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Investments - Unsuitable
Cold Caller: Anatomy of a Fraud
by Howard Haykin
THE ANATOMY, OR ELEMENTS, OF A COLD CALLING FRAUD. According to the SEC, while the broker claimed to be highly experienced, he did nothing more than buy stocks and sell them after a brief holding period. His “strategy” was to relentlessly trade his customers’ accounts – so as to generate enormous commissions, margin interest and other execution costs, which the broker shared with the firm, Joseph Stone Capital, LLC.
Here are the elements or characteristics the broker employed in his alleged fraud:
[NOTE: As an investor, immediately seek assistance upon observing any of these elements.]
- Cold Calling and Remote Communications. Since entering the business, the broker’s primary business-generating technique was cold-calling strangers. While with Joseph Stone, he never met his customers face-to-face and his communications with them were almost entirely by telephone.
- Churning Trades. During the period in question, the broker managed to execute around 3,000 trades in the customers’ accounts – representing $47 million worth of purchases. What made these numbers all the more extraordinary was the fact that total equity in the customers’ accounts averaged just $301,000 throughout the period. Churning was further evidenced by the fact that, on average, stocks were held for an average of just 24 days, and customers’ portfolios turned over, on average, 25 times each year.
- Excessive Costs of Trading. In addition to commissions, which were not disclosed on monthly account statements, each customer was charged a per-trade “fixed commission” of $75.
- Margin Trading. While not all customers wanted to trade on margin, the broker had all sign margin agreements, which permitted him to trade in a margin account. The broker then proceeded to use margin, or borrowed funds, for most trades - which enabled the broker to purchase more stock than could have been done by only using cash. Use of margin increased risks and costs of customers.
- Unauthorized Discretion. The broker engaged in unauthorized trading by placing trades in customer accounts without obtaining their authorization to do so.
- Customers’ Investment Profiles. While certain of the 16 customers - some of whom were retired or in their 70s - had conservative to moderate investment objectives and risk tolerances, the broker coded all customer investment profiles as “Speculation” and/or “Aggressive” - which effectively gave his trading activities the "green light" with supervisory personnel.
- Contradicting Stock Market Trends. From 2013 to mid-2019, the stock market rose nearly 74% (S&P 500 Index), whereas all 16 customers incurred losses – a statistical anomaly.