Joseph Stone Allegedly Failed to Supervise Excessive Trades

FINRA Complaint: Joseph Stone Capital to pay Restitution to Customers for Commissions, Fees  

The Financial Industry Regulatory Authority (FINRA) on September 8, 2022 reportedly censured Joseph Stone Capital, LLC for supervisory failures in connection with suitability requirements involving excessive trading, according to a Letter of Acceptance Waiver and Consent. From January 2015 through June 2020, Joseph Stone allegedly failed to identify or reasonably respond to red flags of excessive trading in 25 customer accounts that purportedly caused the customers to pay more than $1,037,000 in commissions, fees, and margin interest.  

In addition to the censure, the firm was reportedly ordered to pay restitution of $825,607.59 and implement a “reasonable heightened supervision plan” for five registered representatives who were allegedly involved and will maintain the plan for a period of no less than two years. 

FINRA Rule 311 0(a) requires that member firms “establish and maintain a system to supervise the activities of each associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable FINRA rules.” 

According the FINRA, the trades allegedly recommended in the accounts resulted in annualized turnover rates ranging from 6 to 57 and annualized cost-to-equity ratios ranging from 21 percent to 96 percent, making it unlikely that the customers’ accounts would reach their break-even points or earn a positive return. The customers allegedly paid over $1 million in commissions, fees, and margin interest, according to the findings. 

What is Excessive Trading or Churning? 

When a broker engages in excessive trading of securities in a customer’s account without considering the client’s investment goals and primarily to generate commissions that benefit the broker, the broker may be engaged in an illegal practice known as churning. 

Churning fraud is an illegal and unethical practice. The more a broker trades the more they get paid. In many cases this is enough incentive for unscrupulous brokers to over-trade in a client’s account. 

Often churning fraud occurs when a broker has discretionary authority (either actual or implied) to a client’s account, meaning they do not need the client’s consent to trade on their behalf. Churning may result in significant losses and expose the client to unnecessary tax liabilities. 

To learn more about excessive trading, see: Churning and Excessive Trading Attorneys to Recover Investment Losses 

What is Failure to Supervise? 

FINRA Rule 3110 (Failure to Supervise) requires a firm to establish and maintain a system to supervise the activities of its associated persons that is reasonably designed to achieve compliance with securities laws and regulations and FINRA rules. 

The rule gives requirements for a firm to have reasonably designed written supervisory procedures (WSPs) to supervise the activities of its associated persons and the types of businesses in which it engages. 

Among other things, a firm’s WSPs must address supervision of supervisory personnel and provide for the review of a firm’s investment banking and securities business, correspondence and internal communications, and customer complaints. WSPs should describe: 

• the specific individual(s) responsible for each review, 
• the supervisory activities such persons will perform, 
• the frequency of the review, and 
• the manner of documentation.  

Brokerage firms that fail to monitor the business activities of their employees may be liable for investment losses due to negligent supervision for the misconduct of their employees. 

The brokerage firms can be held responsible for any losses in a FINRA arbitration claim if it is determined that they failed to properly supervise their agent. 

If you are concerned about your investments with Joseph Stone Capital, the securities attorneys at The White Law Group may be able to help you. For a free consultation with an attorney, please call (888) 637-5510. 

The foregoing information, which is all publicly available, is being provided by The White Law Group. 

The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Seattle, Washington. For more information, please visit our website, www.whitesecuritieslaw.com.