SEC Enforcement charged the president and principal owner of Aura Financial Services, a broker-dealer, along with 2 branch managers ("BOMs"), with failing to supervise 3 former RRs who are said to have largely depleted the funds in their customers’ accounts through improper churning.  Let's start with the players:

• Timothy Gautney, 37, of Birmingham, AL.  President and principal owner of Aura, he's a former RR of Aura, a B/D formerly registered with the SEC from 1997 to early 2010.  He also was an IA representative with Aura's affiliated registered investment adviser that he also owns.

• Robert Bellia, Jr., 40, of Wantagh, NY.  Registered with Aura from mid-2007 until mid-2009, he owned Aura’s branch office in Islandia, NY, and served as its branch manager (BOM) until early 2009.  During the 14 years prior to joining Aura, Bellia had been registered with 12 other B/D's.  During his entire career at Aura, Bellia was under heightened supervision due to FINRA disciplinary history for failing to supervise RR's at another B/D and customer complaints.

• Erik Blum, 44, of Boca Raton, FL.  Registered with Aura from mid-2006 until mid-2009, he served as BOM of its Miami branch, formerly located in West Palm Beach.  He had worked in the securities business since 1987.

• Aura Financial Services, Inc. a Birmingham, AL-based Broker-Dealer.   From 1997 until February 2010, it was wholly-owned by Gautney.  During the relevant period, it had 90 or independent contractor RR's, working primarily out of 8 branch offices in Alabama, Florida, New York and Georgia.  On 6/11/09, the SEC Commission filed a civil injunctive complaint against Aura and six of its then-current and former RR's.  Aura effectively stopped doing business as a B/D shortly thereafter.  On 2/22/10, Aura's B/D registration was revoked.  

    Churning in Islandia and Miami Offices.   The trading by the Aura RR's was extreme - one Islandia office RR ("RR1”) turned over the accounts of 5 customers 20 to 94 times per year;  a second Islandia RR (“RR2”) turned over 2 customer accounts 40 and 59 times each year, respectively.  These statistics were sent quarterly to BOM Bellia.  An RR in Miami (“RR3”) turned over 2 customer accounts 6 to 54 times each year - these statistics were sent quarterly to BOM Blum. 

The 9 customers had opened and funded their accounts after being cold-called by, or otherwise introduced to, one of the Aura RR's.  All had their accounts aggressively traded, though none had indicated to Aura an investment objective or risk tolerance supporting that trading.  Nearly every customer was unsophisticated in securities trading and relied on the RR to make investments decisions in the account.  No customer had an understanding of the total transaction costs they were incurring by trading through Aura. 

All told, the accounts of these 9 customers generated total gross commissions of approximately $755,000 for the three RRs in 2008 alone - or 12% of the total 2008 gross commissions for the entire firm.  During this time, the customers suffered aggregate losses of almost $2 million.

    Aura's WSP and Active Account Letters.   As the accounts were being churned, Aura’s WSP stated, among other things, that a turnover ratio greater than 6:  "warrant[s] immediate attention and further review of a larger sample size, if applicable.  The [Designated Principal] should take immediate steps to determine that such trading activity is acceptable to the customer (acknowledgment by customer in writing may be sought), and conforms to the customer’s objectives.  Otherwise, steps may be taken to close the trading activity in the customer’s accounts."

At least each quarter, Aura’s Compliance Department provided each BOM with excerpts of a report containing annualized turnover ratios, break even ratios, and other account metrics for the largest commission-producing accounts from their branch.  Aura’s active account letter procedure, which was unwritten, required Aura’s BOM's to send such letters -  entitled “Intent to Maintain Active Account” - to all customers whose accounts had turnover ratios greater than six.  Problems with the letters:

• The active account form letters didn't explain why Aura was sending the letters to the customers.
• Cover letters did not accompany the active account letters, either.
• The body of the form letters didn't identify the respective accounts as actively traded, or something to that effect. 
• Instead, the letters stated that “certain clients may wish to engage in more frequent trading in their accounts,”  and included a general disclosure of the risks associated with “frequent” trading.
• The letters also included numerous blanks for the customer to complete - re: numbers of trades over the past year, anticipated trades in the future year, investment objective, risk exposure, and other financial information.
• Aura did not monitor when an active account letter was sent to a customer from the branch offices.
• Aura had no consistent practice of tracking returned letters and no consistent practice on follow-up of letters that had not been returned.
• If information in the returned active account letter did not indicate changes from the customer’s original application, the returned active account letter was maintained at the branch office. 

There also was no evidence that Aura had a mechanism to implement other aspects of the firm’s procedures - e.g., monitoring whether BOM's gave immediate attention to accounts with high turnover ratios, whether they reviewed a larger sample size, or whether they consistently took steps to close the trading activity in customers’ accounts if customers did not confirm that such trading activity was acceptable.

    Specific Failures Reasonably to Supervise.   The SEC complaint details how each branch manager and president failed reasonably to supervise their registered staff.  In terms of Gautney, Aura’s president, he was responsible for developing and implementing reasonable policies, procedures, and systems to prevent and detect the churning of the three RRs at Aura.  Aura’s system relied on BOM's to supervise RRs, but did virtually nothing to determine whether the branch managers were effectively supervising the RRs in connection with implementing firm procedures to address high levels of trading in customer accounts.

There were no controls to make sure that branch managers followed the active account letter procedures or otherwise reasonably followed up on red flags of churning. Gautney also was generally aware of the high turnover in many Aura customer accounts - as he had access to the reports containing the turnover and cost to equity ratios and, in 2007, was notified by FINRA that 50 customer accounts appeared to be excessively traded, including the account of a customer of RR3.  If Gautney had reasonably implemented the firm’s procedures for addressing potential churning in customer accounts, it is likely that he and the firm would have prevented and detected the RRs’ misconduct. 

For complete details, click onto:   [ SEC '34 Act Rel. 62996, 9/27 ]