Craig Scott Capital, LLC, headquartered in Uniondale, New York, along with owners Craig Scott Taddonio and Brent Morgan Porges, were charged by Financial Industry Regulatory Authority (FINRA) Department of Enforcement in a Complaint alleging that the firm and its owners had engaged in excessive and unsuitable trading, fraudulent churning, and other supervisory failures. Department of Enforcement v. Craig Scott Capital, LLC, et al., No. 20150448235-01 (Dec. 30, 2015).
According to the Complaint, from January 2012through December 2014, the firm and its owners had fostered a culture of aggressive and excessive trading of customer accounts. The Complaint alleged that by encouraging the firm’s Stockbrokers to use upcoming earnings announcements as a catalyst for recommending hundreds and thousands of short-term trades in customer accounts, the firm, along with its owners and brokers had earned more than $5,000,000 in commissions while customers had suffered more than $9,000,000 in losses in accounts where the annualized turnover rates were as high as over 200 and annualized cost/equity ratios were over 800%.
The Complaint stated that brokers Zachary Bader and David Cannata, and EB were the key players for CSC, where they actively traded in customer accounts to the point where the firm and the brokers earned millions of dollars in commission that had resulted from their fraudulent churning and quantitatively unsuitable trading – while at the same time their customers had suffered millions of dollars in losses.
FINRA alleged that as a control person under Section 20(a) of the Securities Exchange Act of 1934 and under common law doctrine of respondeat superior, CSC is equally accountable for the brokers’ churning and excessive trading. Consequently, FINRA alleged that CSC had willfully violated Section 10(b) and Rule 10b-5(c) of the Exchange Act and FINRA Rules 2020 and 2010 for churning; and that CSC also violated NASD Rule 2310 and NASD IM-2310-2, FINRA Rules 2020, 2111(a) and 2010 in connection with excessive trading in customer accounts.
Further, the Complaint stated that firm and owners had failed to establish and enforce a reasonable supervisory system, including written supervisory procedures that would be designed to prevent the quantitative suitability (e.g. excessive trading) and fraudulent churning violations that occurred via the firm. FINRA claimed that while the firm and individuals were aware of numerous red flags about trading and churning, the owners did little to nothing to ensure the brokers were making suitable recommendations and preventing churning.
The Complaint further indicated that the firm and owners permitted their brokers to trade accounts so frequently, relying heavily on margin, that under any established metric it was nearly impossible for customers to profit in their accounts. There were reportedly no meaningful steps taken by the firm and owners to curtail the active trading, which FINRA argued occurred because to do so would have resulted in lower commissions and profits for them and the firm’s sales force. FINRA alleged that the firm violated NASD Rule 3010(a) and (b) and FINRA Rule 2010.
FINRA also alleged that the firm and owners violated FINRA Rules 3230 and 2010 after the firm implemented efforts to have its sales force engage in cold-calling to places which restricted such calls via the do-not-call telemarking restrictions. Finally, FINRA claimed that the firm and owners had lied, under oath, in written responses to FINRA requests for information pursuant to Rule 8210. As a result of allegedly not telling the truth when questioned pursuant to FINRA’s Rule 8210 requests, FINRA claimed that the firm and owners violated Rule 8210 and 2010.
Stockbroker misconduct 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.
Excessive trading is commonly measured by turnover rates, which is the number of times the value of the account is turned over within a certain period of time, and the cost/equity ratio which identifies the percentage return on a customer’s average net equity needed to pay commissions and other account expenses over a certain period.
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.
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 Stockbroker 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.
Public disclosure records via FINRA’s BrokerCheck reveal that Craig S. Taddonio has been subject to eight disclosure incidents. On July 22, 2013, a customer received an award against Taddonio for $338,454.00 after alleging sales practice violations in connection with the management of their accounts, including unsuitability, excessive trading, and misrepresentation. On December 6, 2013, Taddonio settled a customer dispute for $178,500.00 after the customer alleged sales practice violations, unsuitability, excessive trading, and misrepresentation. Taddonio is also subject to a pending customer dispute from April 10, 2015, where a client has requested $900,000.00 in damages after the client alleged breach of contract, breach of duty of good faith and fair dealing, intentional torts and negligent failure to supervise. He has also been subject to four tax judgments from September 15, 2014 – August 5, 2015.
Public disclosure records via FINRA’s BrokerCheck reveal that Brent M. Porges has been subject to eleven disclosure incidents. On May 9, 2008, Porges settled a customer dispute for $9,998.00 after a client alleged unauthorized trading on margin, fraud, and excessive commissions. On July 22, 2013, a customer received an award against Porges for $338,454.00 after alleging sales practice violations in connection with the management of their accounts, including unsuitability, excessive trading, and misrepresentation. On December 6, 2013, Porges settled a customer dispute for $178,500.00 after the customer alleged sales practice violations, unsuitability, excessive trading, and misrepresentation. Porges is also subject to a pending customer dispute from April 10, 2015, where a client has requested $900,000.00 in damages after the client alleged breach of contract, breach of duty of good faith and fair dealing, intentional torts and negligent failure to supervise. He has also been subject to six judgments/liens from November 4, 2010 – March 19, 2015.
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