As recently reported, New Hampshire’s Bureau of Securities Regulation is currently investigating Merrill Lynch, Pierce, Fenner & Smith Incorporated (Merrill Lynch) and at least one of its former top brokers, Charles Ernest Kenahan (CRD# 1351974) in connection with two FINRA arbitration claims alleging account “churning” in various speculative stocks, including some Chinese small cap and microcap securities. New Hampshire securities regulators commenced their investigation into the alleged losses of some $200 million after FINRA arbitration claims were filed by two former clients of Mr. Kenahan, including former New Hampshire Governor, Craig Benson.

According to FINRA BrokerCheck, Mr. Kenahan was a longtime registered representative, having entered the securities industry in 1985. Mr. Kenahan was most recently affiliated with Merrill Lynch, from mid-2007 until his discharge in July 2019. Mr. Kenahan’s termination by Merrill Lynch concerned allegations raised by Craig Benson, as well as Benson’s former business partner Robert Levine, that Mr. Kenahan engaged in “unauthorized trading, unsuitable investment recommendations and excessive trading.”

As disclosed by FINRA, Mr. Kenahan was named or otherwise involved in four customer disputes, including Mr. Benson’s arbitration claim alleging damages of approximately $42 million. According to Mr. Benson, over the course of approximately ten years, Merrill Lynch engaged in numerous unauthorized trades resulting in $26 million in fees to Merrill Lynch and approximately $5 million in trading losses for Mr. Benson. Further, Mr. Benson contends that had his account been passively invested in an S&P 500 index fund during the time frame in question, he would have earned approximately $100 million.

Excessive trading, or churning, occurs where (i) a broker exercises control over a customer’s account, and (ii) the level of activity is inconsistent with the customer’s investment objectives, financial situation, and needs. Excessive trading constitutes a violation of FINRA’s suitability standards set forth under FINRA Rule 2111 (NASD Rule 2310). In determining whether trading was excessive, the use of statistical formulas is common. Pursuant to FINRA rules, “factors such as the turnover rate, the cost-equity ratio, and the use of in-and-out trading in a customer’s account may provide a basis for a finding that a member or associated person has violated the quantitative suitability obligation.”

Broker-dealers like Merrill Lynch have an obligation to ensure that their registered representatives are adequately supervised. Brokerage firms must also take reasonable steps to ensure that their financial advisors follow all applicable securities rules and regulations. When a brokerage firm fails to adequately supervise its representatives, it may be held liable for losses suffered by investors.

The attorneys at Giarrusso Law Group LLC have extensive experience in handling claims on behalf of investors including claims related to securities fraud such as excessive trading or account churning. Investors who believe they may have been victimized by securities fraud may contact our office by telephone at (201) 771-1115 or by email at info@gialawgroup.com for a no-cost, confidential consultation.