David Randall Lockey, of Dallas, Texas, a stockbroker with SWS Financial Services, Inc., was charged by Financial Industry Regulatory Authority (FINRA) Department of Enforcement in a Complaint alleging that Lockey prompted unsuitable switching and trading of investments; while also falsifying forms pertaining to customer accounts. Department of Enforcement v. Lockey, No. 2013034954001 (Mar. 30, 2016).
According to the Complaint, from May 2012 through March 2014, Lockey implemented a trading strategy in four of his firm’s customer accounts consisting of short-term switching and trading of both open-end and closed-end mutual funds as well as unit investment trusts. The Complaint indicated that the affected SWS customers were previously customers of Lockey when Lockey worked at one of his prior firms.
The Complaint stated that the investment objectives of the four customers consisted of a combination of capital appreciation and income. The investments in the open-end and closed-end funds, as well as unit investment trusts, reportedly carried high transaction fees which were designed to be offset conditioned on investors holding the investments for longer holding periods (normally a year at minimum). FINRA alleged that Lockey disregarded the intended holding periods; making recommendations and ultimately effecting certain trades in the investments as early as twenty-two days after investments were initially made.
FINRA alleged in the Complaint that the trading strategy that Lockey implemented was not geared towards providing customers with practically any financial benefit, and actually resulted in three of the four customers to bear losses which amounted to $15,699.38 in the aggregate. Meanwhile, Lockey and his firm raked in $75,729.88 in compensation from his short-term trading.
In one example, Lockey provided recommendations to a customer, HD, a sixty-seven-year-old retiree who indicated to Lockey that his objectives consisted of growth and income. Apparently, pursuant to Lockey’s recommendations, Lockey liquidated HD’s existing holdings soon after HD transferred his assets to SWS. Lockey then reportedly implemented a short-term trading strategy that included purchasing and selling the same investment on various occasions.
Apparently, Lockey effected thirty-four trades consisting of twelve open-end mutual funds, sixteen closed open-end funds, and six unit investment trusts. Lockey and SWS reportedly grossed $39,059.39 in compensation from the transactions, while HD gained a measly $4,948.42.
In another example, Lockey provided recommendations to customer, SB, who had objectives primarily consisting of income. The Complaint stated that Lockey effected sixteen trades in SB’s accounts that included seven open-end mutual funds, seven closed-end funds, as well as two unit investment trusts. Lockey and SBS reportedly grossed $21,350.92 in compensation from the transactions, while SB was left with an overall loss of $2,634.57.
According to the Complaint, Lockey effected eleven short-term trades in the account of customer DT, whose investment objectives called for growth and income. The Complaint indicated that Lockey’s short-term trading transactions consisted of five open-end mutual funds and eight closed-end funds. This allowed Lockey and SWS to generate $10,821.85; however, DT suffered $8,547.11 in losses.
The Complaint further indicated that Lockey made recommendations to customer, LH, who was seeking growth and income like the other aforementioned investors. Lockey’s short term trades included six closed-end fund transactions, four open-end mutual fund transactions, and one transaction with a unit investment trust. LH reportedly lost $4,517.70 in connection with Lockey’s trading activity, while Lockey and SWS grossed $4,497.72.
The Complaint alleged that Lockey’s trading was not suitable for the affected customers considering the products’ designs. According to the Complaint, given what Lockey knew about the investment objectives of his customers, as well as the frequency and overall nature of the transactions, Lockey had no legitimate basis to conclude that recommendations he made to such customers were actually suitable. FINRA alleged that Lockey violated FINRA Rule 2010, 2111, and NASD Conduct Rule 2310 in connection with his unsuitable switching and short-term trading.
The Complaint further alleged that Lockey had falsely stated when the aforementioned customers purchased the securities in order for customers’ investments to appear to have been held longer than such investments were actually held for. Apparently, the firm required a Long Term Investment Exchange Acknowledgement and Authorization Form to be completed when investors switched certain investment products to others.
Lockey reportedly completed five of the aforementioned forms, indicating inaccurate purchase dates which reflected customers to have purchased the initial investments (prior to switching) at a much earlier point than when the investors actually purchased the investments. FINRA alleged that Lockey caused his firm’s records and books to be inaccurate in this regard. The Complaint alleged that Lockey violated FINRA Rules 2010 and 4511 as a result.
The Complaint stated that SWS terminated Lockey on March 28, 2014, amid allegations of his short-term trading. Public disclosure records via FINRA’s BrokerCheck additionally reveal that on March 7, 2012, Edward Jones (Lockey’s prior firm) terminated Lockey amid allegations of making recommendations to investors that included short-term holding periods on investments designed to be held for longer terms; while failing to appropriately respond to the firm’s compliance personnel’s inquiries concerning Lockey’s trading activity.
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