Vanderbilt Securities LLC a brokerage firm headquartered in New York New York and its chief compliance officer Barry Champney have been sanctioned by Financial Industry Regulatory Authority (FINRA) founded on accusations that the firm and Champney failed to adequately supervise a registered representative who churned and effected unsuitable trades in a customer’s account. Letter of Acceptance Waiver and Consent No. 2015045984002 (July 26, 2018).
According to the AWC, an account was established at Vanderbilt Securities by BP – a ninety-three-year-old customer, wherein registered representative Mark Kaplan was responsible for servicing BP’s accounts. Apparently, Kaplan was relied upon by BP to make virtually all decisions in BP’s account. The AWC stated that BP, who had already been suffering from mental decline, was ultimately diagnosed with dementia in 2015.
The AWC stated that from March of 2011 to March of 2015, more than 3,500 transactions had been executed in BP’s accounts by Kaplan, causing Kaplan and Vanderbilt to generate commissions totaling $735,000.00 while BP suffered trading losses totaling $723,000.00. The AWC revealed that BP’s two accounts had annual cost-to-equity ratios ranging between sixteen percent and eight hundred fourteen percent; and the annual turnover rates ranged between two and one hundred eighteen.
The AWC revealed that from March of 2011 to March of 2015, the firm neglected to create and implement an adequate supervision system and written supervisory procedures aimed at detecting and putting a stop to churning and excessive trading in customer accounts. The AWC stated that the firm’s existing written supervisory procedures lacked direction about identifying or preventing those sales practice violations despite the procedures indicating that it could be unsuitable for the same security to be traded at frequent intervals.
The AWC further stated that cost-to-equity ratios and turnover rates in customer accounts were not reasonably tracked by the firm. Apparently, calculations were performed by the firm on a manual basis and typically when a complaint was lodged by the customer. The AWC stated that the firm employed no sufficient means for identifying excessive trading and churning utilizing cost-to-equity ratios or turnover rates.
Instead, the AWC apparently utilized a monthly activity report which was supposed to identify accounts containing more than forty trades in a given month. However, the supervisory procedures reportedly failed to take the activity report into consideration or guide supervisory personnel as to its use. Further, the report did not uncover patterns of excessive trading in customer accounts that occurred over several months.
The AWC revealed that Champney utilized the monthly activity report to make determinations on whether to take action when an account appeared to have been subject of excessive trading. Yet, written supervisory procedures utilized by the firm failed to address whether and to what extent supervisory action was justified. The procedures apparently omitted any requirement for taking action when actively traded accounts were visible on the monthly activity report.
According to the AWC, Champney sometimes sent customers a letter when their accounts showed up on the monthly activity report; however, customers were not made aware in the letter about the volume of trading as well as commissions or losses pertaining to trades placed in their accounts. In addition, written supervisory procedures failed to detail what should be done when customers did not acknowledge receipt of the letter. FINRA found the firm’s supervisory failures violative of FINRA Rules 2010, 3110 and NASD Rule 3010.
The AWC also revealed that as Kaplan’s supervisor, Champney knew about commissions, losses and the extensive volume of trading in BP’s account; BP’s account was visible on the monthly activity report on at least twenty-three occasions. Evidently; however, neither Champney nor Kaplan discussed those losses and commissions with BP. The AWC stated that even after BP’s son e-mailed Kaplan to complain about losses, neither Champney nor Kaplan spoke with BP about it.
FINRA found the firm and Champney to have failed to supervise Kaplan in violation of FINRA Rules 2010 and 3110 as well as NASD Rule 3010. Champney has been fined $5,000.00 and suspended from associating with any FINRA member in any principal capacity; Vanderbilt has been censured and fined $100,000.00; and Kaplan has been barred in all capacities.
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