Churning occurs when a stockbroker does excessive trading in a client’s account. The trades are designed to maximize commissions for the broker instead of profits for the customer. Churning is illegal and prohibited by both the SEC and the Financial Industry Regulatory Authority (FINRA). Earlier this week the SEC fined former LPL broker Paul Lebel $56,000 for excessive trading.
According to records obtained from FINRA, Lebel began work in the securities industry in 1994. Until leaving the securities industry in January 2015, Lebel worked for a number of firms including LPL Financial, Oppenheimer, A.G. Edwards and Gruntal. He spent a few weeks at Arthur W. Wood Co. after leaving LPL but it is unknown if his license was simply placed there or if he was actually working.
Brokerage firms have a duty to supervise the accounts of their agents and employees. That means that LPL Financial can be held responsible for any losses caused by Lebel’s wrongdoing while employed there. Frequently the brokers engaged in wrongdoing are “judgment proof” meaning that attempts to sue them are not effective. The deep pocket is almost always the brokerage firm itself.
Lebel had 9 disclosable events, a huge number for a stockbroker. Two happened while he was working at Oppenheimer. The remaining seven occurred while he was working at LPL Financial. A disclosable event is a customer claim, bankruptcy, tax lien, regulatory action, judgment or criminal conviction.
While a judgment or lien doesn’t mean a broker is stealing, it should be a red flag for compliance officials within the brokerage firm. Ditto for certain criminal convictions. A broker with money problems, casino debts or addiction problems is more prone to steal or engage in misconduct such as churning. It appears that Lebel is no exception.
Lebel’s first money problems began in 2007 and 2008 when he had a simple overdue phone bill. According to him, it was because of a divorce. That isn’t a big deal but a $51,000 IRS lien during that time period signaled larger problems. A series of subsequent tax liens through 2014 is what probably resulted in Lebel becoming unemployable.
What is interesting about this case is that there were no customer complaints. Had those occurred, Lebel probably would have been out of the industry much earlier. Until the SEC action this week, there was no indication that he had engaged in any wrongdoing except not paying his taxes.
FINRA makes broker’s records available online and for free. Anyone can use the “brokercheck” system. Before you invest, always check out your broker.
We aren’t suggesting that you shouldn’t hire a broker that has a late bill or disorderly persons ticket from his or her college days. None of us are perfect. But if there are more serious problems, monitor your accounts carefully. And if the problems involve dishonesty, theft or recent addiction issues, consider a different broker.
In announcing the settlement, the SEC said, “Lebel’s excessive trading was inconsistent with the customers’ investment objectives, and willfully disregarded the customers’ interest. From August 2008 through August 2014, Lebel executed numerous mutual fund A share trades that, in light of Lebel’s customer’s investment objectives, were fraudulent, made to the detriment of Lebel’s customers, and without justification other than the generation of commissions for Lebel.”
This case involved allegations churning in four different customer accounts. The questionable trades involved mutual funds that typically carry higher front end commissions and are meant to be held for longer term.
In addition to the fines and disgorgement orders, Lebel also agreed to a permanent bar from the industry.
If you lost money because of churning, inappropriate investments (suitability violations) or other stockbroker misconduct, call us. Our minimum loss is $100,000. Cases are mostly handled by binding arbitration and resolve in about 14 months or less. We charge a contingent fee meaning we do not get paid unless we recover money for you.
For more information, please contact attorney Brian Mahany at *protected email* or by telephone at (414) 704-6731. We have also have more information on our investor and stockbroker fraud recovery page.
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