A California firm and its part owner have been accused of multiple violations stemming from excessive trading in an elderly customer’s accounts, according to Financial Advisor.
The Financial Industry Regulatory Authority’s Department of Enforcement filed a complaint against Irvine-based Sutter Securities and Keith Charles Moore.
FINRA stated that Sutter, acting through an unnamed former registered representative, recommended and executed 2,217 trades in two accounts of a retired 89-year-old executive between March 2020 and July 2021. The customer was reported to have a long-term growth objective and moderate risk tolerance.
It was alleged that over the 17-month span, the customer paid more than $2.9 million in trading costs and suffered about $1.2 million in realized losses. “Those trades also resulted in annualized cost-to-equity ratios of 46% and 38% [for the two accounts]—meaning the accounts needed to appreciate by these percentages just to break even,” the complaint alleged.
FINRA said that Sutter and Moore failed to notice that 35% of the firm’s total commission revenue, $2.9 million, came from those trades. The authority called the trading fees “staggering and ruinous.”
Most of the trades in question came during a time when Regulation Best Interest had been established. Reg BI, which took effect June 30, 2020, requires broker-dealers to act in a retail customer’s best interest when recommending securities transactions or strategies, prohibiting them from placing their own financial interests ahead of the customer’s.
FINRA said that the trades the representative recommended after Reg BI came into effect were still “excessive and resulted in annualized cost-to-equity ratios of 45% and 52%” for the two accounts.
FINRA’s enforcement department alleges the trading was “excessive, quantitatively unsuitable, and not in the customer’s best interest,” citing the high costs, turnover, use of margin and realized losses. It further claims the representative “did not have a reasonable basis to believe” the series of trades was not excessive or in the customer’s best interest given the client’s profile and the substantial commissions involved.
Moore served as chief executive officer and direct supervisor of the representative during the relevant period. The complaint says Sutter and Moore failed to identify or reasonably respond to “high trading volumes,” “substantial financial losses,” and other red flags, even though Moore was the designated principal reviewing retail trading and commissions.
The FINRA complaint alleges that Moore relied on the representative’s claims that he was using a “replication strategy,” under which he would mirror trades of a third-party asset manager with a low-turnover approach. The alleged trading in the customer’s accounts, however, involved far more transactions in those same portfolio companies and frequent reentry into positions even after the asset manager had exited.
Beyond the individual account, FINRA says Sutter’s broader supervisory systems were not reasonably designed to catch excessive trading or email-related issues. The complaint alleges the firm’s written supervisory procedures did not spell out concrete metrics or processes for detecting excessive trading, required no quantitative reviews using turnover or cost-to-equity measures, and provided no guidance on how to respond when red flags appeared.
Sutter is charged with willfully violating Regulation BI and FINRA Rule 2010 by permitting the alleged excessive trading. The complaint seeks to hold Sutter and Moore responsible for failing to supervise the activity and for ignoring multiple red flags that included, “extraordinarily large trading volumes and realized losses; cost-to-equity ratios over 20%; turnover rates greater than six; a pattern of frequent in-and-out trading; and persistent use of margin.”
FINRA’s Department of Enforcement asked that a FINRA panel find that Sutter and Moore committed the alleged violations and that sanctions be imposed, including disgorgement and restitution, with interest.
The unnamed former representative who recommended the trades was barred by FINRA in 2022 for refusing to provide the authority with information and documents pertaining to sales practice violations. Attempts to reach him and Moore were unsuccessful, Financial Advisor said.
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