The Financial Industry Regulatory Authority (FINRA) found that Sean M. Sheridan, during the course of his association with J.P. Turner & Co., Inc. fraudulently obtained $267,000 from at least eight customers, who also lost approximately $1,040,856 in connection with the short term trading of investment company shares.
Until sometime in 2010, Sean F. Sheridan (“Sheridan”) was a registered representative of JPTC, and was purportedly a “Vice President of Investments” for a “franchise,” or “independent” office of JPTC, which was located in Sheridan’s home at 61 Heath Avenue, Oakhurst, New Jersey 07755. Prior to his association with JP Turner, Sheridan previously employed as a landscaper and fitness club manager, and it appears that he became associated with JP Turner, after attending York College for one year.
According to FINRA
From in or about January 2007 through December 2009 (the Relevant Period), Respondent [Sean M. Sheridan] recommended approximately 205 unsuitable mutual fund switch transactions in the accounts of eight customers. Respondent [Sheridan] only recommended Class A mutual fund shares, thereby requiring customers to pay sales charges with each new purchase. Furthermore, Respondent [Sheridan] effected the switches on a short term basis. The average holding period for the mutual funds that Respondent sold was just four to five months.
As a result of Respondent [Sheridan]’s unsuitable switches and trading of mutual funds, the customers incurred unnecessary sales charges and suffered losses of approximately $1,048, 856. Conversely, Respondent [Sheridan] received commissions of approximately $267,000 through this activity.
FINRA Disciplinary Proceeding No. 2009019209204.
In addition FINRA found that Sean M. Sheridan falsified firm records. His mutual fund switch recommendations were solicited. Nevertheless, from January 2007 until in or about November 2008, Respondent [Sheridan] falsely identified those transactions as “unsolicited” when placing the trades through his employer member firm’s electronic order entry system, thereby causing its records to be inaccurate.
Sean M. Sheridan Permanently Barred
As a result of these “findings,” JP Turner’s former agent, Sean Sheridan was permanently barred from the securities industry.
The Securities and Exchange Commission (“SEC”) and the NASD (now FINRA) have long held that excessive turnover rates of mutual funds are not consistent with the mutual fund concept of investment. Mutual fund shares generally are suitable only as long-term investments and cannot be regarded as a proper vehicle for short term trading, especially where such trading involves new sales loads.
A pattern of switches from one fund to another by several customers of a registered representative, where there is no indication of a change in the investment objectives of the customers and where new sales loads are incurred, is not reconcilable with the concept of suitability. In re Winston H. Kinderdick, 46 S.E.C. 636, 639 (1976); see also In re Harold R. Fenocchio, 46S.E.C. 279, 281 (1976) (SEC relied on NASD determination that because mutual funds have a high initial sales charge, registered representatives should recommend and sell them as long-term investment vehicles — if clients desire to adjust readily to changing markets, registered representatives should recommend other investment vehicles)(Ex. “L”); In re Investment Management & Research, Inc., No. C3B940028, National Business Conduct Committee, at 5-6, 1997 NASD Discip. LEXIS 43, at *10-11 (NBCC July 25, 1997); In re Charles E. Marland & Co., Inc., 45 S.E.C. 632, 636 (1974); Dept of Enforcement v. Respondent, 2003 NASD Discip. LEXIS 16, at *22, citing Kenneth C. Krull, 53 SEC 1101, 1105 (1998), aff’d Krull v. SEC, 248 F.3d 907 (9th Cir. 2001)(“[m]utual fund shares generally are suitable only as long-term investments and cannot be regarded as a proper vehicle for short-term trading”).
FINRA Conduct Rule IM-2310-3, relating to Fair Dealing with Customers, specifically provides that the Trading in mutual fund shares, which are not proper trading vehicles, particularly on a short-term basis is violative of FINRA rules. See also, NASD Notice to Members 91-39 (Limitations on Use of Letters in Switching Customers From One Mutual Fund to Another); NASD Notice to Members 94-16 (NASD Reminds Members Of Mutual Fund Sales Practice Obligations)(; Notice to Members 95-80 (NASD Further Explains Members Obligations And Responsibilities Regarding Mutual Funds Sales Practices).
With respect to “switching” NASD Notice to Members 94-16 specifically cautions that:
Members also have an obligation to evaluate the net investment advantage of any recommended switch from one fund to another. Switching among certain fund types may be difficult to justify if the financial gain or investment objective to be achieved by the switch is undermined by the transaction fees associated with the switch. Further, recommendations to fund investors to engage in market timing transactions should be made, if at all, for transactions in a single family of funds or where there are virtually no transaction costs associated with the trade. Market-timing transactions that do not adhere to this standard may subject the member to an additional burden of proving that the transaction was suitable for the customer. Members have an obligation to ensure that their supervisory and compliance procedures are adequate to monitor switching of customers among funds and should be prepared to document their reasons for switching a customer from one fund to another. NASD Notice to Members 94-16 (February 1994).
According to arbitration claims filed by the Guiliano Law Group against J.P. Turner, based upon Sheridan’s conduct, it is alleged that J.P. Turner has an affirmative duty to supervise the activities of its branch offices and its registered agents, including Sheridan, and to periodically inspect customers’ securities account for evidence of, and to reasonably prevent fraud, switching and the sale of unsuitable investments.
FINRA Conduct Rule 3010, specifically provides that:
Each member shall establish and maintain a system to supervise the activities of each registered representative and associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations, and with the Rules of this Association. Final responsibility for proper supervision shall rest with the member.
Here, Respondent JP Turner had actual knowledge of Sheridan’s activities based upon the existence of the Exception Reports, and was otherwise indifferent to Sheridan’s on-going scheme, but over a period of more than four years failed to act or contact its customers even after Sheridan’s fraudulent scheme was uncovered.
According to these allegations, J.P. Turner also has actual knowledge of its inability to directly supervise its geographically dispersed “franchise” offices, its business model is flawed with respect to these “independent,” brokers operating from offices where there is “no on-site independent supervision” and “creates a potential vehicle for the violation of the securities laws.” See, In the Matter of Prospera Financial Services, Inc., 73 S.E.C. 935 at 6 (Sept. 26, 2000).
Such activity has been at the heart of recent cases, both civil and regulatory, involving non-traditional firms and their “independent contractors.”
Guiliano Law Group
Our practice is limited to the representation of investors in claims, for fraud in connection with the sale of securities, the sale or recommendation of excessively risky or unsuitable securities, breach of fiduciary duty, and the failure to supervise. We accept representation on a contingent fee basis, meaning there is no cost to unless we make a recovery for you, and there is never any charge for a consultation or an evaluation of your claim. For more information contact us at (877) SEC-ATTY.