Advisor made excessively frequent trades for the sole purpose of increasing commissions

The client, a novice investor in her 60s, was looking to invest $75,000 of an inheritance she received. This money was a significant portion of her net worth. With the help of a long-time friend, she opened a margin account with the firm. Through her friend, the client completed the account opening documentation. She never met with the advisor. In fact, they only spoke twice by phone when the client wanted to withdraw money from her account.

The account was opened mid-month and the client's first statement showed 18 trades in two weeks.

She received a handwritten note from the advisor assuring her that the trading activity was normal and that she was making money.

In the second month, the advisor executed another 71 trades. Another handwritten note from the advisor said that even though the account had lost some money, it was well positioned going forward.

Over a period of 18 months, 582 trades were placed in almost 100 different stocks without the client's consent. The aggregate value of the buy orders executed on the $75,000 investment totaled over $4 million. In one month alone, over $1 million was traded with equity in the account of only $20,000. In the end, the portfolio's worth was only $4,785.

The firm argued that the client should accept some responsibility for her losses because she received statements showing the account activity. OBSI concluded that the client could not be expected to identify and stop the inappropriate trading activity when the firm's own supervision, led by licensed and experienced financial professionals, failed to do the same. OBSI recommended that the firm compensate the client for 100 per cent of her losses.

(2006)