Windsor Street Capital L.P. (formerly known as Meyers Associates L.P.) has been censured and fined $500,000.00 by Financial Industry Regulatory Authority (FINRA) according to a Hearing Panel Decision containing findings that (1) the firm neglected to construct and implement adequate supervisory systems and (2) failed to supervise two of the firm’s brokers who effected unsuitable trades in customer accounts. Department of Enforcement v. Windsor Street Capital L.P. Disciplinary Proceeding No. 2015046971701 (Oct. 30, 2018).
Funny, or not so funny thing is that Windsor Street Capital L.P. was expelled by FINRA in May 2018.
According to the Decision, between September of 2014 and June of 2015, unsuitable trades had been effected by two brokers, Nas Adel Allan and Gregory J. Anastos, in the account of an elderly couple. The customers reportedly complained by June of 2015, during the time that those brokers had engaged in a pattern of “round trip” trading, where they would sell the entirety of the customers’ stock position and then buy the same stock position back shortly thereafter without any consideration of whether the customers’ would incur losses. Evidently, commissions of up to 3.5 percent had been charged by the brokers for each trade executed in the customers’ accounts, so each round-trip trade cost customers’ to pay commissions that ranged between five and seven percent. FINRA stated that the commissions assessed in the customers’ accounts ranged between $5,000.00 and $16,000.00 each month.
The Decision additionally stated that beginning in May of 2015, margin trades were executed in the customers’ account by one of the firm’s brokers. Evidently, trades were effected by the broker on a discretionary basis; however, the broker did not properly obtain the customers’ permission to effect eighteen of the twenty six trades. Apparently, the customers’ account had been closed by December of 2015, by which point the customers’ sustained $94,000.00 in losses – a fifty percent decline in value from the initial principal investment. Evidently, while the customers’ suffered from catastrophic losses, trades entered in their accounts generated commissions totaling $100,000.00 for the firm or brokers. FINRA stated that trades were effected on an excessive basis and in a manner which failed to conform to the customers’ investment objectives.
Windsor Street Capital was cited by FINRA for having failed to set forth reasonable devices to oversee the trading in the customers’ accounts and examine the sales practices of the brokers for misconduct. The firm purportedly maintained written supervisory procedures but they were disregarded based upon the firms actions. In addition, supervisors at the firm were tasked with monitoring trading blotters to determine if trading was problematic; however, there were no requirements that the firm set forth to guide supervisory personnel in executing and evidencing reviews. Moreover, the blotters used by the supervisory personnel did not show the extent of customers losses or the amount of commissions which had been assessed for trading, hampering their ability to determine when trading was excessive and unsuitable. The Decision further stated that supervisors were left without guidance on how to follow up with customers and remediate any harm caused.
The Decision additionally stated that the supervisors were not required by the firm to take action against brokers when problematic trading patterns were detected. Plus, the firm seemingly disregarded red flags which could have led it to discover the brokers’ violative sales practices. For example, even the firm’s faulty trading blotters evidenced that abnormally large trades had been executed, and that trades were repetitively executed in the customers’ account; however, the supervisory personnel did nothing about it. FINRA indicated that the clearing firms used by the firm also housed information about the excessive turnover, commissions and losses incurred by the customers; however, the firm did not follow up on those red flags.
Critically, the Decision stated that after the customers lodged a complaint with the firm, no action had been taken to meaningfully address the issue. Indeed, it was not until four months after the customers complained that their account had been closed, and even at that point, a large commission was assessed on a final trade effected in their account. FINRA’s Hearing Panel found the firm’s egregious conduct to be violative of FINRA Rules 2010, 3110(a) and 3010(a), justifying the imposition of a $500,000.00 fine and censure.
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