According to FINRA, Craig Jay Sherman was assessed a deferred fine of $5,000, suspended from association with any FINRA member in any principal capacity for four months, and required to complete 40 hours of continuing education concerning supervisory responsibilities for failing to reasonably discharge supervisory responsibilities specifically assigned to him.
Sherman failed to reasonably investigate potential churning or excessive trading by two registered representatives and failed to review representatives' emails as required. His supervisory failures allowed these two representatives to excessively trade customer accounts, ultimately charging customers more than $300,000 in excess commissions and fees in less than six months.
Sherman did not identify that the two representatives were engaging in excessive trading despite multiple opportunities to do so. Moreover, when red flags of excessive trading were specifically presented to him, Sherman failed to reasonably investigate them. This allowed the harmful trading to continue unchecked while customers incurred devastating losses.
Sherman's complete failure to conduct any reviews of representatives' emails compounded the problem. Had he reviewed emails as required by his supervisory responsibilities, he would have discovered several serious problems. First, the emails would have revealed that the two representatives were recommending securities transactions in accounts despite not being registered in the customers' home states. Second, he would have discovered that a third representative falsified the firm's books and records to make it appear he was the customers' registered representative of record when he was not actually making the securities recommendations. Third, email reviews would have shown that the two unregistered representatives were communicating with customers, sending new account forms, and asking customers to deposit funds.
Sherman knew that the two representatives had been unable to obtain registrations in many states after they joined the firm. He also knew that the third representative, who had virtually no experience and was recruited by one of the unregistered representatives, became registered in many of those same states shortly after the others were unable to do so. Despite these obvious red flags suggesting the unregistered representatives might be improperly conducting business in states where they lacked registration, Sherman did not investigate by reviewing emails or contacting customers.
Had Sherman contacted customers, he would have learned that the two unregistered representatives, not the third representative of record, were actually making securities recommendations. This scheme allowed the unregistered representatives to effectively continue their business in states where they were not registered by using a complicit third party as a front.
The four-month suspension and requirement to complete 40 hours of continuing education reflect the seriousness of Sherman's supervisory failures and the substantial harm to customers that resulted.
