According to FINRA, Mirsad A. Muharemovic was assessed a deferred fine of $5,000, suspended from association with any FINRA member in all capacities for nine months, and ordered to pay $211,643, plus interest, in deferred restitution to customers for engaging in excessive and unsuitable trading.
Muharemovic engaged in excessive and unsuitable trading in the accounts of senior customers. Muharemovic recommended that his customers place trades in their accounts, most of which were executed using margin, and the customers routinely accepted his recommendations. Muharemovic's recommendations resulted in annualized turnover rates ranging from 5.71 to 19.26 and annualized cost-to-equity ratios ranging from 30.12 percent to 74.25 percent. As a result of Muharemovic's unsuitable recommendations, his customers lost approximately $237,823 and paid approximately $211,643 in commissions, fees, and margin interest.
The suspension is in effect from December 19, 2022, through September 18, 2023.
Excessive trading, also known as churning, occurs when a broker executes trades in a customer's account primarily to generate commissions rather than to benefit the customer. To establish churning, three elements must be present: (1) control over the account, (2) excessive trading in light of the customer's investment objectives, and (3) scienter (intent to defraud or reckless disregard for the customer's interests).
The metrics in this case demonstrate extreme levels of excessive trading. Turnover rate measures how frequently the entire portfolio is replaced through trading. A turnover rate of 6 means the entire portfolio was turned over six times in a year. Muharemovic's customers had turnover rates as high as 19.26, meaning the entire portfolio was replaced over 19 times in a single year. This level of trading is almost never appropriate for retail customers and strongly suggests churning.
The cost-to-equity ratios are even more damning. This metric measures the percentage of the account value consumed by commissions, fees, and other trading costs. Muharemovic's customers had cost-to-equity ratios ranging up to 74.25 percent, meaning nearly three-quarters of the account value was consumed by trading costs in a single year. At such cost levels, the investments would need to achieve extraordinary returns just to break even, making profit for the customers nearly impossible.
The use of margin trading exacerbated the harm. Margin allows customers to borrow money from the brokerage to purchase securities, amplifying both potential gains and losses. However, margin also increases costs through interest charges. The combination of excessive trading and margin borrowing resulted in customers losing approximately $237,823 and paying approximately $211,643 in commissions, fees, and margin interest.
The fact that these were senior customers makes Muharemovic's conduct even more troubling. Seniors often have limited ability to recover from investment losses and may be more vulnerable to exploitation due to cognitive decline, social isolation, or other factors. Excessive trading of senior customer accounts represents not only a securities violation but also a form of elder financial exploitation.
For investors, particularly seniors, this case illustrates the importance of monitoring account activity and understanding the costs associated with trading. Red flags for potential churning include: frequent trading that seems inconsistent with your investment objectives, high commission and fee charges relative to your account value, use of margin when you have not explicitly agreed to it, and account statements showing turnover without corresponding improvements in account value.
