Securities Lawyers Blog
On May 5, 2015, the brokerage firm Cape Securities, Inc. (“Cape”) was fined $125,000 by the Financial Industry Regulatory Authority (FINRA) for failing to supervise its personnel, in effect allowing its brokers to recommend unsuitable investments and churn customer accounts.
According to the Letter of Acceptance, Waiver and Consent (AWC), for a sixteen-month period, spanning October 2011 through February 2013, Cape’s supervisory system and written supervisory procedures, pertaining to the review of actively traded accounts, failed to adequately address and identify numerous items. According to FINRA, Cape’s supervisory policies and procedures failed to address (1) the process by which transactions are reviewed, (2) risks in customer accounts, and (3) methods by which Cape conducted its suitability analysis. According to the AWC, Cape never made use of clearing firm exception reports in their review of actively traded accounts and had no written supervisory procedures relating to the monitoring of complex trading strategies.
In addition, during the period of October 2011 through September 2012, registered representatives in Cape’s Manhattan branch conducted trades in several leveraged exchange traded funds (“ETFs”) and sold covered calls to customers. This trading activity caused customer accounts to have excessive turnover ratios, which indicates churning of customer accounts. According to FINRA, Cape did not inquire into the suitability of this trading activity despite all the indications of excessive trading and its awareness of the strategies being recommended.
According to FINRA, Cape also failed to detect several fraudulent wire transfers during the period from February 2012 through September 2012. In doing so, FINRA stated that Cape failed to establish, maintain and enforce supervisory systems and procedures reasonably designed to detect and prevent fraudulent wire activity conducted by Cape’s registered representatives. More specifically, Cape failed to maintain adequate Anti Money Laundering (“AML”) procedures to properly detect, investigate or ensure appropriate reporting of potentially suspicious fund transfers to third parties. FINRA also stated that Cape’s general supervisory system and procedures were not reasonably designed to detect and prevent wire transfers between Cape customers and its registered representatives. As a result, Cape was unable to detect patterns of repeated fund transfers between one of Cape’s registered representative’s customers’ Cape accounts and his branch office operating account.
As a consequence of Cape’s misconduct, FINRA found that Cape had violated numerous FINRA Rules including NASD Rules 3010(a), 3010(b) and 3010(d) and FINRA Rule 2010.
Gana Weinstein LLP specializes in representing investors in cases of broker misconduct. If you have suffered investment losses or financial irregularities, please contact Gana Weinstein LLP for a free consultation.