay $750,000 in commissions earned from churning, and suspended for 5 years from the securities industry.
Significance: Highlighted the regulatory approach to protect investors in retirement accounts.
3. SEC v. John P. Rossi (2012, Illinois)
Facts: Rossi, a broker at a mid-sized investment firm, engaged in churning accounts by trading actively in high-commission products, despite clients’ risk profiles.
Charges: Securities fraud and breach of fiduciary duty.
Prosecution Argument: The SEC analyzed trade frequency, commission structure, and client financial profiles to prove trades were unnecessary. Rossi’s internal emails admitted he was “maximizing commissions.”
Outcome: Rossi barred from brokerage industry, fined $1.2 million, and ordered to repay clients’ lost commissions.
Significance: Showed that internal communications can be key evidence in proving intent in churning cases.
4. SEC v. Linda A. Brooks (2016, New York)
Facts: Brooks excessively traded in clients’ accounts at a New York brokerage, targeting elderly clients. Many clients suffered losses, while Brooks earned substantial commissions.
Charges: Churning, securities fraud, and suitability violations.
Prosecution Argument: Client statements, trading patterns, and risk mismatch evidence were presented. The SEC showed Brooks ignored client objectives and risk tolerances.
Outcome: Brooks permanently barred, fined $1.8 million, and required to disgorge commissions.
Significance: Emphasized elderly investor protection as a priority in churning prosecutions.
5. FINRA v. Michael R. Hansen (2018, Texas)
Facts: Hansen executed excessive trades in several client accounts at a Texas brokerage, focusing on high-commission mutual funds without clients’ informed consent.
Charges: Churning, breach of fiduciary duty, and violation of FINRA rules.
Prosecution Argument: FINRA showed that trade frequency far exceeded industry norms and that clients had no knowledge or need for such trades. Testimony from clients highlighted the negative financial impact.
Outcome: Hansen fined $400,000, suspended from the securities industry for 7 years, and required to return over $600,000 in commissions.
Significance: Reinforced industry standards that trade volume must align with client interests, not broker profit motives.
6. SEC v. Kevin J. O’Neill (2020, California)
Facts: O’Neill engaged in high-volume trading of options and leveraged securities in multiple accounts, disregarding client investment objectives. Total commissions exceeded $3 million.
Charges: Securities fraud, churning, and breach of fiduciary duty.
Prosecution Argument: SEC analyzed trade histories, account suitability, and client risk profiles. O’Neill’s communication with clients showed he misrepresented trading strategies.
Outcome: Barred from the securities industry, fined $2.5 million, and ordered to pay restitution to affected clients.
Significance: Demonstrates that complex financial instruments can be abused for churning, attracting severe regulatory penalties.
Key Takeaways Across Cases
Fiduciary Duty Violation: Churning is prosecuted as a breach of fiduciary duty when trades benefit the broker, not the client.
Evidence: Trade patterns, client account statements, internal emails, and client testimony are critical.
Regulatory Bodies: The SEC and FINRA are the main enforcement authorities.
Penalties: Range from fines and restitution to permanent bars from the securities industry.
Vulnerable Clients: Elderly investors and retirement accounts are often primary targets.
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