Three Supervisors Suspended for Failing to Respond to Red Flags
Eight Representatives Suspended for Excessive Trading
FINRA announced today that it has ordered Joseph Stone Capital LLC to pay restitution of approximately $825,000 to customers whose accounts were excessively traded by the firm’s representatives. In related settlements, FINRA suspended eight current or former Joseph Stone representatives and required them to pay, collectively, an additional $211,000 in restitution to the firm’s impacted customers. In addition, FINRA suspended three supervisors at the firm for failing to reasonably identify or respond to red flags of excessive trading, and barred two representatives for refusing to respond to FINRA’s requests for information in connection with the investigation.
FINRA found that from January 2015 to June 2020, Joseph Stone failed to implement a supervisory system reasonably designed to comply with FINRA’s rules relating to excessive trading. As a result, the firm failed to identify or address representatives’ excessive and unsuitable trading in 25 customer accounts, causing the customers to incur approximately $1 million in commissions and other trading costs. The trading in these accounts generated cost-to-equity ratios—that is, the amount the accounts must increase in value just to cover commissions and other trading expenses—ranging from 21%-96%.
“Excessive costs and commissions make it more difficult for customers to realize a positive return. FINRA is committed to investigating when firms fail to reasonably supervise the suitability of recommended securities transactions, and to providing restitution to harmed investors,” said Jessica Hopper, Executive Vice President and Head of FINRA’s Department of Enforcement. “Firms must ensure that they establish systems and procedures to supervise recommendations to retail customers; supervisors must use available tools to identify and address red flags of excessive trading; and representatives must ensure that the costs and commissions they charge are reasonable and not excessive.”
The excessive trading in these accounts was evident in exception reports made available to Joseph Stone by its clearing firm, including an “active account report” that flagged accounts with high-commission-to-equity ratios. However, the designated principal responsible for reviewing actively traded accounts often did not review this report. Even when a supervisor flagged an account for potential excessive trading, Joseph Stone did not respond appropriately. For example, in several instances when the firm identified red flags of excessive trading, the firm responded by prospectively restricting the commission that the representative could charge for certain trades in the account. The firm, however, did not restrict the number of trades the representative could execute in the account or the aggregate commissions that could be charged—in other words, representatives could simply place more frequent trades in the account, earning higher commissions on a larger number of trades.
In related settlements:
- Three Joseph Stone principals who failed to reasonably respond to red flags of excessive trading agreed to supervisory suspensions ranging from two to five months: Adam Maggio, Joseph Scott Audia, and Anthony Joseph Graziano;
- Eight Joseph Stone representatives who excessively traded customer accounts agreed to suspensions ranging from three to eight months and to pay, collectively, approximately $211,000 in restitution: Miguel Angel Murillo, Joseph A. Ambrosole, Sebastian Wyczawski, Michael James May, Douglas J. Rosenberg, Todd Franklin Kling, Martin J. Petela, and Nico Rutella. As part of the settlement, Joseph Stone also agreed to place the representatives who are still associated with the firm on heightened supervision for two years; and
- Two Joseph Stone representatives agreed to bars from associating with any FINRA member for refusing to respond to FINRA’s requests for information in connection with the investigation: Eugene A. McAdams and David Martin Martirosian.
In settling these matters, the respondents consented to the entry of FINRA’s findings while neither admitting nor denying the charges.
About FINRA
FINRA is a not-for-profit organization dedicated to investor protection and market integrity. It regulates one critical part of the securities industry—brokerage firms doing business with the public in the United States. FINRA, overseen by the SEC, writes rules, examines for and enforces compliance with FINRA rules and federal securities laws, registers broker-dealer personnel and offers them education and training, and informs the investing public. In addition, FINRA provides surveillance and other regulatory services for equities and options markets, as well as trade reporting and other industry utilities. FINRA also administers a dispute resolution forum for investors and brokerage firms and their registered employees. For more information, visit www.finra.org.
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Contacts
Ray Pellecchia (212) 858-4387
