JD Nicholas Brokers Charged with Fraud
Donald J. Fowler, of Massapequa, New York, and Gregory T. Dean, of Seaford, New York, both of whom are stockbrokers formerly registered with J.D. Nicholas & Associates, Inc., have been charged by the Securities and Exchange Commission (SEC) in a Complaint alleging that Fowler and Dean excessively traded and fraudulently churned customer accounts, and effected unsuitable investment strategy recommendations. Securities and Exchange Commission v. Gregory T. Dean et al., No. 1:17-cv-00139 (Jan 9. 2017).
Previously Donald J. Fowler has been subject to eleven customer initiated investment related complaints or arbitration proceedings alleging fraud. Gregory T. Dean has also been subject to eleven customer initiated investment related complaints or arbitration proceedings alleging fraud.
Both appear to have been associated with the same firms that have been expelled by regulators.
According to the SEC Complaint, Fowler and Dean incorporated a short-term investment strategy in twenty-seven of the firm’s customer accounts, which entailed short-term purchases and sales of stock irrespective of the movement of stock prices. The individuals allegedly executed the strategy repetitively in customer accounts.
The Complaint stated that Fowler and Dean were required to comprehend the benefits and drawbacks of the investment strategy that they implemented in order to have a reasonable basis to execute the strategy. Yet, the SEC alleged that Fowler and Dean did not engage in practically any due diligence concerning their strategy, which prevented them from having an adequate basis to conclude that the investment strategy effected by them was suitable for investors. The Complaint indicated that the strategy effected by Dean and Fowler was primarily geared for generating them income, even if it came at the customers’ expenses.
The Complaint alleged that prospective investors were first cold-called by Fowler and Dean and informed that they had extensive experience regarding picking stocks, and that the individuals’ investment strategy would provide investors returns which would beat those generated by the market. Apparently, customers were under the impression that the substantial returns proclaimed to be possible by Fowler and Dean could offset the risks imposed by the strategy. Additionally, customers received few details, if any, concerning the costs and fees pertaining to the strategy suggested by Fowler and Dean.
According to the Complaint, personnel for J.D. Nicholas prefilled customer account documents that pursued the strategy, where such forms indicated that customers intended to invest speculatively. Additionally, customers provided margin agreements which enabled Fowler and Dean to utilize margin in the customers’ accounts with funds which was borrowed. As a result of the leverage associated with the individuals’ utilization of margin in the customers’ accounts, Fowler and Dean allegedly caused customers to be exposed to significant risks. The Complaint further indicated that Fowler and Dean placed trades in customers’ accounts without receiving proper authorization.
The Complaint alleged that Fowler and Dean imposed fees exceeding three and one-half percent for each sale or purchase effected in customer accounts, in which the fees were represented to the customers as the individuals’ commissions or mark-ups and mark-downs. In addition, prior to November 1, 2011, a mandatory $65.00 fee for each trade was assessed to customers as a firm commission. Subsequent to November 1, 2011, the firm commission was $49.95. Moreover, customers reportedly faced additional expenses based upon the interest pertaining to margin purchases.
The SEC alleged that continuous short term purchases and sales of securities constituted a strategy that Fowler and Dean knew, or had been reckless in being unaware, was extremely unlikely to be in the customers’ best interests, in that the costs of transactions was likely to erode the possible investment returns. Apparently, Fowler and Dean failed to properly analyze whether there was a reasonable basis pertaining to their investment strategy.
The individuals reportedly only relied upon the internet, investment periodicals, and news publications to conclude that their strategy was reasonable, despite those sources not providing Fowler and Dean with any information concerning the negative impacts pertaining to a short-term trading or the substantial costs imposed within the strategy pursued by them.
According to the Complaint, cost-to-equity ratios of more than twenty percent and turnover rates of six are typically the threshold for what the SEC deems excessive trading. In the twenty-seven customer accounts, the cost-to-equity ratios reportedly ranged from twenty to over four-hundred and fifty-one, with an average of one-hundred and five. Additionally, the cost-to-equity ratios were over one-hundred and ten percent on average.
The Complaint further alleged that investments were only held by Dean and Fowler for an average of nine days in the customers’ accounts. Customers, on average, paid fees and commissions totaling $37,039.00, even though the customers only had $26,289.00 equity in their account on average. The SEC alleged that the total average equity in the twenty-seven accounts had been exceeded by the total costs. As a result of Dean and Fowler’s investment strategy and high cost structure, customers collectively lost $1,374,202.00. Moreover, an estimated $1,000,044.00 in revenue had been accumulated by the firm in connection with the twenty-seven accounts. After J.D. Nicholas took a twenty percent cut of the revenues, Fowler and Dean pocketed an estimated $800,000.00.
The SEC additionally alleged that three customer accounts had been churned by Fowler and Dean, in which the individuals did not trade in a manner that reflected the retired customers’ interests of investing conservatively. Fowler and Dean allegedly raked in an estimated $67,000.00 in gains, while the three customers collectively sustained $105,400.00 in investment losses.
The SEC alleged that Fowler’s and Dean’s conduct was violative of Securities Act of 1933 Section 17(a), and Securities Exchange Act of 1934 Section 10(b), and Rule10b-5.
Guiliano Law Group
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