A brokerage firm accused of churning client accounts and years of supervisory failures has settled with FINRA to the tune of $2.8 million.
FINRA announced Tuesday it had sanctioned Aegis Capital, a New York-based firm with 300 registered representatives in its 23 branch offices, in a case involving allegedly excessive and unsuitable trading in customer accounts between July 2014 and December 2018. During that period, Aegis did not implement a supervisory system to comply with FINRA’s suitability rule, according to the regulator.
Additionally, FINRA said that Aegis failed to identify and address potentially excessive and unsuitable trading taking place at the firm, including trading by eight Aegis representatives who over-traded 31 customer accounts.
The trading in these accounts generated average cost-to-equity ratios of 71.6%, causing customers to incur more than $2.9 million in trading costs, according to FINRA. A ratio above 20% is considered problematic by the self-regulator.
Two Aegis supervisors, Joseph M. Giordano and Roberto Birardi, also failed to take reasonable steps to investigate and address red flags emblematic of the excessive trading, according to FINRA. The firm ignored more than 900 exception reports from its clearing firm that identified potentially unsuitable trading and more than 50 customer complaints alleging excessive, unsuitable or unauthorized trading in their accounts.
Giordano and Birardi, who supervised six of the representatives, allegedly failed to respond to 700 of the 900 exception reports. When Aegis’ compliance personnel pointed out deficiencies with internal systems used to monitor excessive trading at the firm, Aegis did not promptly address the situation.
FINRA’s investigation was sparked by an examination of the firm and a review of a customer’s arbitration complaint.
“Recognizing and responding to red flags is the hallmark of proper supervision and a critical component in preventing excessive and unsuitable trading in customer accounts,” Jessica Hopper, executive vice president and head of FINRA’s Department of Enforcement, said in a statement. “This matter demonstrates FINRA’s commitment to holding accountable the firm, supervisors and individuals responsible, and providing restitution to harmed customers.”
In settling the case without admitting or denying the charges, Aegis agreed to pay $1.7 million in restitution to 68 customers and a $1.1 million fine for Aegis’s supervisory violations.
Michael Ference, an attorney representing Aegis, said the firm is “pleased to have resolved this legacy matter.
“The referenced items occurred many years ago and relate solely to the activity of a discrete number of brokers,” Ference said in an emailed statement. “Aegis has subsequently invested significant capital to enhance its supervisory and compliance systems, which has enabled Aegis to detect, monitor and prevent the referenced activity.”
For veteran securities attorney Bill Singer, the Aegis case is an example of everything that’s wrong with Wall Street — both in terms of customer protection and inadequate regulation.
Singer, who worked as a regional attorney for the New York office of FINRA’s predecessor, the National Association of Securities Dealers, said the regulator is taking a “victory lap” for a settlement secured years after the firm’s failures should have been identified and addressed.
He added that without the presence of the customer complaint, the excessive trading may have continued and the settlement being celebrated this week may have taken even longer to materialize.
“What happened in 2014? What happened in 2015? What happened in 2016, 2017 and 2018? What happened is examiners went into Aegis, because it’s not a small, unheard of firm, and nobody spotted any of this,” Singer said. “You don’t get credit for reading toe tags in the morgue, and that’s essentially what this is. This is FINRA going into the morgue, looking at all these dead bodies and telling us what they died from. That’s not effective regulation.”
Singer said the case is also important because it unintentionally sends a message to the public that trading on your own may be the best way to avoid big losses. Examples of clients paying commissions only to lose millions represents a real threat to the traditional FINRA broker-dealer model, he said.
“It allows a customer to step back for a minute and ask, ‘Why are you using a stock broker? Why are you entering trades through a broker-dealer? Maybe you’d be better off trading on your own,’” Singer said. “Now I don’t necessarily agree that is an intelligent conclusion, but that’s what comes out of this.”
Giordano, who has 28 years of experience across 10 firms and served as manager of Aegis’s Melville branch, has agreed to a six-month supervisory suspension and $10,000 fine. Birardi, a 17-year veteran, has agreed to a three-month supervisory suspension and $5,000 fine.
The suspended supervisors must also complete 20 hours of continuing education.
This is the second FINRA suspension handed down to Giordano, according to FINRA BrokerCheck. In November 2007, he was suspended for 10 days and fined $7,500 on accusations of failure to properly supervise a registered representative who engaged in penny stock transactions for public customers without satisfying required penny stock disclosure requirements.
Birardi has not been previously suspended by FINRA, but he has been fined for his previous actions as a supervisor. According to BrokerCheck, he paid $71,125 to settle a customer complaint in July 2010.
In a BrokerCheck comment, Birardi said he was added to the 2010 customer complaint as branch manager one year after the initial complaint was submitted. He adamantly denied all allegations, stating they were “malicious and untrue.”
Giordano, Birardi and the attorneys representing them have not responded to requests for comment. Both individuals are still registered with Aegis.
To date, FINRA has reached settlements with four Aegis representatives. Two have been barred for churning and excessive and unauthorized trading, and two for excessive trading.