Caldwell International Securities Group, headquartered in Fischer, Texas, along with the firm’s supervisory staff members (Greg Caldwell, Lennie Freiman, and Paul Jacobs) were censured and fined by Financial Industry Regulatory Authority (FINRA) per an Order Accepting Offer of Settlement containing findings that the firm and individuals committed, inter alia, unsuitable investment strategy recommendations, unsuitable exchange traded fund recommendations, failure to supervise, and charging of unlawful fees. Department of Enforcement v. Caldwell International Securities Corp., et al., No. 2014039091903 (Aug. 25, 2016).
According to the Order, between December 1, 2010, and April 30, 2015, the firm, via its supervisory principals, including Caldwell, Freiman, and Jacobs, did not create and maintain reasonable supervisory procedures and protocols, resulting in a significant number of the firm’s registered representatives to make recommendations in connection with an active investment trading strategy which FINRA deemed unsuitable. Apparently, the model incorporated by the firm’s staff was not understood by the registered representatives, and it led customers to bear substantial losses, all while staff members raked in significant profits.
The Order stated that certain representatives traded in accounts on a discretionary basis despite not having the requisite authorization, and such trading practices went unsupervised. FINRA deemed such trading to have been excessive, and resulted in churning of customer accounts. FINRA stated in the Order that the firm as well as its supervisory personnel were cognizant of the representative’s mishaps and did not act accordingly in stopping it and preventing customers from suffering from excess commissions.
The Order indicated that several customers complained to the firm regarding the representative’s misconduct, yet these complaints were not properly disclosed to FINRA. Additionally, the firm’s staff failed to report commissions which were misclassified as miscellaneous fees.
According to the Order, the firm’s representatives who engaged in the aforementioned unsuitable recommendations included James Starks, Alex Etter, Rasheed Adams, Ricardo Francois, Lucas Lichtman, Alain Florestan, and Richard Lim, and Richard Lee. These individuals were cited as making recommendations to the firm’s clientele to pursue an active trading strategy despite such individuals not understanding the risks associated with such.
In addition to the representatives being ignorant regarding unsuitable investment strategies being recommended to clients, they were also reportedly ignorant regarding how detrimental the fees and commissions were to customers in connection with the investment strategies. FINRA found that the staff members did not have a legitimate basis in making such recommendations, and their conduct led to $1,000,000.00 in excess fees and commissions to be charged in fifteen of the firm customer accounts.
FINRA also noted in the Order that the affected customer accounts suffered from exceedingly high cost/equity ratios ranging from approximately eighteen percent up to one hundred and twenty-one percent, while annual turnover rates ranged from approximately four percent up to nearly thirty percent.
FINRA also identified registered representatives Honetta Kao and Marat Zeltser as making unsuitable investment recommendations concerning leveraged and inverse exchange traded funds. These individuals reportedly had no reasonable basis in making such recommendations. FINRA found that such conduct was violative of FINRA Rule 2111.
Apparently, Jacobs, Freiman, and Caldwell were tasked with supervising the aforementioned staff members, and were cognizant of the excessive trading taking place in several of the customer accounts within ZK Group branches, AWM Group, East Meadow Group, and ECG. These supervisory personnel reportedly did nothing to supervise such extraordinary trading, and did not properly address churning or excessive trading.
The Order stated that the misconduct of such registered representatives was not curtailed upon being identified by supervisory personnel. As a result of such supervisory mishaps, FINRA found that the firm and Freiman (as president and chief compliance officer) violated FINRA Rules 2010 and NASD Rule 3010(a).
The firm and Freiman apparently failed to report thirty-six customer complaints, resulting in FINRA finding a violation of FINRA Rule 2010 and 4530(d) to have been committed. Additionally, the firm and Freiman failed to incorporate heightened supervision for the aforementioned registered representatives, and failed to provide customers with the ability to receive waivers or a reduction in the fees and commissions charged. Customers were overcharged $107,367.08 due to the firm and Freiman not taking action to offer customers with such reinstatement and reinvestment rights, or reduction in fees.
Finally, FINRA found that the firm, via Freiman, did not adequately design and maintain supervisory protocols and procedures to detect and prevent the aggressive trading taking place by representatives. The firm apparently did not detect and prevent excessive trading, churning, and other trading strategies which were unsuitable from being implemented. FINRA found that the conduct of the firm and Freiman in this regard was violative of FINRA Rule 2010 and NASD Rule 3010(b).
In connection with the aforementioned misconduct, the firm was censured and fined $1,000,000.00, while also being ordered to provide $1,026,089.48 in restitution to affected customers. Caldwell was fined $50,000.00 and barred from associating with any FINRA member in any capacity. Jacobs was suspended for six months from associating with any FINRA member in a principal capacity. Freiman was barred from associating with any FINRA member firm in any capacity, and fined $75,000.00.
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