Cape Securities, Inc., a FINRA member since 1976 headquartered in McDonough, GA, offers brokerage services via 118 registered reps via its 20 branch offices and 79 non-registered offices. The Firm was censured and fined $125,000 after consenting to FINRA findings that the firm failed to establish and enforce adequate supervisory systems to detect/prevent fraudulent wires executed by the firm’s reps; supervisory failures pertaining to identifying and preventing excessive and unsuitable trading and churning in client accounts; and supervisory failures pertaining to their anti money laundering processes. FINRA Letter of Acceptance, Waiver, and Consent No. 2013035211002 (May 5, 2015).
According to the Letter of Acceptance, Waiver, and Consent
From February of 2012 to September of 2012, a registered rep referred to as “PE” had converted client funds for his benefit from the brokerage accounts of 7 Cape customers. The AWC noted that PE had submitted a total of 21 separate wire transfer requests which totaled $690,152.90 on behalf of his clients, yet none of his clients actually authorized such transfers. Cape’s AML system failures, according to the AWC, resulted in Cape not being able to detect PE’s repeated wire funds transfers between client accounts and PE’s operating account at his branch office.
The AWC stated that Cape Securities failed to detect that the aforementioned 21 wires were being sent to a third party or were unauthorized. According to the AWC, even after PE admitted to have submitted forged signatures on wire transfer requests for one of the client’s accounts, the firm neither made any additional inquiries into other wire transfers coming from PE’s office, nor put in place additional supervision of PE. Consequently, according to the AWC, PE engaged in several more wire transfers, converting more than $100,000. FINRA found Cape to have violated FINRA Rules 2010 and 3310(a) along with NASD Rules 3010(a), 3010(b), and 3012(a)(2)(B) given the aforementioned conduct involving PE.
Additionally according to the AWC, from October of 2011 through February of 2013, FINRA found that Cape Securities’ written supervisory procedures and supervisory systems concerning supervision of actively traded account and review of transactions had not reasonably addressed or identified the process in which transactions are approved, red flags to be reviewed in active accounts, and the methodology behind the firm’s quantitative suitability assessments (e.g. turnover ratio or cost/equity analysis).
The AWC indicates that from October of 2011 through September of 2012, Cape Securities’ registered reps from the firm’s Manhattan branch had conducted trades into multiple leveraged exchange-traded funds as well as selling covered calls to clients. This activity, according to the AWC, resulted in a minimum of 15 client accounts with annualized turnover ratios that ranged from 7.09 to 19.67. Further, the AWC reported that due to the substantial amount of commissions being charged, annualized cost/equity ratios had ranged from 11.02% to 63.74%. FINRA alleged that notwithstanding the indications that there was excessive trading in addition to the recommendations being made by the registered reps, the firm failed to inquire into whether the trading activity was suitable, let alone require the disclosure to clients of risks involved in active trading. The AWC indicates that such clients weren’t even contacted. FINRA found the firm to have violated FINRA Rule 2010 along with NASD Rules 3010(a), 3010(b), and 3010(d) for the aforementioned conduct.
Securities brokerage firms have a duty to supervise their brokers and the sales practices of their brokers, and to review customer statements for, among other things, evidence of suitability, unauthorized trading, or excessive activity. FINRA Conduct Rule 3010, specifically provides that each member shall establish and maintain a system to supervise the activities of each registered representative and associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations, and with the Rules of this Association. Final responsibility for proper supervision shall rest with the member.
Stockbroker misconduct, such as the type indicated with Cape’s registered reps here, includes excessive activity or churning. Securities brokers are typically compensated by each transaction effected in your securities account. Sometimes brokers effect these transactions in your account, not for the purpose of reasonably fulfilling your stated investment objectives, but instead in an effort to generate excessive commissions for themselves and their firm. Such conduct is called churning.
Churning is a type of fraudulent conduct in a broker-customer relationship where the broker over-trades a customer’s account to generate inflated sales commissions. According to FINRA Conduct Rule IM-2310-2, churning occurs when, to generate excessive commissions, a broker causes securities in a customer’s account to be bought and sold with a frequency too great in light of the customer’s financial needs, resources, and investment objectives.
Guiliano Law Group
If you have been the victim of securities fraud and you have a complaint, you should consult with an attorney. The practice of Nicholas J. Guiliano, Esq., and The Guiliano Law Group, P.C., is limited to the representation of investors in claims for fraud in connection with the sale of securities, the sale or recommendation of excessively risky or unsuitable securities, breach of fiduciary duty, and the failure to supervise. We accept representation on a contingent fee basis, meaning there is no cost unless we make a recovery for you, and there is never any charge for a consultation or an evaluation of your claim. For more information contact us at (877) SEC-ATTY.