FINRA Expels Broker/Dealer for Excessive Churning
The Financial Industry Regulatory Authority has expelled a New York-based broker/dealer for violating federal securities regulations through excessive churning, claiming it was “virtually impossible for customers to earn a profit.”
In addition to expelling the firm Reid & Rudiger, the agency barred co-founder Clifford Reid and CEO Edward Rudiger Jr., from associating with any industry firm. In the 43-page settlement, regulators claim the firm broke the SEC’s Regulation Best Interest rule (as well as FINRA mandates).
According to FINRA Enforcement Head Bill St. Louis, the “egregious churning and excessive trading in this case resulted in significant customer losses over nearly six years,” and “underscores FINRA’s unique role” as a self-regulatory organization.
According to the settlement, the firm’s business mainly involved recommending high-volume, high-cost market-timing strategies, focusing on high-net-worth investors reached through cold calling. The firm first registered with FINRA in 1998.
During the time period in question (about 2018 to 2023), Rudgier and Reid recommended that clients swap large positions in equity securities of well-known companies, frequently using margin, based on research supposedly conducted by the firm’s supervisor, Marc Harrison.
The heads of the firm would often recommend the same trades for numerous clients, regardless of individual investment profiles. According to FINRA, the co-founders pushed this excessive trading approach across 20 accounts, several of which were also churned (a level of excessive trading committed with intent to defraud or with “reckless disregard”).
According to FINRA, the misconduct was evident in the high cost-to-equity ratios of many of the trades (reflecting the return on investment required to cover commissions and expenses).
In one account, the cost-to-equity ratio was more than 111%, meaning the client would have needed to generate returns of more than 111% just to break even (other clients’ cost-to-equity ratios were 69% and 67%).
According to the settlement, the firm’s clients paid about $2 million in commissions during the excessive trading and incurred about $2.7 million in losses.
In addition to kicking out the firm’s co-founders, FINRA suspended firm supervisors Harrison and Kelli Mezzatesta (who also served as the firm’s chief compliance officer), arguing the duo failed to catch red flags, including high cost-to-equity ratios and turnover rates, which FINRA said were “key metrics” in determining whether excessive trading and churning are taking place.
As part of the deal, FINRA suspended the duo for three months, fined them $5,000 each and required them to complete 20 hours of “supervision-related” continuing education.
Harrison and Mezzatesta (as well as Reid and Rudiger) acquiesced to the FINRA settlement stipulations without admitting or denying the findings.
Representatives for the firm did not return a request for comment prior to publication.
According to the firm’s BrokerCheck page, its designation as a “Restricted Firm” is on appeal.