SEC Charges Atlanta-Based Firm for Compliance Failures as Brokers Churned Customer Accounts
The Securities and Exchange Commission today charged three former brokers at an Atlanta-based brokerage firm for “churning” the accounts of customers with conservative investment objectives, causing severe investor losses while the brokers collected handsome fees.
The SEC also charged the head supervisor at JP Turner & Company, Michael Bresner, as well as the firm’s president William Mello and the firm itself for compliance failures. JP Turner and Mello agreed to settle the SEC’s charges, while an administrative proceeding will continue against the three brokers and the supervisor.
Churning is a fraudulent practice in which brokers disregard the customer’s investment objectives and engage in excessive trading for the purpose of generating commissions and other revenue for themselves or their firms. The SEC’s Enforcement Division alleges that brokers Ralph Calabro, Jason Konner, and Dimitrios Koutsoubos engaged in churning while they worked at JP Turner. They collectively generated commissions, fees, and margin interest totaling approximately $845,000 while the defrauded customers suffered aggregate losses of approximately $2.7 million.
“Broker-dealers’ supervisory systems must provide customers with reasonable protection from churning and similar abuses. JP Turner’s supervisory systems failed to do that,” said William P. Hicks, Associate Director of the SEC’s Atlanta Regional Office.
According to the SEC’s order instituting administrative proceedings against the three brokers and the supervisor, Calabro lives in Matawan, N.J. and Konner and Koutsoubos each live in Brooklyn, N.Y. They all work at different firms now. While at JP Turner, they collectively churned the accounts of seven customers with conservative investment objectives and low or moderate risk tolerances. The churning occurred between January 2008 and December 2009.
According to the SEC’s order, Bresner lives in Atlanta and is an executive vice president and the head of supervision at JP Turner. He is charged with failing to reasonably supervise Konner and Koutsoubos, who generated such high commissions for some of their churned customers that it triggered a requirement in the firm’s procedures requiring that Bresner personally review the underlying trading activity. However, Bresner failed to take appropriate action in response to the trading in these accounts despite several red flags.
Specifically, the SEC’s Enforcement Division alleges that Calabro, Konner, and Koutsoubos violated Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and Bresner failed reasonably to supervise Konner and Koutsoubos with a view to preventing and detecting their violations.
The settled administrative order against JP Turner and Mello finds that they failed to implement adequate procedures to detect and prevent the fraudulent churning of customer accounts. Mello as president was ultimately responsible for establishing and implementing the firm’s supervisory policies and procedures designed to detect and prevent churning violations. Although JP Turner had a monitoring system to identify actively traded accounts, the system imposed few requirements and no meaningful guidance for supervisors to review these accounts and take meaningful action to investigate the trading activity.
In settling the SEC’s charges without admitting or denying the findings, JP Turner agreed to hire an independent consultant to review the firm’s supervisory procedures in order to prevent future violations. The SEC’s order censures JP Turner and requires payment of $200,000 in disgorgement (JP Turner’s approximate share of the commissions and fees generated by the fraudulent churning) plus $16,051 in prejudgment interest and a $200,000 penalty. The order suspends Mello from association in a supervisory capacity with a broker, dealer, or investment adviser for a period of five months and requires him to pay a $45,000 penalty.
The SEC’s investigation was conducted in its Atlanta Regional Office by staff attorneys Natalie M. Brunson and Song P. Brandon under the supervision of Assistant Regional Director Matthew F. McNamara. The SEC’s litigation will be led by Regional Trial Counsel M. Graham Loomis, senior trial counsels Edward G. Sullivan and W. Shawn Murnahan, and staff attorney Natalie Brunson. Assistant Regional Director Anthony D. Russell and securities compliance examiner Charlotte E. Moncrieff conducted the examination that led to the investigation.