FINRA bars former Aegis Capital rep for churning customer accounts
The United States Financial Industry Regulatory Authority (FINRA) has ordered that Steven Robert Luftschein, also known as Steven Lerner, is barred from associating with any FINRA member firm in any capacity. The bar is a part of a settlement offer which FINRA accepted on January 13, 2021.
Luftschein, while associated with Aegis Capital Corp, a FINRA-regulated broker-dealer, churned and excessively traded the accounts of several customers, from July 2014 through June 2016.
Let’s explain that churning is a manipulative and deceptive conduct that occurs in a broker-customer relationship when
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a broker controls his customer’s account;
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the trading in the account is excessive in light of the customer’s investment objectives; and
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the broker acts with scienter, i.e., with intent to defraud or with reckless disregard of the customer’s interests.
From July 2014 through June 2016, Luftschein controlled the trading in the accounts of Customers A, B and C. He controlled the volume and frequency of trading in these accounts, deciding what securities to buy and sell, the quantities, the price, and when each transaction would occur. Luftschein also frequently made unauthorized trades in these accounts.
Also, his trading in these accounts was excessive and quantitatively unsuitable for each of these customers, as evidenced by the high annualized turnover rates and cost-to-equity ratios, the size and frequency of the transactions, the transaction costs incurred and the customers’ investment objectives and needs. Luftschein’s trading in the Customers’ accounts resulted in annualized turnover rates ranging from 12.5 to 96.3 and annualized cost-to-equity ratios (or break-even points) ranging from 35.6% to 123.8%.
According to FINRA, Luftschein acted with scienter. In churning these customers’ accounts, Luftschein acted with an intent to defraud or, at the very least, with reckless disregard of his customers’ interests, seeking to maximize his own remuneration in disregard of the interests of his customers. He deliberately incurred unreasonably high trading costs in these customers’ accounts, which made it virtually impossible for the accounts to be profitable.
Indeed, Luftschein’s trading in these customers’ accounts caused more than $261,000 in losses, while Luftschein received substantial income from trading the accounts. He also masked the true costs of his trading from customers by placing a high percentage of the trades as riskless principal trades.
By churning and excessively trading the customers’ accounts, Luftschein willfully violated Section 10(b) of the Securities Exchange Act of 1934 (the Exchange Act) and Rule 10b-5 thereunder, and also violated FINRA Rules 2111, 2020 and 2010.