According to FINRA, FINRA expelled broker-dealer SW Financial for multiple serious violations including making misrepresentations to customers, churning customer accounts, and failing to supervise representatives. In a related settlement, Thomas Diamante, the firm's co-owner and CEO, was suspended for nine months in all capacities followed by three months in all principal capacities, fined $50,000, and required to requalify by examination if he seeks future registration as a general securities principal or investment banking representative.
Between January 2018 and December 2021, Diamante and SW Financial made material misrepresentations and omitted material information in connection with selling private placement offerings of pre-IPO securities, violating both FINRA rules and Regulation Best Interest's Disclosure Obligation. The firm informed potential investors it would receive only a 10 percent sales commission when Diamante had entered into an undisclosed agreement under which SW Financial would receive an additional 5 percent in selling compensation and half of any carried interest.
SW Financial sold the private offerings to 171 investors, including 163 retail customers, and the firm and its owners received approximately $2 million in undisclosed compensation - a serious conflict of interest that should have been fully disclosed. The firm and Diamante also failed to conduct reasonable due diligence and did not confirm the issuer actually held or had access to the shares it purported to sell, violating FINRA's suitability rule and Reg BI's Care Obligation.
Between January 2016 and May 2019, SW Financial, through two former representatives, churned nine customer accounts, causing customers to incur more than $350,000 in total trading costs and realized losses exceeding $465,000. In one case, a retired 75-year-old customer's excessively traded account had a cost-to-equity ratio over 103 percent, paid $101,806 in commissions, and incurred realized losses of $131,979 comprising most of his retirement savings. SW Financial failed to reasonably follow up on red flags of excessive trading.
This case demonstrates egregious sales practice and supervisory violations warranting expulsion from FINRA membership. The undisclosed compensation and lack of due diligence on pre-IPO offerings, combined with churning of customer accounts including those of vulnerable senior investors, show a pattern of putting firm interests ahead of customer interests.
