Merrill Lynch has come under scrutiny from New Hampshire regulators follow allegations of excessive trading by one of its Boston-based registered representatives, Charles Kenahan. The State has ordered Merrill Lynch to pay $26.25 to cover fines and restitution to an allegedly defrauded investor. The investor alleged losses of $100 million due to churning as well as unauthorized trading. This is the largest monetary sanction in New Hampshire’s history, and an enormous settlement for the Financial Industry Regulatory Authority (FINRA).
“Churning” refers to executing more trades than necessary in order to generate commissions for the broker. These extra trades do nothing to support the investment goals of the investor and may even result in losses. Jeff Spill, the deputy director and head of enforcement for New Hampshire’s Bureau of Securities Regulation told CNBC, “Ultimately, Kenahan’s recommendations benefited Kenahan and Merrill Lynch and not the investor.”
Consequences Following Unsuitable and Excessive Investments
The New Hampshire Department of State Bureau Securities Regulation has since barred Charles Kenahan and fined the broker $2,000,000. According to his BrokerCheck record, Merrill Lynch fired Charles Kenahan in July, following a settlement for $40 million with an investor who alleged excessive trading.
The New Hampshire enforcement order includes more allegations about the problems with Charles Kenahan’s investment strategy (or lack thereof). The order alleges that Kenahan recommended securities to a client that were not followed by Merrill Lynch’s research. It therefore went against Merrill Lynch’s policy to recommend the security. The state regulator further alleged that Kenahan purchased complex products, including inverse and leveraged exchange-traded funds – investments that most investors would find unsuitable. Furthermore, the broker allegedly held these short-term securities for longer than advisable, resulting in losses.
FINRA can hold Merrill Lynch responsible for its brokers’ actions because firms have a duty to supervise their registered representatives. Firms must have systems in place that can catch any potentially unsuitable investment recommendations or trading strategies. In this case, excessive trading should have alerted Merrill Lynch that these trades needed to be flagged for review.
Merrill Lynch’s History with Regulators
This is far from the first time Merrill Lynch has had to pay a settlement for millions of dollars. The firm’s broker check reveals a long list of disclosures from regulators and arbitration awards for defrauded customers. Representatives for Merrill Lynch have maintained that the client named in the latest enforcement from New Hampshire is a sophisticated investor, and therefore the claim doesn’t “add up,” as one representative for the firm told CNBC in an email.
What Went Wrong?
This case underlines that even experienced, high net worth individuals can suffer the consequences of an allegedly unsupervised broker. The investor recalled the high-pressure tactics that Kenahan used to get him to agree to certain trades, saying that the broker had come to him at a busy time when he wasn’t able to fully review the details of the recommended trading strategy. After years of working with the same adviser, the investor simply trusted that his financial adviser would work in his best interest. And even experienced investors can be caught off guard by high-pressure tactics intended to elicit a quick agreement.
What Can Investors Do?
If you believe you may have lost money due to a broker’s high-pressure sales tactics and excessive trades, you may be able to recover your losses. For a free case evaluation with experienced securities attorneys, call (877) 238-4175 or email firstname.lastname@example.org.