Five registered reps at SW Financial violated the Securities and Exchange Commission's Regulation Best Interest rule by pursuing a short-term strategy that made it “virtually impossible” for clients to make a profit on their investments, according to the regulator.
The commission filed charges against Michael Blumer, John Kuprianchik, David Page, Steven Thompson and Joseph Todaro, who were all registered with the Melville, N.Y.-based broker/dealer Salomon Whitney, which does business as SW Financial. FINRA barred the firm from the industry this past May for Reg BI violations.
The alleged conduct ran from August 2018 through June 2022, involving about 2,000 client account trades and 16 retail customers. During this time, the five brokers allegedly recommended rapidly buying and selling securities, sometimes in the same week or even same day.
The cost-to-equity ratio in client accounts after these trades often exceeded 100%, meaning clients would need an annual return of more than 100% in their investments just to break even.
According to the commission, the brokers “knowingly or recklessly” disregarded the fact that their trading strategy was extremely unlikely to generate profits for clients. Losses for clients exceeded $1 million during this period, while the five brokers collectively recouped more than $660,000 in commissions and fees.
In May, FINRA announced it was expelling SW Financial for a number of violations, including misrepresenting its sales of private placement offerings of pre-initial public offering securities, churning accounts and poorly supervising its registered reps. Regulators also settled charges with SW Financial co-owner and CEO Thomas Diamante by suspending him for a year and fining him $50,000.
“Firms cannot make material misstatements or omissions when they sell securities to customers,” Christopher Kelly, an SVP and acting head of FINRA’s Enforcement Division, said at the time. “Firms also must reasonably surveil for, and respond to, red flags of excessive trading and churning.”
Specifically, FINRA found those misrepresentations and omissions violated Reg BI’s Disclosure Obligation, which requires reps to supply clients with “all material facts relating to conflicts of interest” connected to a particular recommendation.
Particularly, SW Financial told investors the firm would receive a 10% sales commission for certain pre-IPO securities, though Diamante had an agreement with the issuer that it would get an additional 5% in selling compensation. SW Financial agreed to the settlement (and expulsion) without admitting or denying the findings.
The SEC filed its first case related to Reg BI violations in June 2022, charging Western International Securities and several of its b/ds with recommending and selling high-risk “L” bonds. FINRA followed suit with its first Reg BI violation that October, suspending a former broker with Network 1 Financial Securities.