Financial Industry Regulatory Authority arbitrators ruled in favor of a client in his dispute with New York-based Spartan Capital and two of its former representatives, Financial Advisor reported.
The FINRA panel ordered Spartan and the reps, Jesse D. Krapf and Joao Amorim Pinto, to pay nearly $2 million over the complaint filed by Nicholas R. Nuzzi Jr.
Nuzzi accused Spartan of negligence and violating Regulation Best Interest, while accusing Krapf and Pinto of churning and excessive trading in his accounts.
The award by the arbitrators included $916,725 in compensatory damages from Spartan, Krapf and Pinto, as well as $295,689 in punitive damages and $225,000 in attorney’s fees.
Separately, Spartan was assessed $500,000 in discovery sanctions for what the arbitrators said were “repeated issues of non-compliance with the panel’s orders” as well as withholding of response documents.
Spartan and its representatives have been the subject of enforcement actions in the past involving excessive trading, including the suspensions of both Krapf and Pinto.
According to FINRA, Pinto “engaged in quantitatively unsuitable trading” in one customer’s account, over which he had de facto control.
“Pinto’ s trading resulted in a high turnover rate and cost-to-equity ratio, as well as significant losses,” FINRA stated. “In particular, Pinto effected 130 transactions in the customer’s account, resulting in an annualized turnover rate of 14 and an annualized cost-to-equity ratio of 55%. Pinto’s trading in the customer’s account generated total trading costs of $92,237, including $83,484 in commissions, and caused $141,051 in realized losses.”
Krapf was accused of excessive trading of what were termed unsuitable investments in the account of a senior and business owner, over which he had de facto control.
“Krapf recommended in-and-out trading to the customer, even when the price of his recommended securities did not materially change,” Finra said in the original disciplinary letter. “For example, in April 2020, Krapf recommended that the customer purchase nearly $180,000 of stock in a biotechnology company, and then recommended that the customer sell the position two days later. Krapf charged commissions on the round-trip transaction of $7,800. The next day, Krapf recommended that the customer purchase nearly $82,000 in a semiconductor company and, that same day, sell the position for a loss, while charging the customer commissions of $2,000.”
Krapf was permanently barred by FINRA after his initial suspension. Pinto was also suspended and he is currently not registered with FINRA. Neither Krapf nor Pinto could be reached for comment.
Earlier this year, FINRA filed a complaint against Spartan and some of its top executives for allegedly facilitating excessive trading in the accounts of investors.
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.”.
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