Oppenheimer must pay $1.2 mln in excessive trading case -panel

Fri Jan 18, 2013 1:16pm EST

Jan 18 (Reuters) - Oppenheimer & Co Inc must pay a total of nearly $1.2 million to a Texas-based investor in a dispute over allegations of excessive securities trading in his account, an arbitration panel has ruled.

Lloyd Gillespie alleged Oppenheimer and two brokers generated $550,000 in sales commissions on a $2-million portfolio during a 2-1/2 year period.

An Oppenheimer spokesman was not immediately able to comment on the ruling that was issued on Thursday by a Financial Industry Regulatory Authority panel.

The case is an example of the extent to which excessive trading, also called "churning," can diminish the value of an investor's portfolio.

"This was among the worst churning cases we've seen over the years," said Craig McCann, an economist based in Fairfax, Va., who testified on behalf of the investor.

Trading costs ate away 20-percent of the investor's portfolio value, McCann said. An ideal threshold is close to three or four percent, although some experts believe it can be as high as ten percent, McCann said.

The panel's award to the investor includes $848,000 in damages, $174,000 in legal fees, plus interest and costs, according to the ruling.

Gillespie, of Nacogdoches, Texas, filed the arbitration case in 2009, requesting a total of $4 million in damages, according to the ruling. He alleged that Oppenheimer and two other firms where the brokers who advised him later worked, were responsible for concentrating his portfolio in "highly speculative stocks" and used margin, a type of loan, to buy the securities, according to the ruling.

The investments were not appropriate given his risk tolerance and investment goals, alleged Gillespie, a logger and former owner of a lumber business. Gillespie, now semi-retired, also alleged that Oppenheimer and the other firms failed to supervise the brokers who worked on his account.

The cases against the two other firms were later settled.

Most of the excessive trading occurred through Oppenheimer, according to Bruce Oakes, a St. Louis, Missouri-based lawyer who represented Gillespie. A now former Oppenheimer broker who advised Gillespie between 2003 and 2007, was responsible for generating about $400,000 of the total $550,000 commission tab, Oakes said. A second broker who worked on Gillespie's account for ten months generated about $110,000 in commissions.

Oppenheimer received 60 percent of those commissions, Oakes said. Gillespie's overall losses were about $1 million, he said.

Arbitrators also denied requests by the two brokers who worked on Gillespie's account to remove a disclosure about the arbitration case from their public disclosure records, according to the ruling.

"I'm glad the panel recognized that brokerages have some responsibility to protect their clients from the brokers," Oakes said. "Oppenheimer profited from this more than the brokers did," he said.

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