Rampant Churning

US SEC and Alabama Securities Commission (ASC) recently charged a broker-dealer in connection with rampant churning of customer accounts, widespread supervisory failures, and other securities violations that resulted in significant harm to clients and substantial profit to the firm. Also charged by SEC and ASC were several of the firm's senior officers and registered representatives. Churning is a fraudulent practice that occurs when a broker engages in excessive trading without regard to the customer's investment objectives for the purpose of generating commissions and other revenue.

SEC alleges that Aura Financial Services and six registered representatives used fraudulent sales practices and high-pressure sales tactics to convince customers to open and invest money in Aura brokerage accounts, which the brokers subsequently churned. Aura and the brokers enriched themselves with approximately US$1 million in commissions and other fees paid by the customers while largely depleting the customers' account balances through trading losses and excessive transaction costs.

ASC issued an amended order to show cause against Aura and three of its senior officers, based upon the findings of several ASC audits. The order alleges that Aura and the three managers violated their supervisory and compliance responsibilities under the Alabama securities laws. Despite the fact that many of the firm's representatives had criminal or disciplinary backgrounds and multiple prior customer complaints, Aura and the three managers failed to adopt appropriate procedures, failed to enforce rules, failed to conduct branch office inspections, and failed to maintain files of and follow up on customer complaints.

In addition to alleging the supervisory failures, ASC also cited Aura with unauthorized trading by a former representative which included trading after the death of the trustee. The firm's representatives operated under the "honor system" and documentation evidencing active oversight was lacking. Aura failed to perform independent review of customer complaints and summarily dismissed certain complaints based solely on the representations of their agent or representative.

The amended order requires Aura, within 28 days, to show cause to ASC why its registration as a broker-dealer and agent in the State of Alabama should not be suspended or revoked. The named supervisors in ASC's order are Timothy M. Gautney, Aura's founder and Chief Operation Officer; Loyd Gilford King, Aura's Corporate Treasurer; and John Wesley Woodruff, Jr., Aura's Chief Compliance Officer.

SEC's complaint has charged six current and former Aura registered representatives located in branch offices in Florida and New York. SEC alleges that the scheme began in approximately 2005. Although some of the misconduct stopped when two of the registered representatives left Aura in August 2008, the scheme continued through at least April 2009.

What a house of thieves!