## Facts

- Alan Jay Davidofsky was a registered representative associated with Oppenheimer & Co., Inc., a FINRA member firm.
- When Davidofsky joined Oppenheimer (November 2004), the firm paid him a signing bonus structured as a five-year forgivable loan, with forgiveness occurring monthly so long as he stayed at the firm; leaving early could trigger repayment.
- After losing two large accounts (around 2006), Davidofsky’s commissions declined and he experienced financial difficulties through 2007 and 2008.
- In April 2008, Davidofsky considered bankruptcy; Oppenheimer agreed to support his bankruptcy plan and continue his employment if he maintained specified production levels and did not attempt to discharge Oppenheimer’s loan.
- Davidofsky began handling customer JL’s individual retirement account (IRA). JL had limited investment experience, annual income of about \$50,000, total net worth of about \$300,000, and conservative objectives focused on current income and capital appreciation.
- Before Davidofsky’s activity, JL’s IRA had minimal trading and an average monthly balance of about \$127,000, holding mutual funds, corporate bonds, and one individual stock.
- Davidofsky reviewed JL’s account and proposed a revised trading approach. Although he discussed the idea with JL, JL did not authorize him to implement the strategy, and he did not have discretionary trading authority.
- Over about 10 months (December 2007 to October 2008), Davidofsky executed 104 transactions in 38 different securities, frequently trading in and out of positions.
- The total purchases and sales exceeded \$1.4 million in an account of roughly $120,000–$130,000 in value.
- A sales assistant altered JL’s account-information form to reflect aggressive objectives for current income and capital appreciation and to indicate approval for short-term trading; JL did not request or approve these changes.
- The trading produced an annualized turnover ratio of 10.89 and an annualized cost-to-equity ratio of 44.86%.
- JL’s IRA lost about 90% of its value (losses described as roughly \$108,206 during the period). Davidofsky earned nearly \$12,000 in commissions from the account (disgorgement amount: \$11,741.78).
- After market declines, JL reviewed her statements and complained to Oppenheimer. FINRA’s Department of Enforcement filed a disciplinary complaint. A FINRA Hearing Panel found unauthorized trading, excessive trading, and churning; Davidofsky appealed to the National Adjudicatory Council (NAC).

## Issues

1. Whether Davidofsky effected transactions in JL’s IRA without prior customer authorization and without discretionary authority, in violation of applicable NASD/FINRA conduct rules.
2. Whether the size and frequency of trading were quantitatively unsuitable (excessive) for JL’s financial situation and conservative investment objectives, in violation of NASD suitability standards.
3. Whether the trading constituted churning, requiring proof of account control, excessive trading, and scienter, under Exchange Act § 10(b), SEC Rule 10b-5, and related NASD antifraud provisions.
4. Whether the Hearing Panel’s sanctions—industry bars and disgorgement—were appropriate.

## Decision

- The FINRA NAC affirmed the Hearing Panel’s findings that Davidofsky engaged in unauthorized trading, excessive trading, and churning in JL’s IRA.
- The NAC affirmed the sanctions barring Davidofsky from association with any FINRA member in any capacity (including separate bars tied to the misconduct findings).
- The NAC affirmed disgorgement of \$11,741.78 (plus interest) as the financial benefit from the misconduct.

## Legal Principles

- Executing customer transactions without prior authorization, absent discretionary authority, violates FINRA/NASD standards requiring high standards of commercial honor and just and equitable principles of trade.
- Quantitative suitability (excessive trading) evaluates whether a representative who controls an account—through formal discretion or effective control—caused trading that was excessive in light of the customer’s objectives and circumstances.
- Objective measures such as turnover ratio and cost-to-equity ratio are common indicators of excessive trading; very high ratios may support a finding that trading could not reasonably serve a conservative retirement investor’s goals.
- Churning requires proof of (1) control over the account, (2) excessive trading, and (3) scienter (intent or recklessness). Scienter may be inferred from extreme trading levels, commission-driven incentives, customer harm, and conduct inconsistent with the customer’s stated objectives.
- In determining authorization and control, FINRA adjudicators may weigh customer testimony, contemporaneous records, trading patterns, and whether account documentation was changed without the customer’s knowledge.
- For egregious misconduct in a retirement account that causes major losses and generates commissions to the representative, strong sanctions—including a bar and disgorgement of commissions—may be imposed to protect investors and deter similar misconduct.

## Conclusion

In the Matter of Department of Enforcement v. Alan Jay Davidofsky, Complaint No. 2008015934801 (2013) held that Davidofsky, while registered with Oppenheimer, traded a conservative customer’s IRA without authorization and at a frequency and cost level that was excessive and fraudulent, resulting in a roughly 90% loss while producing commissions for him; the FINRA NAC affirmed the Hearing Panel’s findings of unauthorized trading, excessive trading, and churning and upheld industry bars and disgorgement of \$11,741.78 plus interest.
