Worden Capital Management has been sanctioned over $1.5M by the Financial Industry Regulatory Authority (FINRA) for lapses in supervision leading to churning, or excessive trading, in customer accounts. Of this, $1.2M is in restitution to customers whose accounts suffered commission payouts on account of the excessive trading done by the firm’s representatives, while the balance of $350K is for supervisory and other violations.
Churning can be defined as a practice where a broker indulges in frequent and excessive trading, mostly with a view to earning commissions, often with a disregard to the client’s investment goals. This can sometimes happen when a broker holds discretionary authority on a client account; in other words, he does not need a specific client agreement for each transaction.
Churning is, unambiguously, a fraudulent, illegal, and unethical practice. Haselkorn & Thibuat has undertaken an investigation of Worden Capital Management and potential securities claims arising out of its failure to implement an adequate system for supervision of its financial advisors that led to such practices.
The Letter of Acceptance, Waiver, and Consent (AWC), which was signed on 31st December 2020, sanctions Worden Capital for its failure to supervise. Worden will also need to undertake a review of its supervisory systems and procedures with the help of an independent consultant.
FINRA’s investigations cover the period from January 2015 to October 2019, during which time, Worden’s registered representatives indulged in making unsuitable recommendations, traded excessively in customer accounts, and realized over $1.2 million in, as it now appears, unjustified commissions. This was made possible by the absence and enforcement of a system that could enable and facilitate compliance with FINRA’s rules pertaining to excessive trading.
An example of the rampant misuse of trading privileges is of a customer whose account was traded for about a year and incurred realised losses of $118490, including commissions paid that amounted to $205557. This customer had a cost to equity ratio (also known as breakeven point) of more than 100 percent. The conclusion one can draw from this example is that the customer’s primary investment goal was to trade more and more so that Worden could make money while he lost it.
It also appears that despite receiving monthly reports on active accounts that highlighted many customer accounts where excessive trading was possibly taking place, Worden did precious little to investigate and/ or stop this practice in the flagged accounts.
It does not end there. According to FINRA, customer requests to transfer their account to another member firm were also tampered with. In addition, in another example of supervisory failure, Worden Capital repeatedly failed to file Forms U4 and U5 for their registered representatives, forms that disclose the filing or resolution of customer arbitrations.
In response to FINRA charges, the CEO of Worden has apparently agreed to a three-month supervisory suspension, a $15000 fine, a 15-day suspension in all capacities and completion of 20 hours of continuing education.
In doing so, however, the CEO has consented to the entry of FINRA’s findings, without agreeing with or denying the charges.
Haselkorn & Thibaut, P.A., is a national investment fraud law firm, is actively involved in filing FINRA arbitration claims for cases of churn in customer accounts leading to financial losses.
If you have investments with Worden Capital Management or are concerned that your account with another broker-dealer could be the subject of similar malpractices, call us for a free consultation with one of our investment fraud attorneys at 1 888-628-5590.