← Broker database 2023-07-20
Monmouth Capital Management Expelled for Churning Customer Accounts Including Gold Star Families
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.