Finra announced today that it has expelled New Jersey-based Monmouth Capital Management for churning and excessively trading Gold Star Family and other customer accounts in violation of Regulation Best Interest (Reg BI).

Finra found that between August 2020 and February 2023, six of Monmouth’s representatives “excessively traded 110 accounts, 42 of which were also churned, causing customers to incur approximately $3.9 million in commissions and trading costs and to suffer substantial losses, in violation of the Care Obligation of Reg BI,” the regulator said in a statement.

“Monmouth abdicated its responsibility to reasonably supervise its representatives’ trading, resulting in substantial harm to customers, including Gold Star families. The egregiousness of the firm’s sales practice and supervisory violations necessitated expulsion of the firm from FINRA membership,” Christopher J. Kelly, Senior Vice President and Acting Head of FINRA’s Department of Enforcement said in a statement.

The broker-dealer, in operation since 2017, agreed to settle the expulsion and agree to Finra’s findings. The expulsion is at least the second time in recent months that Reg BI violations has been cited as the justification to shut down a rogue broker-dealer. In May, Finra expelled New York-based SW Financial for multiple Reg BI and suitability violations,

Monmouth was also cited by Finra for failing to supervise its reps, and for providing false and misleading disclosures to retail customers on its client relationship summary (Form CRS). This is Finra’s second expulsion of a firm for violations that include Reg BI infractions.

In one instance, a customer’s account had an annualized cost-to-equity ratio of more than 103%—meaning the customer’s account would have had to grow by more than 103% just to cover commissions and trading costs. In another instance, a customer’s account had an annualized cost-to-equity ratio of more than 72%, resulting in a loss of $158,078.

“Monmouth failed to take reasonable steps to supervise the trading in these customers’ accounts, despite numerous red flags indicative of churning. For example, one customer’s account appeared on 24 consecutive monthly exception reports that flagged the account for churning. However, no one at Monmouth reviewed any of these 24 reports and thus the firm failed to detect the churning,” Finra said.

Several of the churned or excessively traded accounts were owned by Gold Star Families who had funded their accounts with a military death gratuity payment or a Servicemembers’ Group Life Insurance (SGLI) payment following the death of a family member who had served in the Armed Forces, Finra said 

In one instance, Monmouth opened an account for the benefit of a 13-year-old child following the death of the child’s father. Monmouth representatives bought and sold more than $1.9 million in securities in the account over a 20-month period, generating nearly $80,000 in commissions and trading costs on an account which carried an average daily balance of $150,000.

FINRA also found that between November 9, 2020, and February 28, 2023, “Monmouth made false and misleading statements on its Form CRS or customer relationship summary. These misrepresentations included a statement that Monmouth monitored customer accounts for risks using daily exception reports, though the firm never utilized such reports,” Finra said.

This matter originated from a customer complaint made to FINRA concerning a former Monmouth registered representative, the regulator said.

A call made to the Holmdel, N.J.-based firm and its CEO Robert Steven Meyer for comment was not immediately returned.

In a separate, but related action, the SEC has charged former Monmouth broker Caz Craffy with allegedly using his job as a U.S. Army financial counselor to defraud Gold Star family members and others by engaging in unauthorized and excessive trading of death benefits.

According to the SEC's complaint, Craffy, of Colts Neck, N.J., allegedly used his job to “manipulate grieving family members by directing them to transfer their benefits into brokerage accounts he managed,” the SEC said in its complaint.

From there, the SEC said, Craffy engaged in unauthorized and risky trading that cost customers more than $1.64 million in commissions and fees, “most of which Craffy pocketed, while the accounts he managed suffered approximately $1.79 million in realized losses and faced additional unrealized losses of approximately $1.8 million,” the SEC said.

In what the SEC refers to as “a particularly egregious offense,” Craffy misappropriated $50,000 from the IRA account of a minor child whose parent had died on active duty, the SEC said.

Craffy was barred by Finra in December, 2022.