Corinthian Partners, L.L.C. a brokerage firm headquartered in New York New York and Richard Calabrese (the firm’s majority owner, Chairman, Chief Compliance Officer and President) and Mitchell Manoff (the firm’s Chief Executive Officer) have been sanctioned by Financial Industry Regulatory Authority (FINRA) based upon findings that the firm, Calabrese and Manoff: (1) neglected to supervise the firm’s non-traditional exchange traded product business (2) failed to supervise a registered representative who made unsuitable non-traditional exchange traded product recommendations to customers of the firm and (3) failed to supervise the firm’s sales operations with a view towards ensuring suitability of the non-traditional exchange traded products placed in customer accounts. Letter of Acceptance Waiver and Consent No. 2016047621801 (Mar. 18, 2019).l
According to the AWC, non-traditional exchange traded products are meant to produce multiples of the returns of a benchmark or index, and inverse exchange traded products are designed to generate multiples of the opposite returns of the benchmark or index. Critically, these products are often designed to be rebalanced daily, and when held for multiple trading sessions, non-traditional exchange traded funds can result in performance which does not reflect the performance of the benchmark or index. Evidently, the firm was notified about the unique risks of these products, and cautioned by FINRA to create supervisory measures that would encompass the review of customer suitability for these products because of their speculative nature and lack of appropriateness for investors that do not comprehend its terms and risks or who aren’t actively managing their portfolios.
The AWC revealed that between January of 2013 and May of 2016, one of the firms brokers, VV, executed 1,910 non-traditional exchange traded product purchases and 1,663 sales in customer accounts. Apparently, seven of those investments were routinely bought and sold by VV in the accounts of at least seven firm customers. Evidently, a total of sixty inverse or leveraged exchange traded products had been traded by VV, resulting in purchases of $279,000,000.00 and sales of $275,000,000.00. The AWC stated that those transactions produced commissions of $890,000.00 which was a substantial amount of the overall revenue generated by the firm.
Nevertheless, the AWC revealed that the firm failed to create and maintain an adequate supervision system and written supervision procedures with a view towards making sure the non-traditional exchange traded products were appropriate for customers. Evidently, there were no adequate policies or procedures utilized by the firm which meaningfully addressed the appropriateness of non-traditional exchange traded product recommendations. Additionally, there was no legitimate processes by which the firm made sure that the documentation – which it relied upon to determine suitability – was accurate and complete. As a result, some documents did not detail the customer’s tolerance for risk. In one case, millions of purchases in non-traditional exchange traded funds were placed in the account of a customer that never confirmed information about the customer’s tolerance for risk.
Moreover, the AWC stated that there was no adequate supervisory systems for evaluating non-traditional exchange traded products when those investments had been held in the customer’s accounts for extended periods. Supposedly, the firm lacked exception reports for the non-traditional exchange traded products, so it did not watch out for investors accounts containing the speculative investments for inappropriate periods. Consequently, FINRA found the firm, Calabrese and Manoff’s conduct violative of FINRA Rules 2010 and 3110 as well as National Association of Securities Dealers Rule 3010.
The AWC additionally stated that VV was not adequately supervised by the firm, Calabrese and Manoff. Specifically, the firm was supposed to make sure that it maintained documentation about VV’s discussions with customers concerning non-traditional exchange traded product volatility and risks so that the customers were apprised prior to the investment transactions being effected in their accounts. But Manoff and Calabrese never took action to assess whether those conversations with customers took place.
In addition, there were apparently no adequate actions taken by Manoff and Calabrese to make sure that VV’s customers comprehended the risks and features unique to the investments that VV advised customers to purchase. For example, VV did not evidence that there were compounding risks because of the products resetting daily, or that there were risks pertaining to derivatives. Consequently, FINRA found that VV’s investment recommendations were never vetted by supervisory personnel, and there was no foundation to conclude the advice VV gave customers was appropriate.
Further, the AWC stated that Calabrese and Manoff both failed to utilize a procedure for identifying and assessing the suitability concerns of non-traditional exchange traded product trades given the rebalancing, compounding and leverage-based risks. In particular, these products were held by customers, on average, for twenty-four days despite both FINRA and the prospectuses cautioning investors that the investments contained special risks when held for more than a single trading session.
Additionally, the firm reportedly failed to look into atypical large purchases of non-traditional exchange traded funds in customer accounts. The AWC revealed that one customer’s account contained at least twenty-eight $1,000,000.00 purchases. According to the AWC, the large purchases were suspicious and should have been examined by supervisions to assess possible over-concentrations of the investments in customer accounts. As a result, FINRA found the firm, Calabrese and Manoff’s activities to be violative of FINRA Rules 2010 and 3110 as well as NASD Rule 3010. Corinthian was censured and fined, while Calabrese and Manoff were each fined and suspended in all supervisory capacities.
