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NEWSLETTERS & ALERTS
Suitable Yesterday, But Unsuitable Today
by Howard Haykin
David Lomedico agreed to a $5K fine and a 4-month suspension to settle FINRA charges that he recommended unsuitable transactions in 2 customers’ accounts.
BACKGROUND. Lomedico, a resident of Huntington, NY, had 29 years’ experience with 12 firms. He held Series 6 and Series 7 licenses. From 2007 to 2013, he was associated with Rockwell Global Capital, and had no prior regulatory disclosures.
FINRA FINDINGS. From June 2007 to July 2011, Lomedico was the registered rep for a husband and wife – aged 72 and 64, respectively - when they opened a joint trust account with "speculation" as the investment objective. Over those 4 years, Lomedico communicated on a nearly exclusive basis with the husband about the couple's account, and he made buy and sell recommendations for that account solely to the husband.
The wife had little investment knowledge or experience, and she had relied entirely on her husband to manage the couple’s finances and investments, including their account with Lomedico’s firm.
In July 2011, the husband died, and the investment objective of the widowed woman, now 68, was long-term capital appreciation. Yet, according to FINRA, Lomedico never took steps to assess the wife’s changed circumstances. He did not speak with her to determine her investment objective and investment experience. Instead, Lomedico relied on the account’s prior investment objective of speculation for his recommendations. As a result, Lomedico continued to recommend short-term trading and use of margin that was inconsistent with the wife’s investment objective and risk tolerance – which were inherently unsuitable.
In this case, FINRA notes other instances where Lomedico offered unsuitable recommendations. In 2009, he opened an account with a different customer who sought a steady return with limited risk. This customer had minimal investment experience and did not have any prior experience trading in Non-Traditional ETFs. Nevertheless, from June 2009 through May 2010, Lomedico recommended the purchase of Non-Traditional ETFs as long-term investments for this customer, which were inconsistent with the customer’s investment objective and risk tolerance – and thus unsuitable.
FINANCIALISH TAKE AWAYS. I've got 2 basic concerns. First, is that Lomedico, as the broker of record of a joint account with "speculation" as the investment objective, has exposed himself and the firm to unnecessary risks. How so?
Because Lomedico dealt solely with just one of the beneficial owners of a joint account - the husband - he would have little defense against a complaint filed by the wife for, say, significant investment losses or unauthorized withdrawals. Lomedico might also have few defenses if the account had failed for whatever reason to perform on par with an appropriate market index.
Look back at past "bait and switch" frauds perpetrated by dishonest couples. In one scenario, a husband opens an account for his wife, or a couple opens a joint account, and from that point forward the broker deals exclusively with the husband on investment decisions and perhaps account matters. If all goes well in the account or accounts, everyone's happy. However, if and when investments tank, or if they don't perform as well as expected, or if the husband withdraws funds from the account, then the wife typically would file arbitration claims against the broker and the firm on suitability and failure to supervise charges.
A second concern, is the disconnect in FINRA’s case details. One the one hand, FINRA notes that Lomedico took no steps to assess the widowed customer's changed circumstances. Yet, FINRA notes that the widowed customers now had “long-term capital appreciation” as her investment objective. From where did FINRA obtain this information? And, ... Who at the firm other than Lomedico knew about the husband’s death?
An experienced broker, Lomedico should have known and acted upon his obligation to update the customer account profile following the husband’s death. And presuming that someone else at the firm knew of the husband’s death, supervisory steps should have been taken to ensure that appropriate changes were made. There's no indication in BrokerCheck that Rockwell Global Capital was disciplined in this matter, and we have no way of determining if a firm supervisor might have been disciplined for the oversight.
The Take Away, however, is that brokers and firms need to be vigilant upon learning that a customer has died or become incapacitated. When that occurs, account records must be updated. This is not rocket science.
This case was reported in FINRA Disciplinary Actions for October 2017.
For details on this case, go to ... FINRA Disciplinary Actions Online, and refer to Case #2013037843201.