Marc A. Arena of Westbury, New York, a stockbroker with Newport Coast Securities, Inc., was suspended for twenty-three months from associating with any Financial Industry Regulatory Authority (FINRA) member firm in a principal capacity, while being suspended for ten business days from association with any FINRA member firm in any capacity per an Order Accepting Offer of Settlement containing findings that Arena, along with other representatives working for Newport, excessively traded and churned twenty-four customers’ accounts. Department of Enforcement v. Newport Coast Securities, et al., No. 2012030564701 (Oct. 20, 2015).
According to the Order, Newport Coast and five of its Stockbrokers excessively traded and churned twenty-four customers’ accounts. FINRA found that the misconduct should have drawn scrutiny and been stopped, considering that cost/equity ratios often exceeded ten percent, turnover rates were typically over one hundred, there were mass amounts of in-and-out trading, customer accounts were highly margined and concentrated in one security, there were a significant number of transactions where the total commission/markup per trade exceeded three percent (some exceeding four percent), there was a deceptive mix of riskless principal and agency trading, inverse and leveraged exchange traded funds and exchange traded notes remained in accounts for multiple trading sessions, trades marked as unsolicited were actually solicited, and practically all of the customer accounts at issue in the matter incurred substantial losses.
The Order stated that Arena was responsible for supervising one of the individuals, Leone, involved in the aforementioned conduct. Arena, another supervisor, and the firm’s compliance department all reportedly saw the misconduct transpiring, yet no one took any meaningful steps to stop it. Rather, according to the Order, the managers, a supervisor, and the firm’s former president all profited via overrides on the churned accounts.
Arena, according to the Order, was provided by Newport Coast with significant compensation for becoming the branch office manager. In addition to receiving a ninety percent payout of his gross production, he also received an override on each representative’s production that amounted to the difference between the ninety percent and the representative’s payout. For example, Arena received a six percent override on one of his subordinate’s (Leone) eighty-four percent payout.
Arena, in his branch office manger capacity, was responsible for reviewing transactions, monitoring for excessive trading, and ensuring transactions were suitable. The Order indicated that Arena approved new accounts and reviewed transactions, yet did not provide meaningful oversight.
The Order further stated that Arena knew that Leone was concentrating and heavily margining accounts, was aware that Leone’s customers were losing money, and knew that Leone was overcharging and excessively trading accounts. However, according to the Order, his supervision was limited to reviewing what Leone charged on individual transactions. Arena reportedly failed to ask Leone to cease breaking up transactions into multiple orders (each of which contained separate commissions), nor were there consequences when Leone ignored emails addressing isolated transactions.
FINRA found that Arena never verified a customer’s investment objective, never performed a profit and loss analysis or change of equity calculation, never calculated a turnover rate or cost-to-equity ratio, never inquired about why trades were broken up into multiple orders resulting in multiple commissions, never initiated a call to a customer (apart from his own accounts), never looked at customer account statements or examined account activity over time, and never spoke to a customer about his account.
Arena consented to FINRA’s findings that he failed to supervise aforementioned conduct in violation of FINRA Rule 2010 and NASD Rule 3010 (Leone and other individuals, as a consequence of excessively trading customers’ accounts, were charged in a FINRA Complaint for violating NASD Rules 2310 and 2110, FINRA Rules 2110 and 2010, and NASD IM-2310-2, and churning in violation of Section 10(b) of the Exchange Act, Rule 10b-5, FINRA Rules 2020 and 2010, and NASD Rules 2120 and 2110). Arena was also found to have violated NASD Rule 2110, NASD IM-1000-1, FINRA Rules 2010 and 1122, and Article V, Section 2(c) of the FINRA By-Laws as a result of failing to disclose liens.
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.
Stockbroker misconduct, such as the type indicated with Newport’s Stockbrokers here, 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.
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.
Public disclosure records via FINRA’s BrokerCheck reveal that Arena has been subject to six disclosure incidents. On May 16, 2007, Arena was subject to a $27,479.00 tax judgment/lien. On July 11, 2008, Arena was subject to a $31,519.00 tax judgment/lien. On March 14, 2010, Arena was subject to a financial compromise.
On May 10, 2013, Arena settled a customer dispute for $9,999.00 after a customer alleged churning, misrepresentation, and breach of fiduciary duty. On September 16, 2013, Arena settled a customer dispute for $110,000.00 after a customer alleged excessive and unauthorized trading, suitability, omissions, misrepresentation, breach of contract, breach of fiduciary duty, and negligence.
Guiliano Law Group
If you have been the victim of securities fraud and you have a complaint, you should consult with an attorney. The practice of Nicholas J. Guiliano, Esquire, and The Guiliano Law Group, P.C., is limited to the representation of investors in claims for fraud in connection with the sale of securities, the sale or recommendation of excessively risky or unsuitable securities, breach of fiduciary duty, and the failure to supervise. We accept representation on a contingent fee basis, meaning there is no cost unless we make a recovery for you, and there is never any charge for a consultation or an evaluation of your claim. For more information contact us at (877) SEC-ATTY.
