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FINRA Takes Victory Lapse in Aegis Capital Regulatory Settlement
November 10, 2021
This is the FINRA Press Release headline:
https://www.finra.org/media-center/newsreleases/2021/finra-orders-aegis-capital-corp-pay-1-point-7-million-restitution
These are the underlying FINRA AWC settlements:
Aegis Capital Censured and Fined $1.05 Million by FINRA and Ordered to Pay $1.7 Million in Restitution and Undertake Supervisory Review
In the Matter of Aegis Capital Corp., Respondent (FINRA AWC 2016051704305)
https://www.finra.org/sites/default/files/fda_documents/2016051704305
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For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Aegis Capital Corp. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Aegis Capital Corp. has been a FINRA member firm since 1984 with over 300 registered representatives at 23 branches. In accordance with the terms of the AWC, FINRA imposed upon Aegis Capital Corp. a Censure, a $1,050,000 fine, $1,692,256.44 in restitution, and an undertaking to implement an independent consultant's recommendations pertaining to supervisory systems and written supervisory procedures. As alleged in part in the "Overview" section of the AWC [Ed: footnote omitted]:
From July 2014 through December 2018, Aegis failed to establish, maintain, and enforce a supervisory system, including written supervisory procedures (WSPs), reasonably designed to achieve compliance with the suitability requirements of FINRA Rule 2111 as it pertains to excessive trading. As a result, Aegis failed to identify trading in hundreds of customer accounts that was potentially excessive and unsuitable, including trading conducted by eight Aegis registered representatives in the firm's Melville and Wall Street branches whose trading in the accounts of 31 firm customers resulted in an average annualized cost-to-equity ratio (or break-even point) of 71.6%, an average annualized turnover rate of 34.9, combined customer costs (including commissions, markups or markdowns, margin interest and fees) of more than $2.9 million, and cumulative losses of $4.6 million.Additionally, from July 2014 to June 2019, Aegis failed to establish, maintain, and enforce a supervisory system, including WSPs, reasonably designed to achieve compliance with the suitability requirements of FINRA Rule 2111 when selling leveraged, inverse, and inverse-leveraged Exchange-Traded Funds (Non-Traditional ETFs) to retail customers. As a result, Aegis failed to identify customers who purchased and held Non-Traditional ETFs for extended periods of time, or whose purchase was inconsistent with their recorded investment objective, risk tolerance or finances.By virtue of the foregoing, Aegis violated NASD Rule 3010 and FINRA Rules 3110 and 2010.
Aegis Capital Branch Owner/Manager and Branch Supervisor Fined, Suspended, and Ordered to Undertake Continuing Education for Supervisory Lapses
In the Matter of Joseph Michael Giordano and Roberto Birardi, Respondents,(FINRA AWC 2016051704306)
https://www.finra.org/sites/default/files/fda_documents/2016051704306
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For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Joseph Michael Giordano and Roberto Birardi submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Giordano was first associated with a FINRA member firm in 1992 and in February 2010, he was registered with Aegis Capital Corp, where he was a Co-Owner/Designated Branch Manager of the Melville, Long Island branch. The AWC asserts that Birardi was first associated with a FINRA member firm in 2003, and in March 2010, he was registered with Aegis Capital Corp, where he is a Designated Supervisor of the Melville branch. In accordance with the terms of the AWC, FINRA imposed upon:
- Giordano: a $10,000 fine, a six-month suspension from association with any FINRA member in any Principal-only capacity, and an undertaking to complete 20 hours of continuing education concerning supervisory responsibilities.
- Birardi: a $5,000 fine, a thre-month suspension from association with any FINRA member in any Principal-only capacity, and an undertaking to complete 20 hours of continuing education concerning supervisory responsibilities.
As alleged in part in the "Overview" section of the AWC [Ed: footnote omitted]:
From July 2014 through December 2018, Giordano and Birardi failed to reasonably supervise six Aegis registered representatives who worked in the firm's Melville branch (the Aegis Representatives). As the designated supervisory principals, Giordano and Birardi were presented with but did not respond to multiple red flags identifying potentially excessive and unsuitable trading in customer accounts managed by the Aegis Representatives, including, among others, more than 700 exception reports generated by Aegis's clearing firm.As a result, the Aegis Representatives engaged in excessive and. unsuitable trading in at least 23 customer accounts, generating annualized turnover rates ranging from 4.2 to 96.3, annualized cost-to-equity ratios ranging from 21.3% to 164.6%, combined customer costs (including commissions, markups or markdowns, margin interest and fees) of more than $2.6 million, and cumulative losses of $4 million.By virtue of the foregoing, Giordano and Birardi violated NASD Rule 3010 and FINRA Rules 3110 and 2010.
The FINRA Press Release makes much about the self-regulatory-organization's role as a cash register that rings up millions in fines. Ka-ching!
The FINRA Press Release trumpets that folks were suspended. That'll show 'em!
The FINRA Press Release admonishes the respondents for "failing to respond to red flags." Shame on ya!
The FINRA Press Release wrings its hands about "customers whose accounts were excessively and unsuitably trade." Oh my!!
As FINRA would spin the two AWCs above, the 2021 settlements somehow demonstrate that FINRA is committed to effective regulation whereby member firms and associated persons are held accountable and victimized customers are aided by restitution.
That's all fine talk but is there anything of substance behind it? What exactly did the respondents admit to doing wrong? Not set out in the FINRA headline is this portion of the Acceptance, Waiver and Consent settlement agreement (the "AWC"):
ACCEPTANCE AND CONSENT
A. Respondent hereby accepts and consents, without admitting or denying the findings and solely for the purposes of this proceeding and any other proceeding brought by or on behalf of FINRA, or to which FINRA is a party, prior to a hearing and without an adjudication of any issue of law or fact, to the entry of the following findings by FINRA:
Buried amid the bland prose of the AWCs is that the respondents accepted and consented to the settlement "without admitting or denying the findings . . ." How Zen-like: to accept and consent without admitting or denying. How did Shakespeare put it -- full of sound and fury, signifying nothing.
FINRA alleged in the AWCs that from July 2014 through December 2018 (and separately through June 2019), Aegis Capital had failed to establish, maintain, and enforce a supervisory system. Separately, FINRA alleged that from July 2014 through December 2018, Giordano and Birardi failed to reasonably supervise six Aegis registered representatives. Here we are in November 2021, and FINRA has published a Press Release about a settlement in which no respondent admits or denies anything AND the supervisory lapses that constitute the violations go back to July 2014 -- which is over seven years ago. Apparently, it doesn't require much for FINRA to take a victory lap or perhaps we should call it a victory lapse?
Of what use is a Wall Street regulator that is supposed to be conducting regular oversight of its member firms but misses outrageously excessive and unsuitable trading in customer accounts during 2014, 2015, 2016, 2017, 2018 (and in some instances 2019)? Worse, that same self-regulatory-organization can't get out of its own way and requires three or more years from the last cited inappropriate trade before it can muster up the wherewithal to settle the allegations in 2021, and, go figure, but after all these years and millions in losses, FINRA enters into a settlement without requiring any admission of wrongdoing. Seems more like a racket than an effective regulatory regimen.
At some point this transitions from idiocy to shamefulness. I mean, for godsakes, just throwing FINRA's words back into its face, for nearly six years some 31 public customers were subjected to cumulative losses of $4.6 million. Six years. 31 customers. $4.6 million in losses. For six years, no FINRA examiner noticed the problems; for six years, no FINRA examiner was aware of the red flags of failing supervision. Not comforting is it? How the hell does FINRA have the audacity to criticize its member firm when the regulator itself was oblivious to the same set of facts? All of which compels me to ask one simple, stark question: Did FINRA learn nothing from its failures to detect Bernie Madoff's years of fraud?
In the end, there's nothing here to gloat about from FINRA's perspective despite the fact that that's just what the self-regulatory-organization is doing. The AWCs are nothing more than mopping up. Putting a price-tag on violations of FINRA rules is not regulating. It's retail. It's a thrift shop. It sure as hell isn't Wall Street regulation.