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Merrill Lynch and At Least One of its Top Brokers Face Investigation Over Alleged $200 Million Losses Due To Churning After Paying a Record $40 Million Settlement in a FINRA Arbitration

The New Hampshire Bureau of Securities Regulation is reportedly investigating Merrill Lynch and Charles Kenahan, one of its top-producing brokers, over customer complaints alleging “churning” in their accounts that resulted in damages of approximately $200 million. Churning, or excessive trading, occurs when a broker or financial advisor trades securities in a customer’s account at high frequency in order to generate commissions rather than advance the customer’s best interests. According to multiple sources familiar with the New Hampshire securities regulator’s investigation, the churning claims that alerted the regulator stem from two arbitrations filed before the Financial Industry Regulatory Authority (“FINRA”), one by former New Hampshire Governor Craig Benson and the other from Benson’s long-time friend and business partner, Robert Levine.

According to CNBC, which obtained documents from the FINRA arbitrations, Benson’s claim, currently pending before FINRA, names Merrill Lynch, Kenahan, and another Merrill Lynch advisor Dermod Cavanaugh and alleges damages in excess of $100 million due to churning and unauthorized trading. Levine’s arbitration claim sought approximately $100 million in damages based on allegations of churning, unsuitable investment recommendations and misrepresentation.

According to news outlets, Benson and Levine originally met Kenahan through Cavanaugh, who had been the accountant for Cabletron Systems – a company Levine and Benson co-founded out of Levine’s garage. Levine and Benson said they thought they could trust and that Cavanaugh and Kenahan would act in their best financial interests, so they decided to move their individual investment accounts into the care of the two men.

In June 2019, Merrill Lynch settled Levine’s claim by paying out a $40 million settlement. Although Merrill Lynch admitted no wrongdoing when paying Levine what is believed to be the largest churning settlement in a decade, it did terminate Kenahan that same month over investors’ allegations of unauthorized and excessive trading and unsuitable investment recommendations. According to Kenahan’s FINRA BrokerCheck record, there have been three additional customer complaints against him alleging that he engaged in unauthorized trading and excessive trading and made unsuitable recommendations. He has not registered with another firm since his termination from Merrill Lynch. Cavanaugh left Merrill Lynch in October 2017 and has also not registered with another firm to date. His FINRA BrokerCheck record shows a past customer complaint for unsuitable investment recommendations.

Churning is an unethical and illegal practice that violates SEC rules and securities laws. Financial advisors and brokers have an obligation not to trade customer’s accounts excessively for the purpose of generating commissions or other fees for the financial advisor, broker or the brokerage firm. The three components of a churning claim are: (1) broker exercised control of the customer’s account; (2) the broker engaged in excessive trading contrary to customer’s investment objectives and risk tolerance; and (3) the broker acted with intent to defraud or with reckless disregard for the customer’s interests, usually in pursuit of commissions.

The attorneys at Lax & Neville LLP have extensive experience in successfully prosecuting claims on behalf of customers who have suffered damages resulting from sales practice abuses, such as churning, excessive trading, unauthorized trading, and unsuitable recommendations. If you are a victim of churning by Merrill Lynch, Kenahan, Cavanaugh or any other financial advisor, please contact Lax & Neville, LLP today at (212) 696-1999 to schedule a consultation.

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