$10.5 Million Asked for Alleged ‘Churning’ : Carl Karcher Sues Brokerage Firm
Fast-food magnate Carl N. Karcher has filed a $10.5-million suit against the New York brokerage firm of Morgan Stanley & Co. and two of its account executives, alleging that they “churned” the assets of a trust fund for him and his wife, Margaret, and lost more than $500,000 of trust money.
Karcher, chairman and chief executive of Carl Karcher Enterprises, parent of the Carl’s Jr. chain of fast-food outlets, claims in the Orange County Superior Court suit that Morgan Stanley and two employees, broker Arthur L. Thompson in New York and regional office manager Joseph O’Connor in San Francisco, engaged in “unauthorized” and “excessive” trading for the purpose of “generating fees and earning commissions.” Such a practice is called churning an account.
The suit, in which Karcher seeks reimbursement of at least $500,000 in trust fund losses plus $10 million in punitive damages, is one of a growing number being filed throughout the nation by investors concerned with trading losses in a booming market.
Neither Karcher nor his attorney would discuss the case, declining through secretaries to be interviewed.
But Monroe R. Sonnenborn, vice president and litigation attorney for Morgan Stanley, said the complaint, filed Friday, “is utterly without merit and we intend to defend against it vigorously.”
He also denied that the firm or its brokers acted improperly in trading securities. “This is just not a churning case,” he said.
Churning is a growing problem in the securities field, with investor complaints increasing in each of the last three years, said Donald S. Malawsky, senior vice president for enforcement and regulatory standards at the New York Stock Exchange.
The rate of investor complaints about trading practices so far this year, Malawsky said Tuesday, is “the highest in recent memory.” If the number of churning complaints filed with the NYSE continues at the same pace throughout the year, the total would be more than 4,000, he said, surpassing 1985’s total of about 3,700.
“So much more trading is going on that churning can go on almost undetected unless the member firms are supervising the accounts,” he said. “If, and underscore if, there is a substantial drop in the market, there will be even more complaints as people start looking at their accounts and begin questioning various sales activities.”
Normally in a period of stock market growth, he said, investors do not check up on what their brokers are doing and fewer complaints are made.
But Malawsky said the increased complaints in a boom period come from the exceptionally high volume of trading in the last few months, a new crop of brokers who are either inadequately supervised or inadequately trained by their firms, a higher response from firms in reporting complaints against them to the NYSE and the stock exchange’s stepped-up enforcement activities.
Karcher’s suit was filed 10 days after Wespac Financial Corp., a Newport Beach sponsor of real estate investment trusts, filed a federal court suit in Los Angeles on March 4 alleging improper trading practices against Morgan, Olmstead, Kennedy & Gardner, a Los Angeles investment banking and securities brokerage firm.
Wespac claims Morgan, Olmstead violated federal securities and commodities laws in “reckless speculation” over the last three years, causing a $5.98-million loss in pension investments. The suit is based on the same circumstances cited in a lawsuit the company filed in Orange County Superior Court last July but alleges federal law violations that can only be heard in federal court.
Morgan, Olmstead and its attorney, Phillip L. Bosl of Los Angeles, have said the lawsuits are groundless.
