According to FINRA, Aegis Capital Corp. was ordered to pay approximately $2.8 million in total sanctions, including $1.7 million in restitution to 68 customers whose accounts were potentially excessively and unsuitably traded by the firm's representatives, plus a $1.1 million fine for supervisory violations. Two supervisors, Joseph Giordano and Roberto Birardi, were also fined and suspended for failing to respond to red flags.
FINRA's case originated from an examination of the firm and review of a customer arbitration complaint. The investigation revealed that from July 2014 to December 2018, Aegis failed to implement a supervisory system reasonably designed to comply with FINRA's suitability rule. As a result, the firm failed to identify and address potentially excessive and unsuitable trading by its representatives.
Eight Aegis representatives excessively traded 31 customers' accounts, generating average cost-to-equity ratios of 71.6 percent. This means customers' accounts had to increase in value by an average of 71.6 percent just to cover commissions and other trading expenses before generating any profit—an unrealistic expectation that virtually guaranteed customer losses. The excessive trading caused customers to incur more than $2.9 million in trading costs.
Aegis and designated supervisors Giordano and Birardi failed to take reasonable steps to investigate numerous red flags indicative of potentially excessive and unsuitable trading. The firm failed to act on more than 900 exception reports from its clearing firm that identified potentially unsuitable trading. These exception reports are specifically designed to alert firms to problematic trading patterns, yet Aegis ignored them.
The firm also failed to act on more than 50 customer complaints alleging excessive, unsuitable, or unauthorized trading in their accounts. When customers themselves complained about the trading, the firm still did not take adequate action to investigate and stop the misconduct.
Giordano and Birardi, who were responsible for supervising six of the eight representatives engaged in excessive trading, failed to respond to 700 of the 900 exception reports. This wholesale failure to review exception reports meant the supervisory system completely broke down for most of the problematic trading.
Making matters worse, when Aegis's compliance personnel identified deficiencies with the firm's systems and procedures used to monitor for potentially excessive trading, Aegis did not promptly address the deficiencies or improve its supervision. The firm was aware its supervisory system was inadequate but failed to fix it, allowing the excessive trading to continue.
For their supervisory failures, Giordano agreed to a six-month supervisory suspension and $10,000 fine, while Birardi agreed to a three-month supervisory suspension and $5,000 fine. Both must also complete 20 hours of continuing education. Additionally, FINRA has settled with four Aegis representatives, barring two for churning and excessive trading and suspending and fining two others.
The case demonstrates FINRA's commitment to holding accountable firms, supervisors, and individual representatives responsible for excessive trading, and providing restitution to harmed customers.
