Richard Lee, of Englewood Cliffs, New Jersey, a stockbroker formerly registered with Caldwell International Securities Group, was suspended for eighteen months from associating with any Financial Industry Regulatory Authority (FINRA) member in any capacity per an Order Accepting Offer of Settlement containing findings that Lee made unsuitable investment recommendations. Department of Enforcement v. Richard Lee, No. 2014039091903 (Oct. 10, 2016).

According to the Order, between June of 2012 and July of 2014, at a time when Lee was employed ECG (one of Caldwell International Security Group’s branches), he effected an investment strategy for firm customers which FINRA concluded was not suitable. FINRA alleged that Lee made recommendations to the firm’s customer base that involved investing via an active trading strategy, where purchases and sales of securities were based upon the occurrence of catalyst events in the markets. Apparently, securities were traded utilizing this strategy on a repetitive basis.

The Order stated that Lee’s commissions were derived from effecting customers’ securities based transactions. Apparently, Lee was responsible for obtaining customers through cold calling them, and focused his efforts on procuring investors who had high risk tolerance and intended to invest speculatively.

Apparently, customers did not comprehend the risks associated with Lee’s approach. FINRA stated in the Order that Lee failed to comprehend the strategy which he recommended to customers, and additionally failed to comprehend the nature of turnover rates and cost/equity ratios. The Order further stated that Lee could not understand how costs impacted the customer’s bottom line.

The Order further stated that customers commonly paid at least four percent commissions in connection with the purchases and sales of securities that were recommended within the active trading model. Lee seemingly failed to inform customers in occasions where commissions associated with the transactions outweighed the benefit of executing them. Lee also apparently failed to inform customers when such commissions could cause the customers to suffer from financial losses.

According to the Order, the firm’s customers suffered from substantial cost/equity ratios which ranged from nearly eighteen percent up to over eighty-one percent. Apparently, the customers’ annual turnover rates ranged from nearly four up to approximately ten. Lee was reportedly responsible for customer CVO’s account, where CVO suffered from cost/equity ratio of over thirty-eight percent and annual turnover rate of over nine.

The Order further stated that Lee failed to conduct due diligence pertaining to the active investment strategy. Apparently, Lee made recommendations to his customer even though he never reviewed such account in order to determine whether such strategy was suitable or had been successful in any way for the customer. Lee reportedly did not understand what it meant for his customer to break even.

FINRA found that Lee’s investment recommendations in the active investment strategy were unsuitable because he failed to consider the volatility, benefits and drawbacks faced by the customer, costs, and how the strategy would perform in in various market conditions. FINRA found that Lee’s conduct in this regard was violative of FINRA Rules 2010 and 2111.

Guiliano Law Group

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