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Investments - Unsuitable
Cold Caller: Pas De Deux
[Photo: Sleeping Beauty Ballet / Royal Opera House]
by Howard Haykin
While “Broker #1” was engaging in a high-cost, in-and-out trading strategy that cost 16 of his customers over $800,000 [see Financialish], “Broker #2” was conducting a parallel fraud. And all this took place at the Mineola, NY-based main office of broker-dealer Joseph Stone Capital.
According to the SEC, from 2015 to 2019, Broker #2 traded in and out of his 12 customers’ accounts so rapidly that stock positions were held on average for fewer than 15 days - which facilitated Broker 2’s efforts to generate trading compensation. He also did that by applying excessive commissions, mark-ups, and mark-downs, and by affixing a $75 ‘postage’ fee to every trade. By the time Broker #2 was barred from the industry, his customers had experienced cumulative losses of $741,000, while he had received $265,000 in commissions and fees.
FIRMS WITH THE MOST TAINTED BROKERS. Interestingly, a 2017 investigative study identified Joseph Stone Capital as having the 2nd highest (worst) concentration of brokers with serious public disclosures - among all registered broker-dealers. That study, conducted by Reuters, provided statistics for the 48 brokerage firms whose broker ranks were the most highly populated with registered persons who, at the time, had been flagged by regulators for irregularities.
‘FINRA flags’ are incidents that the Financial Industry Regulatory Authority requires brokers to publicly disclose - including customer disputes, disciplinary actions and employee terminations for cause. At Joseph Stone Capital, 71% of its 59 brokers had 'FINRA flags' on their records.
Yet, despite the questionable track record of its brokers, along with the 2 recent cases cited by Financialish, there's nothing to indicate that the SEC or FINRA ever held Joseph Stone Capital or any of its supervisory principals accountable in these alleged frauds – e.g., charging them with failing to adequately supervise the conduct of its brokers. One possible explanation is that Broker #1 and Broker #2 (and other brokers) falsely coded their customers as having “Speculative” or “Aggressive” Investment Profiles - which, to some degree, might have 'provided excuses' for excessive trading. Of course, that last statement is pure conjecture.
[To read about Reuters' Investigation, click on ... Wall Street’s self-regulator blocks public scrutiny of firms with tainted brokers.]