New York Firm Missed ‘Glaring Red Flags’ of Churning

You can find original article here WealthManagement. Subscribe to our free daily WealthManagement newsletters.

A New York-based brokerage firm missed “glaring red flags” of churning by its reps that generated about one-third of the firm’s overall revenue, impacting 114 accounts that suffered millions of dollars in total investment losses.

Spartan Capital Securities was registered with FINRA in 2008 and has approximately 80 registered representatives working out of its headquarters in New York City, as well as two branch offices on Long Island. The FINRA complaint names Spartan as a defendant, as well as CEO Kim Monchik and several other employees.

FINRA’s complaint released this week stated that, starting in 2018 and through April 2022, the firm’s reps allegedly excessively traded 114 accounts, including 35 that were “churned” (in which a rep excessively buys and sells securities in a customer’s account to boost their commission). The cost-to-equity ratios in the excessively traded accounts ranged from about 16% to 491%.

According to FINRA, some of the churning occurred after the June 2020 effective date for the SEC’s Regulation Best Interest. Following this date, Spartan excessively traded in 92 retail accounts (many of which were churned), resulting in nearly $6 million in total losses.

Spartan Capital Securities did not respond to a request for comment prior to publication.

According to FINRA, Spartan “routinely” hired reps with histories of customer complaints and regulatory investigations, as well as histories of financial difficulties (several filed for bankruptcy while at Spartan). FINRA also claimed that the firm’s method of charging commissions misled customers as to the actual amount of commissions they were charged.

One of the reps named in the complaint is James Pecoraro, who registered with the firm in November 2019 out of its Garden City, N.Y. office. Pecoraro had previous run-ins with state regulators in Colorado (where his license was suspended for three years) and FINRA, which suspended him in both 2010 and 2022 for excessive trading (customer arbitration is pending).

Despite the claims (as well as a still-pending federal tax lien), Pecoraro excessively traded in eight customer accounts and churned two; in one case, he churned the account of a 72-year-old California resident who ran a company that manufactured products for the U.S. Navy.

In the case of an anonymous Spartan rep who wasn’t named as a defendant, FINRA Enforcement filed a complaint against him in 2021, charging him with churning and excessive trading, among other allegations. 

In 2022, the rep settled and agreed to an industry bar, but the firm allowed the rep “to continue to churn and excessively trade customer accounts, and cause harm to his customers, until days before his FINRA bar became effective.”

In addition to the high cost-to-equity ratios and turnover rates, FINRA argued that Spartan, Monchik and NYC Branch Office Manager Frederick Cammarano were aware of other red flags suggesting reps at Spartan were excessively trading, including large trading volumes, high losses, high trading costs and in-and-out trading, among other indications.