Joseph Gunnar & Co. LLC, a FINRA brokerage firm headquartered in New York, New York, has been censured and fined $60,000.00 by Financial Industry Regulatory Authority (FINRA) founded on allegations that the firm failed to develop supervisory procedures to identify and stop unsuitable trades from being executed in customers’ investment accounts. Letter of Acceptance, Waiver and Consent, No. 2013039507102 (Dec. 5, 2017).
According to the AWC, the top-producing registered representative, AS, was also the equity partner and managing director of Joseph Gunnar & Co. LLC. Between January of 2010 and January of 2015, AS made investment recommendations to a seventy-year-old widow, JM, who held two investment accounts at the firm. The AWC stated that JM had a $300,000.00 net worth and intended on investing on a moderate to aggressive basis.
JM was reportedly exposed to AS’ ongoing recommendations for her to buy highly risky securities that were in no way consistent with JM’s investment profile. Those recommendations caused JM’s investment account to be overly concentrated in speculative investments, and her investment accounts made up most of the liquid assets that she owned. The AWC additionally mentioned that AS traded speculative securities in JM’s account in a frequent manner, utilizing an in-an-out trading strategy that caused JM to incur at least $150,000.00 in investment losses.
The AWC stated that the firm failed to appropriately supervise the accounts that AS effected possible unsuitable trades in. Apparently, the in-and-out short-term trading of the customer’s assets and over-concentration of the customer’s accounts had not been supervised by the firm because there were no policies created and implemented to detect and prevent those risks.
Evidently, the firm relied upon a branch manager to supervise AS’ conduct; however, the were no adequate tools that the firm provided the branch manager so that a suitability determination could be made with respect to the investments that AS recommended. The AWC stated that the firm did not provide the branch manager with any exception reports that could have determined when an over-concentration of customer assets had occurred.
The AWC indicated that there was no process by which the branch manager could have assessed the risk of securities as possibly failing to be consistent with the investment profile of the customer or, and no process by which the branch manager could assess excessive trading. Rather, a manual review of trading activities was the branch manager’s only mechanism to review transactions – a review that did not take into account any information concerning concentration of customer assets or the risk level of securities purchased and sold in the customer’s account.
The AWC further specified that the branch officer’s manual review of trading failed to address and prevent unsuitable trading. Apparently, the branch manager was not even furnished with any active accounts report that the firm put in place; the information was instead furnished to the firm’s compliance department. Consequently, the firm failed to identify red flags in connection with AS’ activities, including: his excessive commissions in customer accounts; the level of investment risk that customers were exposed to; and concentration of customers’ accounts. Further, the firm failed to address that AS’ recommendations were made to customers that could not handle his approach financially, or that AS’ short-term trading strategy maintained a history of producing losses in the customers’ investment accounts.
In one circumstance, the AWC indicated that customer JM was advised to make a $72,000.00 investment in a microcap pharmaceutical entity’s initial public offering. The prospectuses for the offering evidenced that the entity was exposed to losses year after year as a result of the entity’s operations, raising concerns about the entity’s ability to stay afloat. Evidently, JM sold the investment two days later for a loss. FINRA concluded that the firm did not identify the red flags relating to the investment amount, as well as the risk factors and short holding period of the investment.
The AWC stated that Joseph Gunnar additionally failed to identify that a recommendation was made by AS for a customer to make a $92,340.00 investment in a real estate investment trust. Apparently, the customer’s net equity was $63,556.00. The AWC stated that the customer did not have adequate cash to effect the transaction, leading AS to effect a sale of the investment to cover costs of the purchase. The firm failed to identify that AS potentially made unsuitable investment recommendations to the customer in that regard.
Moreover, the firm’s failure to identify unsuitable trading was evidently caused by the firm’s failure to respond in any manner outside of sending a generic letter to the customer that asked the customer to confirm the activity in the customer’s account. JM’s transactions were revealed in the company’s active accounts report, demonstrating seven months of AS’ activities and commissions earned. FINRA found that the firm’s supervisory failures constituted a violation of FINRA Rules 2010, 3110(a), 3110(b), as well as NASD Rules 3010(a) and 3010(b).
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