According to FINRA, Spartan Capital Securities, LLC and five associated individuals—Frederick Joseph Cammarano III, Michael A. Darvish, Kim Marie Monchik, James Robert Pecoraro, and John Joseph Stapleton—were named as respondents in a complaint alleging they engaged in widespread churning and fraud that generated millions in revenue while causing millions in customer harm over more than four years.

The complaint alleges that the firm, Pecoraro, and Stapleton willfully violated Section 10(b) of the Securities Exchange Act and Rule 10b-5 by churning customer accounts. Churning involves excessive trading in customer accounts primarily to generate commissions rather than to serve customer investment objectives. To establish churning, regulators must prove three elements: control over the account, excessive trading, and scienter (intentional misconduct or reckless disregard).

According to the complaint, the firm, Pecoraro, and Stapleton exercised de facto control over customer accounts. They controlled the volume and frequency of trading, decided what securities to buy and sell, the quantity of each transaction, and the timing. Customers relied on their recommendations and routinely followed them. The complaint alleges they acted with scienter—with intent to defraud or at minimum with reckless disregard of customers' interests.

The complaint also alleges that the firm, Darvish, and Pecoraro recommended trading that was excessive and quantitatively unsuitable given customers' investment profiles. The excessive nature was evidenced by high cost-to-equity ratios and turnover rates, frequent transactions, and substantial transaction costs. Cost-to-equity ratio measures annual trading costs as a percentage of account equity. Turnover rate measures how many times per year the entire portfolio is replaced. High ratios in both metrics strongly suggest excessive trading.

Additionally, the complaint alleges the firm, Darvish, Pecoraro, and Stapleton willfully violated Regulation Best Interest by failing to act in customers' best interests. The recommended series of securities transactions were allegedly excessive and not in customers' best interests, instead placing the financial interests of the firm and its representatives ahead of customer interests. The respondents allegedly failed to exercise reasonable diligence, care, and skill to determine whether the trading recommendations were suitable or in customers' best interests.

Finally, the complaint alleges that the firm, Cammarano, and Monchik failed to reasonably investigate and address red flags of excessive trading and churning. The firm and these supervisors had obligations to investigate and follow up on red flags indicating representatives were engaged in potentially excessive trading and churning. Their alleged failure to reasonably supervise allowed the misconduct to continue.

It is important to note that issuance of a complaint represents FINRA's initiation of a formal proceeding. Findings as to the allegations have not been made. The respondents are entitled to present a defense, and no determination of guilt or liability should be assumed. The case will proceed to a hearing before FINRA's Office of Hearing Officers unless the parties reach a settlement.

For investors, these allegations highlight the importance of monitoring account activity for signs of excessive trading, including frequent purchases and sales and high commission charges relative to account size.