SEC Brings Proceedings Involving Failure to Supervise and Churning
The Commission filed two administrative proceedings centered on churning and failure to supervise claims involving Atlanta broker dealer JP Turner. One named as Respondents the firm co-founder and president, William Mello which settled. In the Matter of JP Turner & Co., LLC, Adm. Proc. File No. 3-15014 (Sept. 10, 2012). The other named as Respondents Michael Bresner, executive vice president and head of supervision of JP Turner and three registered representatives at the firm, Ralph Calabro, Jason Konner and Dimitrios Koutsoubos. In the Matter of Michael Bresner, Adm. Proc. File No. 3-15015 (Sept. 10, 2012). This proceeding is not settled.
From January 2008 through the end of 2009 the three registered representatives churned the accounts of seven customers, engaging in excessive trading for their personal gain at the expense of the customers. The trading activity generated fees and margin interest of $845,000 as the customers collectively lost about $2.7 million.
Messrs. Calabro, Konner and Koutsoubos are each alleged to have exercised de facto control over, respectively, three, two and two customer accounts. The accounts traded by Mr. Calabro had turn over rations of 8 to 13. This is the times per year a customer’s securities are replaced by new securities. When it exceeds 6, there is a presumption of excessive trading. His accounts had loses of about $2.3 million. The accounts handled by Mr. Konner had annualized turnover rations of 17 and 18 along with losses of $134,0000. The accounts traded by Mr. Koutsoubos had turn over rations from 28 to 56 and losses of $193,000.
The JP Turner supervisory system produced quarterly reports based on return on investment. It identified accounts with commission at Levels 1 through 4, requesting that certain actions be taken at each level. At Level 1 the system sent an e-mail to front-line supervisors requiring that they review the account. At Level 2 the system sent an e-mail to the same supervisors and requested that they take one of four actions – compute a profit and loss analysis, discuss the account with the broker, call the customer or restrict commissions. In addition, a letter was sent to the client requesting a form be filled out about the activity in the account. At Level 3 an e-mail went to a senior supervisor who was required to perform a review of the account and conduct a profit and los analysis. At Level 4 Mr. Bresner as EVP was notified and required to review the account and take appropriate action.
According to the Order, Mr. Bresner failed to take action when required. Accounts traded by Mr. Konner reached Level 4 three times during the period. Accounts traded by Mr. Koutsouos reached Level 4 four consecutive times in a brief period. Mr. Bresner was notified. The most restrictive action taken with respect to these alerts was to restrict commissions. If he had undertaken meaningful follow up in supervising Messrs. Konner and Koutsoubos such as closely reviewing the files and conducting follow up with the customers, it is likely he could have prevented or detected the churning according to the Order.
The Bresner Order alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b) by the three registered representatives. It also alleges that Mr. Bresner failed to reasonably supervise Messrs. Konner and Koutsoubos. This proceeding will be scheduled for hearing.
The JP Turner Order charges deficiencies in the supervisory systems. Specifically, it claims that the system imposed few requirements on the supervisors. The system failed to specify the manner in which an internal review of an account flagged by it was to be reviewed; provided no guidance for analyzing the accounts; and did not require contact or follow up of the trading activity with the customers. While the procedures did call for the firm to send customers whose account was flagged a questionnaire, that would only occur once every twelve months regardless of how many times the account was flagged during the period. If JP Turner and Mr. Mello as President had established reasonable policies and procedures and a system to implement them it is likely the firm could have prevented and detected the wrongful conduct by the representatives, according to the Order. The Order alleges violations of Exchange Act Section 15(b)(4)(E) by the firm and Section 15(b)(6) by Mr. Mello.
The firm and Mr. Mello settled with the Commission. The firm agreed to hire an independent consultant to review its supervisory procedures and consented to a censure. It also agreed to pay $200,000 in disgorgement, prejudgment interest and a $200,000 penalty. Mr. Mello will be suspended from association in a supervisory capacity in the securities business for a period of five months and pay a penalty of $45,000.