Adam R. Tau of New York, New York, a registered representative with Garden State Securities, Inc., was fined $7,500 and suspended from association with any Financial Industry Regulatory Authority (FINRA) member in any and all capacities for two months after consenting to findings that Tau had made unsuitable recommendations and engaged in discretionary trading. Letter of Acceptance, Waiver and Consent, No. 2013038121201 (Dec. 11, 2015).
According to the AWC, from November 2011 through February 2012, while Tau was associated with Garden State, he had made unsuitable recommendations to customer RD, a retired person with a conservative investment objective and risk tolerance of limited assets and income. The AWC stated that Tau had recommended five purchases of common stock in a publicly traded company, Company W, totaling $204,000.
The AWC noted that as a result of RD’s purchases based on Tau’s unsuitable recommendations, RD had a concentrated position of Company W stock in his brokerage account that represented an estimated seventy percent of RD’s liquid net worth. The AWC stated that as of February 2012, RD’s cumulative stock position in Company W represented all of the assets in his accounts, which FINRA claimed unnecessarily exposed RD to a risk of loss. Company W’s stock reportedly experienced several price declines during the relevant period. Tau reportedly sold RD’s shares between March and August 2012 – which resulted in an estimated $30,000 in losses.
FINA found that Tau’s recommendation to RD that he invest the $204,000 in Company W’s stock was unsuitable for him in light of the concentrated nature of the investment and his conservative investment profile, age and limited financial means. Consequently, FINRA found Tau violated NASD Conduct Rule 2310, IM-2310-2, and FINRA Rule 2010.
According to the AWC, Tau had also exercised discretion in RD’s account by effecting ten trades of Company W’s stock prior to gaining authorization from RD. Tau also reportedly failed to obtain written acceptance of the account as discretionary by his firm. FINRA found that Tau had violated Conduct Rule 2510(b) and FINRA Rule 2010 in this regard.
FINRA requires that a member or an associated person must have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the member or associated person to ascertain the customer’s investment profile.
A customer’s investment profile includes, but is not limited to, the customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information the customer may disclose to the member or associated person in connection with such recommendation.
Prior to the recommendation of any security, the broker must first understand the risk and characteristics of the securities being recommended, and whether that security is suitable for any customer. The second step, in connection with the recommendation of a particular investment or investment strategy, is to determine whether the transaction is suitable for that particular customer.
By definition, a broker is liable for making unauthorized trades without the customer’s prior authorization. Absent written discretion, it is a violation of Section 10(b) of the Exchange Act, and Rule 10b-5, as promulgated thereunder, to effect transactions in customer accounts without their prior authorization or consent.
Customers also have a duty to review securities purchase and sale confirmations and review their securities accounts. If a stockbroker has placed unauthorized transactions in a customer account, the customer under most circumstances has a duty to act, or a duty to complain, or else generally, the customer may be deemed to have ratified these transactions, with actual or imputed knowledge, by doing nothing. Under such circumstances, a customer’s damages may be limited to the time they knew or should have known about the unauthorized transactions.
Public disclosure records via FINRA’s BrokerCheck reveal that Tau settled a customer dispute on August 19, 2013, for $18,000 after the client alleged that Tau made unsuitable recommendations.
Guiliano Law Group
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