Monmouth Capital Management LLC, a securities broker dealer headquartered in Point Pleasant Beach, New Jersey, has been expelled from Financial Industry Regulatory Authority (FINRA) membership because it churned customer accounts and failed to supervise certain representatives, resulting in losses to customers. Letter of Acceptance, Waiver, and Consent No. 2022076459303 (July 6, 2023).
Between August of 2020 and February of 2023, Monmouth came under scrutiny due to the trading practices of six of its stockbrokers. These stockbrokers excessively traded 110 customer accounts, adopting a strategy where the entire value of these accounts has been concentrated in a few securities. The securities were usually held for a short duration, spanning from weeks to months, before being switched out for another set of securities.
The accounts showed annual cost-to-equity ratios ranging between 21.75 percent and 128.5 percent, with an average ratio of 52.18 percent. The annual turnover rates for these accounts fluctuated between 6.05 and 35.24, averaging 11.78.
FINRA indicated that these trading patterns did not align with customers’ investment profiles. For perspective, the total trading costs for these 110 accounts reached $3,953,492.00, out of which $3,553,102.00 were solely in commissions. 57 of these accounts were held by senior citizens.
Another instance involved two accounts belonging to siblings aged 13 and 14. These accounts were funded using the insurance payouts they received after their military serviceman father’s death. In these accounts, Monmouth’s trading approach resulted in high annual cost-to-equity ratios, excessive trading costs, and losses.
Out of the 110 excessively traded accounts, the securities broker dealer churned 42 of them, facilitated by four stockbrokers. This churning involved engaging in excessive trading to generate more commissions. A significant portion of these churned accounts belonged to seniors, and many of the account holders were novice investors. They largely followed their representative’s advice, which allowed Monmouth to exercise almost complete control over those investment accounts.
Examples of excessive trading included a customer with limited experience, who consistently followed Monmouth’s recommendations, amassing large trading costs and losses over a 16-month span. Another customer, over 29 months, incurred substantial costs and losses due to the short-term trading recommendations by Monmouth.
In 2020, during a routine examination by FINRA, Monmouth was informed about its failure to supervise trading and FINRA’s concerns about excessive trading. The securities broker dealer indicated to FINRA that it had made various improvements to its supervision system. However, these statements were later found to be inaccurate. Monmouth’s supervisory system, including its written supervisory procedures, were flawed. For instance, the firm’s procedures until April of 2021 didn’t mention the Regulation Best Interest (Reg BI), and later procedures contained misinformation about the regulation. Moreover, Monmouth failed to utilize exception reports, which could have helped identify potential excessive trading cases.
FINRA indicated that had Monmouth utilized these reports, they would have identified several customer accounts that consistently displayed signs of excessive trading. Instead, the securities broker dealer’s supervision heavily depended on a daily trade blotter, which only captured the previous day’s trades and failed to provide comprehensive information on customer account trading patterns.
FINRA found that Monmouth Capital Management LLC violated FINRA Rules 2010 and 3110 as well as Securities Exchange Act of 1934 Rule 15.
