A New York-based brokerage firm and some of its leaders have been accused of facilitating excessive trading in the accounts of investors, Advisor Hub reports.
The Financial Industry Regulatory Authority filed a complaint against Spartan Capital Securities, as well as CEO Kim Monchik and several other executives: Frederick Joseph Cammarano III, James Pecoraro, John Stapleton and Michael Darvish.
FINRA alleged that starting in 2018 and through April 2022, Spartan’s representatives allegedly excessively traded in 114 accounts, including 35 that were “churned”, in which a representative excessively buys and sells securities in a customer’s account to boost their commission. 53 of the accounts were those of senior citizens.
The cost-to-equity ratios in the excessively traded accounts ranged from about 16% to 491%. The customers were reported to have incurred nearly $10 million in total trading costs and suffered nearly $8 million in investment losses as a result of the trading.
FINRA stated that one-third of Spartan’s revenue was generated from accounts with cost-to-equity ratios higher than 20%, a threshold that can indicate excessive trading. “Spartan’s business model depended on this misconduct,” the complaint stated.
It further states, “Spartan allowed the Spartan Representatives to churn and excessively trade customer accounts despite glaring red flags that those representatives were committing misconduct and harming customers.”.
The complaint alleges that Spartan routinely hired representatives with histories of customer complaints and regulatory investigations, as well as histories of financial difficulties. FINRA also alleged that the firm’s method of charging commissions misled customers as to the actual amount of commissions they were charged.
A spokesperson for Spartan did not immediately respond to a request for comment. The named Spartan representatives could not be reached for comment.
Besides the executives named in the complaint, FINRA also alleged that 36 additional Spartan representatives, who were not named as respondents, failed to “take any meaningful steps to supervise” or prevent the churning.
Spartan, Pecoraro and Stapleton were accused of willfully violating the Securities Exchange Act of 1934 and FINRA Rules 2020 and 2010. FINRA also alleged that Spartan and the representatives violated the Securities and Exchange Commission’s Regulation Best Interest, and that Spartan, Pecoraro and Darvish violated FINRA Rule 2111 requiring brokers to have a reasonable basis to believe that an investment is suitable.
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