The Securities and Exchange Commission filed anti-fraud and Regulation Best Interest violation charges today against five registered representatives from expelled Long Island broker-dealer SW Financial over extensive churning that the agency said cost investors nearly $1.7 million.
The five reps, who have all already been suspended or barred by Finra between 2022 and 2023 for sales violations, were charged with Reg BI violations “for recommending a short-term, high volume investment strategy to at least 16 customers without reasonable basis,” the SEC said.
The SEC also announced yesterday that it settled charges tied to the churning with SW Financial.
"Without admitting or denying the findings, SW Financial agreed to a censure and to pay disgorgement of $216,896 and prejudgment interest of $19,277," the SEC said in a press release.
From at least August 2018 through June 2022, representatives Michael Blumer, John Kuprianchik, David Page, Steven Thompson and Joseph Todaro recommended and executed more than 2,000 trades in 16 customers’ accounts without regard for the high transaction costs incurred by these customers, the SEC said in a civil complaint filed in U.S. District Court in the Eastern District of New York.
The customers sustained aggregate losses exceeding $1 million, while three of the brokers and the firm received more than $660,000 in commissions from excessing trading that made it “virtually impossible for investors to achieve a positive return in their accounts,” the SEC said.
The SEC said the reps violated anti-fraud and suitability provisions of the securities laws, as well as two Reg BI obligations. Those obligations are “reasonable basis,” because the reps failed to consider the costs of the recommended trades and the care obligation, because they failed to have a reasonable basis to believe that transactions were in the retail customer’s best interest, the regulator alleged.
The SEC is seeking permanent injunctive relief, disgorgement with prejudgment interest and civil penalties from the reps, who all worked for SW Financial before it was expelled by Finra in May 2023 for charging 15% commissions on private placements without disclosing the charges to clients.
Attorneys who represent investors said the SEC could have brought this case under pre-Reg BI securities laws.
“I don’t know that the resources of the agency are well spent here,” said Joe Wojciechowski, a partner at Stoltmann Law in Chicago.
“I don’t see these guys ponying up much cash. It is more just an easy pelt for the SEC and just another example of the agency taking the low-hanging fruit. I don’t think this teaches us anything about the direction Reg BI is going. This would have been a violation of securities laws before Reg BI,” Wojciechowski added.
Adam Gana, managing partner of Gana LLC in New York City, said he is “amazed that we’re still seeing churning cases in these little chop shows in 2023.”
Gana noted, however, that Reg BI does make these kinds of cases easier to win “because it is nearly impossible for a firm or rep to show that high volume trading with high commissions is ever in the best interest of the client.”
Prior to Reg BI, reps could claim their actions were “reasonable” under the suitability standards, he added.