Broker Causes Firm to Preserve Inaccurate Books and Records

A broker was named a respondent in a FINRA complaint alleging that he willfully violated Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder, and violated FINRA Rule 2020 by churning a customer’s account.

The complaint alleges that the broker exercised de facto control over the customer’s account by controlling the volume and frequency of trading, deciding what securities to buy and sell, the quantities, the price, and when each transaction would occur. The customer relied on the broker to make securities recommendations and consistently followed those recommendations.

The broker’s trading in the customer’s account was excessive and quantitatively unsuitable, as evidenced by the:

• Annualized turnover rate of 9.65
• Cost-to-equity ratio of nearly 74%
• Size and frequency of the transactions
• Transaction costs incurred
• In-and-out trading

This trading generated more than $650,000 in commissions and concessions for the broker and his member firm and more than $770,000 in additional costs that were paid to the underwriters of the offerings. The customer experienced approximately $1,245,000 in losses.

The complaint alleges that the broker did not have a reasonable basis to believe that the transactions and strategy he recommended to the customer were suitable for any customer. The complaint further alleges that the broker falsely characterized transactions in the customer’s account as unsolicited, when, in fact, he solicited the customer to participate in each transaction. As a result, the broker caused his firm to make and preserve false or inaccurate books and records.

In addition, the complaint alleges that the broker made false statements to his firm on an annual compliance questionnaire about how he communicated with the customer. The broker denied communicating via text message with clients when, in fact, he had exchanged text messages with the customer that were nearly all related to the customer’s account.