Bad Brokers

According to FINRA, Monmouth Capital Management was expelled from FINRA membership for churning and excessively trading customer accounts in violation of Regulation Best Interest, failing to supervise its representatives, and providing false and misleading disclosures to retail customers on its Form...

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According to FINRA, Monmouth Capital Management was expelled from FINRA membership for churning and excessively trading customer accounts in violation of Regulation Best Interest, failing to supervise its representatives, and providing false and misleading disclosures to retail customers on its Form CRS.

Between August 2020 and February 2023, Monmouth, acting through six representatives, excessively traded 110 accounts, 42 of which were also churned, causing customers to incur approximately $3.9 million in commissions and trading costs and to suffer substantial losses. One customer's account had an annualized cost-to-equity ratio of more than 103 percent—meaning the account would have had to grow by more than 103 percent just to cover commissions and trading costs. Another customer's account had an annualized cost-to-equity ratio of more than 72 percent, resulting in a loss of $158,078.

Monmouth failed to take reasonable steps to supervise the trading in these accounts, despite numerous red flags indicative of churning. One customer's account appeared on 24 consecutive monthly exception reports that flagged the account for churning, but no one at Monmouth reviewed any of these reports.

Several of the churned or excessively traded accounts were owned by Gold Star Families who had funded their accounts with a military death gratuity payment or a Servicemembers' Group Life Insurance (SGLI) payment following the death of a family member who had served in the Armed Forces. For example, an account was opened for the benefit of a 13-year-old child and funded by SGLI payments following the death of the child's father. Although the account had an average monthly equity of approximately $150,000, Monmouth representatives purchased more than $1.9 million in securities over a 20-month period, generating nearly $80,000 in commissions and trading costs.

FINRA also found that Monmouth made false and misleading statements on its Form CRS, including a statement that it monitored customer accounts through daily exception reports, though the firm never utilized such reports.

This case represents particularly egregious misconduct involving churning of accounts belonging to vulnerable investors, including Gold Star Families and a child. The firm's complete failure to supervise despite 24 consecutive red flags demonstrates willful disregard for investor protection. The expulsion is appropriate given the severity of the harm to these families.

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According to FINRA, BrokerBank Securities, Inc. was expelled from FINRA membership and Philip Paul Wright was barred from association with any FINRA member in all capacities on August 18, 2023.

FINRA found that the firm and Wright, acting as the firm's majority owner, CEO, Chief Compliance Office...

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According to FINRA, BrokerBank Securities, Inc. was expelled from FINRA membership and Philip Paul Wright was barred from association with any FINRA member in all capacities on August 18, 2023.

FINRA found that the firm and Wright, acting as the firm's majority owner, CEO, Chief Compliance Officer, and Financial and Operational Principal, contracted with an unregistered person to introduce his former customers to the firm. In exchange, they agreed to pay this unregistered person 90 percent of all commissions generated from those customers' transactions for two years, and 30 percent for the following two years. Because the unregistered person had a prior disciplinary history, Wright determined the firm would not sponsor his registration with FINRA.

The unregistered person introduced customers to the firm who made securities purchases totaling more than $1.8 million. Wright identified himself as the registered representative for these customers' accounts, but had no actual role in completing subscription agreements or opening accounts. Instead, Wright sent required documents to the unregistered person, who communicated with customers and coordinated execution of the documents.

The situation worsened when the unregistered person became statutorily disqualified from conducting any securities business by virtue of a FINRA suspension. Despite being aware of this regulatory action, the firm and Wright did not submit a required Membership Continuance Application and permitted him to continue engaging in securities business. The firm paid $101,598 to the unregistered person in compensation, including $19,125 while he was statutorily disqualified and suspended.

Additionally, Wright failed to respond to FINRA's requests for information and documents related to the quantity and suitability of securities purchased by firm customers, compensation paid to individuals, supervision of suitability of investments, due diligence conducted, and whether the firm's written supervisory procedures were reasonably designed to comply with FINRA rules.

Investors should understand that firms must ensure all persons conducting securities business are properly registered and qualified. Allowing unregistered or disqualified individuals to conduct securities activities undermines regulatory protections designed to protect investors. The failure to respond to regulatory requests further demonstrates a lack of commitment to regulatory compliance and investor protection.

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According to FINRA, Network 1 Financial Securities Inc. was censured, fined $200,000, and ordered to pay $533,587 plus interest in restitution to customers on August 31, 2023. Michael Robert Molinaro was fined $5,000 and suspended from association with any FINRA member in any principal capacity for ...

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According to FINRA, Network 1 Financial Securities Inc. was censured, fined $200,000, and ordered to pay $533,587 plus interest in restitution to customers on August 31, 2023. Michael Robert Molinaro was fined $5,000 and suspended from association with any FINRA member in any principal capacity for three months.

FINRA found that the firm and Molinaro failed to establish, maintain, and enforce written supervisory procedures reasonably designed to achieve compliance with FINRA Rule 2111 and the Care Obligation of Regulation Best Interest as they pertain to excessive trading. The firm's procedures did not set forth how supervisors should apply certain factors to identify potentially excessively traded accounts, did not identify what cost-to-equity ratio or turnover rate was suggestive of excessive trading, and did not provide supervisors with reasonable guidance about what steps to take after identifying an excessively traded account.

Furthermore, the firm and Molinaro did not revise the firm's procedures to reference Regulation Best Interest until eight months after the rule became effective. Even after revision, the procedures provided no guidance about what steps the firm's principals or representatives should take to prevent, detect, or promptly correct violations of Reg BI.

The firm and Molinaro also failed to establish and maintain a reasonably designed supervisory system to identify and respond to red flags of excessive trading. The firm received exception reports from its clearing firm that were relevant to identifying excessive trading, including monthly reports flagging accounts with high cost-to-equity ratios. Instead of reviewing those reports, the firm limited its reviews to an internal report identifying the 100 accounts with the largest year-to-date aggregate commissions, which excluded smaller accounts with high commission amounts relative to their equity value.

Even when the firm identified excessively traded accounts, it did not take steps to investigate and act upon the results. Molinaro, as the designated principal responsible for determining actions upon identifying red flags, did not require the firm to take any steps until nearly two years after taking over this responsibility. As a result, representatives continued charging high commissions even after the firm had notice of excessive trading. The firm's representatives recommended that customers place frequent trades, and the customers routinely relied on those recommendations, causing these customers to pay more than $533,500 in commissions and trading costs.

Investors should be aware that excessive trading, also known as churning, occurs when a broker places trades to generate commissions rather than to benefit the customer's investment objectives. Firms must have robust supervisory systems to detect and prevent such harmful practices.

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According to FINRA, StratCap Securities, LLC (formerly known as SC Distributors, LLC) was censured and fined $15,000 on August 10, 2023.

FINRA found that the firm conducted a securities business while failing to maintain its minimum required net capital. The firm received capital contributions fr...

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According to FINRA, StratCap Securities, LLC (formerly known as SC Distributors, LLC) was censured and fined $15,000 on August 10, 2023.

FINRA found that the firm conducted a securities business while failing to maintain its minimum required net capital. The firm received capital contributions from its parent company totaling $530,000, which caused it to fall below its minimum required net capital on 12 consecutive business days. During this period, the firm's net capital deficiency ranged from approximately $58,000 to $700,000. Despite these significant capital deficiencies, the firm continued to operate a securities business by acting as a wholesale distributor of private placement offerings.

Net capital requirements are fundamental safeguards in the securities industry, designed to ensure that broker-dealers maintain sufficient liquid assets to meet their obligations to customers and other creditors. These requirements protect investors by reducing the risk that a firm will fail and be unable to return customer assets or fulfill its financial obligations.

When a broker-dealer falls below its minimum required net capital, it must cease conducting a securities business until it can restore compliance with the net capital rule. The firm's decision to continue operating despite being significantly undercapitalized put customer assets and transactions at risk. The fact that the deficiency persisted for 12 consecutive business days and ranged as high as $700,000 demonstrates a serious lapse in the firm's financial management and regulatory compliance.

Broker-dealers are required to monitor their net capital daily and must immediately notify FINRA if they fall below minimum requirements. Continuing to conduct business while undercapitalized violates fundamental investor protection rules and undermines the stability and integrity of the securities markets.

Investors should understand that net capital rules exist to protect them by ensuring that firms have adequate financial resources to operate safely. When firms violate these rules, it can indicate broader compliance or financial management issues. While this case involved a wholesale distributor that may not have direct retail customer relationships, the principles of maintaining adequate capital apply to all broker-dealers and are essential to investor protection.

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According to FINRA, CoreCap Investments, LLC was censured and fined $60,000 on August 15, 2023.

FINRA found that the firm operated more offices than permitted in its membership agreement without filing a Continuing Membership Application for a material change in business operations and without ob...

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According to FINRA, CoreCap Investments, LLC was censured and fined $60,000 on August 15, 2023.

FINRA found that the firm operated more offices than permitted in its membership agreement without filing a Continuing Membership Application for a material change in business operations and without obtaining approval from FINRA. The firm was advised that it had exceeded the number of offices in its membership agreement and, in response, filed a Continuing Membership Application requesting approval for a business expansion.

Subsequently, the firm executed membership agreements permitting it to operate 55 offices (registered and unregistered), which includes the main office. Despite the firm's representation in its membership agreements, it actually operated 82 offices and had thereby expanded its permitted business operations by 27 offices. The firm also exceeded the safe harbor established by FINRA Interpretive Material 1011-1 by 11 offices.

Although the firm recognized that it had expanded its business beyond its membership agreement and the safe harbor, it failed to reduce its number of offices to the permitted number until a year after it discovered the violation and approximately five months after FINRA advised the firm that it had exceeded the number of offices allowed by its membership agreement and the safe harbor.

FINRA's membership agreement requirements exist to ensure that firms do not expand their operations beyond their operational and supervisory capabilities without proper regulatory review. When firms add offices, they must demonstrate that they have adequate systems, resources, and controls to supervise the expanded operations effectively. By operating 27 offices beyond what was permitted in its membership agreement, CoreCap potentially exposed investors to supervisory gaps and compliance risks.

The safe harbor provision in FINRA rules allows for some operational flexibility, permitting limited expansion without prior approval. However, when firms exceed both their membership agreement limits and the safe harbor provision, it raises concerns about whether the firm can adequately supervise its representatives and protect investors.

Investors should be aware that the number and location of a firm's offices is important regulatory information. Firms operating beyond their approved business parameters may face challenges in maintaining adequate supervision and compliance controls across all locations, which can impact the quality of service and protection provided to customers.

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According to FINRA, Goldman Sachs & Co. LLC was censured and fined $425,000 on August 16, 2023.

FINRA found that the firm failed to report, or inaccurately reported, over-the-counter (OTC) options positions to the Large Options Positions Reporting (LOPR) system. The firm's systems for reporting O...

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According to FINRA, Goldman Sachs & Co. LLC was censured and fined $425,000 on August 16, 2023.

FINRA found that the firm failed to report, or inaccurately reported, over-the-counter (OTC) options positions to the Large Options Positions Reporting (LOPR) system. The firm's systems for reporting OTC options positions to the LOPR failed to recognize that certain customer accounts were under common control or acting in concert.

Additionally, FINRA found that the firm failed to reasonably supervise LOPR reporting. The firm's automated system that identified acting-in-concert accounts that shared certain characteristics, such as the same beneficial owner or investment advisor, was too restrictive to be effective on its own. Furthermore, the firm failed to conduct a manual review for institutional investor accounts as a result of an oversight during a transfer of LOPR reporting responsibilities from one department to another within the firm.

The Large Options Positions Reporting system is a critical regulatory tool that allows FINRA and other regulators to monitor for potential market manipulation, excessive concentration of risk, and other concerns related to large options positions. Accurate reporting to LOPR is essential for regulators to identify positions that may pose risks to market integrity or financial stability.

The identification of accounts under common control or acting in concert is particularly important because it prevents sophisticated investors or entities from circumventing position limits or avoiding regulatory scrutiny by spreading positions across multiple accounts. When reporting systems fail to properly aggregate these related accounts, regulators lack visibility into the true size and concentration of positions in the market.

As a result of a FINRA inquiry, the firm identified the process gap and implemented revised manual and automated review processes to improve its LOPR reporting compliance. This case demonstrates that even large, well-resourced firms can experience significant compliance failures when procedures are not properly designed or when responsibilities are transferred between departments without adequate oversight.

Investors should understand that accurate regulatory reporting by broker-dealers is a fundamental component of market integrity and investor protection. While LOPR reporting may seem like a back-office function, it plays a vital role in helping regulators monitor for activities that could harm market stability and investor interests.

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According to FINRA, Instinet, LLC was censured, fined $3,800,000, and required to retain an independent consultant to conduct a comprehensive review of its Consolidated Audit Trail (CAT) reporting compliance on August 16, 2023.

FINRA found that the firm failed to timely and accurately report data...

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According to FINRA, Instinet, LLC was censured, fined $3,800,000, and required to retain an independent consultant to conduct a comprehensive review of its Consolidated Audit Trail (CAT) reporting compliance on August 16, 2023.

FINRA found that the firm failed to timely and accurately report data for tens of billions of order events to the CAT Central Repository. The firm hired a third-party vendor to act as its CAT reporting agent, but failed to maintain adequate technical specifications for its order data that would have allowed the data to be converted into a CAT-reportable format. Moreover, the firm's technical specifications were not widely understood by certain individuals at the firm, which significantly hindered the reporting agent's ability to convert the firm's data into a format that could be used for CAT reporting.

The firm notified FINRA in advance that it anticipated CAT reporting issues when required reporting started in June 2020. As a result, the firm failed to timely report over 5.2 billion equities and options order events to the CAT Central Repository, which constituted approximately 17 percent of the firm's CAT reporting obligation during that period. The firm reported 2.7 billion of the late order events by October 2020, but did not report the remaining late order events until five months later.

Subsequently, the firm experienced additional late reporting issues in connection with at least 26 billion events, which constituted approximately eight percent of the firm's CAT reporting obligation for that period. These late reports were caused by various issues, such as the reporting agent's insufficient capacity to process the firm's order event volume.

The problems translating order data and other configuration issues also caused the firm to report inaccurate data for billions of other order events. The firm identified approximately 180 different types of CAT reporting errors, including inaccurate share quantity, handling instructions, department type codes, customer display instruction flags, and event timestamps.

FINRA also found that the firm failed to establish and maintain a supervisory system, including written procedures, reasonably designed to achieve compliance with CAT reporting rules. The firm did not conduct a supervisory review of the accuracy of data it reported to the CAT Central Repository until the third quarter of 2021. Even then, the firm conducted this review only once per quarter, which was not reasonable given the volume of data that it reports, each quarter averaging billions of CAT events.

The firm did not reasonably respond to red flags of significant problems with the accuracy of its CAT reports. While the firm became aware of reporting issues in 2020, it did not reasonably respond to its CAT reporting errors until FINRA raised concerns in 2021.

The Consolidated Audit Trail is a comprehensive database that captures detailed information about orders and trades in the U.S. securities markets. It is a critical regulatory tool that allows FINRA and the SEC to efficiently and accurately track trading activity, detect market manipulation, reconstruct market events, and protect investors. Accurate and timely CAT reporting is essential to maintaining market integrity and enabling effective regulatory oversight.

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According to FINRA, Cantor Fitzgerald & Co. was censured and fined $100,000 on August 17, 2023.

FINRA found that the firm published public quarterly reports on its handling of customers' orders in National Market System (NMS) securities that failed to disclose required information and provided in...

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According to FINRA, Cantor Fitzgerald & Co. was censured and fined $100,000 on August 17, 2023.

FINRA found that the firm published public quarterly reports on its handling of customers' orders in National Market System (NMS) securities that failed to disclose required information and provided inaccurate and incomplete information. When the firm published a quarterly Rule 606(a) report, that report failed to disclose required material aspects of the firm's relationship with one of its specified execution venues, including a description of the firm's payment for order flow and profit-sharing relationship with the venue.

The venue was the firm's only execution venue for NMS stocks in that quarter, and it passed along exchange rebates and applied credits to reduce the firm's overall execution costs. The firm had previously received warnings from FINRA regarding the accuracy of its Rule 606(a) reports and had corrected the reports at issue.

After the Securities and Exchange Commission (SEC) adopted amendments to Rule 606, the firm published a Rule 606(a) report that did not provide the information required with respect to NMS securities that are options contracts. In the firm's report, tables were empty instead of providing required data, and sections labeled material aspects were blank. After the firm learned of these deficiencies from FINRA, it published an amended report that continued to be deficient in that it misidentified two execution venues, and it did not include required information on the net aggregate amount of payment for order flow received, payment from any profit-sharing relationship received, transaction fees paid, and transaction rebates received, both as a total dollar amount and on a per share basis.

FINRA also found that the firm's supervisory system, including written supervisory procedures, was not reasonably designed to achieve compliance with Rule 606(a). The firm's procedures only addressed its obligation to report orders in listed options, not NMS stocks. The firm later addressed this particular deficiency in revised procedures. Separately, the firm failed to enforce its procedures regarding Rule 606(a) in that it did not review reports prior to publishing them, which resulted in the deficiencies described above.

Rule 606 requires broker-dealers to disclose information about their order routing practices, including payment for order flow arrangements. This transparency is critical for investors to understand potential conflicts of interest and to evaluate whether their broker is seeking the best execution for their orders. Payment for order flow arrangements, where broker-dealers receive compensation from market makers or other venues for routing customer orders to them, can create incentives that may conflict with the broker's duty to seek best execution for customers.

Subsequently, the firm took remedial measures by making additional revisions to its procedures, including to address the amendments to Rule 606(a) and recent guidance from FINRA and the SEC, and by implementing additional reviews of its reports prior to publishing. Investors should review their broker's Rule 606 reports to understand where their orders are being routed and whether the broker receives payment for order flow.

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According to FINRA, Lebenthal Financial Services, Inc. was censured and fined $50,000 on August 31, 2023.

FINRA found that the firm failed to reasonably supervise the creation, use, and dissemination of consolidated reports. The firm prohibited its registered representatives from creating, using,...

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According to FINRA, Lebenthal Financial Services, Inc. was censured and fined $50,000 on August 31, 2023.

FINRA found that the firm failed to reasonably supervise the creation, use, and dissemination of consolidated reports. The firm prohibited its registered representatives from creating, using, and disseminating to customers consolidated reports; however, it did not have any system or procedures to identify when such events occurred in violation of the prohibition.

Despite the firm's prohibition, a representative created hundreds of consolidated reports, and he disseminated an unknown number of those reports to his customers. Subsequently, the firm revised its written supervisory procedures to permit the use of consolidated reports with prior approval from a designated principal and subject to supervisory review.

FINRA also found that the firm disseminated consolidated reports that omitted material disclosures to customers. The reports failed to provide a sound basis for evaluating the content. Additionally, the firm failed to preserve copies of the consolidated reports disseminated to customers, which violated recordkeeping requirements.

Consolidated reports are documents that combine information about a customer's accounts held at multiple financial institutions into a single report. These reports can be helpful tools for customers to view their overall financial picture, but they also create compliance challenges for broker-dealers. Consolidated reports may include accounts and assets that are not held at or supervised by the broker-dealer, which can create misleading impressions about the scope of the broker-dealer's services or responsibilities.

When consolidated reports are disseminated without proper disclosures, customers may not understand which accounts and assets are held at the broker-dealer (and therefore subject to FINRA rules and SIPC protection) and which are held elsewhere. They may also not understand that the broker-dealer has no responsibility for, or ability to supervise, assets held away from the firm.

The failure to supervise the creation and dissemination of these reports meant that customers may have received misleading information about their financial holdings without proper context or disclosures. The failure to preserve copies of the reports also violated fundamental recordkeeping requirements that enable regulatory examinations and investor protection.

Investors who receive consolidated reports from their broker should carefully review the disclosures to understand which accounts and assets are held at the broker-dealer and which are held elsewhere. They should understand that their broker generally has no supervisory responsibility for assets held at other institutions, even if those assets appear on a consolidated report provided by the broker.

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According to FINRA, Ashley Fenderson was barred from association with any FINRA member in all capacities on August 1, 2023.

FINRA found that Fenderson refused to produce information and documents requested by FINRA during an investigation that originated from its review of a Uniform Termination N...

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According to FINRA, Ashley Fenderson was barred from association with any FINRA member in all capacities on August 1, 2023.

FINRA found that Fenderson refused to produce information and documents requested by FINRA during an investigation that originated from its review of a Uniform Termination Notice for Securities Industry Registration (Form U5) filed by her member firm. The Form U5 reported that she had been permitted to resign due to misuse of fraternal funds.

When broker-dealers terminate registered representatives, they are required to file a Form U5 that discloses the reasons for termination. When those reasons involve alleged misconduct, FINRA typically conducts an investigation to determine whether violations of securities laws or regulations occurred. As part of these investigations, FINRA has the authority to request information and documents from registered persons.

Registered persons are obligated to cooperate with FINRA investigations by providing requested information and documents. This obligation continues even after an individual is no longer associated with a member firm. The duty to cooperate is fundamental to FINRA's ability to investigate potential misconduct and protect investors.

When a registered person refuses to provide information to FINRA, it impedes the regulatory process and prevents FINRA from determining whether violations occurred and whether the individual poses a risk to investors. Because of the serious nature of this obstruction, FINRA typically imposes a bar for refusal to provide information or testimony.

A bar prohibits an individual from associating with any FINRA member firm in any capacity. This means Fenderson cannot work for any broker-dealer in any role, whether as a registered representative, principal, or in any other capacity. The bar protects investors by ensuring that individuals who refuse to cooperate with regulatory investigations cannot continue to work in the securities industry.

Investors can check the background of their financial professionals through FINRA's BrokerCheck system, which includes information about regulatory actions such as bars. Before working with a financial professional, investors should review their BrokerCheck report to understand their disciplinary history and qualifications.

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