From January 2015 to June 2020, Joseph Stone Capital and eight of its brokers engaged in excessive trading in several customer accounts and made considerable commissions for themselves and the firm. This caused the customers to over-pay and never see a return on their investments.
FINRA made the announcement on September 8, 2022, and levied a fine of $1.04 million against the firm. The firm also failed to create adequate Written Supervisory Procedures (WSPS) that complied with FINRA Rule 2111.
FINRA also suspended the eight brokers for periods from three to eight months. Some are no longer registered with Joseph Stone Capital. Those who continue to work for the firm will be under increased supervision for up to two years. Two reps were barred for refusing to respond to FINRA’s request for information during their investigation.
Three supervisors were also suspended for failing to respond to red flags that showed churning and failing to reasonably identify the signs. They received exception reports sent by Joseph Stone Capital’s clearing firm, which included an “active account report” that red-flagged those accounts with high commission to equity ratios. Customer accounts were charged thousands of dollars even after being identified in a red-flag report.
The individual responsible for reviewing the report rarely did so, allowing the eight brokers to continue churning the accounts. These accounts also saw annualized turnover rates of 6 to 57, leading to annualized cost-to-equity ratios of 21% to as much as 96%. This meant that these accounts would never see a positive return or even reach a break-even point.
The representatives in question charged commissions that “substantially exceeded” the firm’s restrictions. Over time, these customers paid over $1.3 million in commissions, fees, and margin interest.
In the disclosure, Joseph Stone Capital neither admitted nor denied the findings, and accepted the sanctions of censure and disgorgement. Joseph Stone Capital will pay $825,000 in restitution to the clients and the brokers will pay $211,000 to their clients.
Is Your Account Being Churned by Your Broker?
Churning is an unethical—and illegal—practice when a broker continually trades in a customer’s account to continue generating commissions. Continual trading can lead to substantial losses in your brokerage account if left unchecked. They can also lead to a tax liability for a customer, even if the account made money.
How do you know if your broker is churning? For one thing, if you are not seeing any gains but being charged frequent commissions, your account may be over-traded. But you must watch your accounts closely, and be ready to ask questions. Then ask more if the first answer doesn’t tell you what you need to know.
When your account is traded, you generally receive multiple notices letting you know about the trades. How many of these notices are you getting every week?
Many investments, such as mutual funds, are intended for long-term holding and not traded frequently. If you find that long-term investments are traded frequently, your account may be churned.
One way to prevent churning entirely is to maintain full control over your account, and not give the broker discretionary authority. That means the broker will have to contact you prior to making any type of changes or trades.
Paying close attention to your accounts is vital to prevent churning and other unwanted activity. Review statements, ask questions, and know what each account is doing. If you believe your broker is engaging in churning or other activity, consider speaking with a securities law attorney who can help.
Did You Invest With Joseph Stone Capital?
Silver Law Group represents investors in securities and investment fraud cases. Our lawyers are admitted to practice in New York and Florida and represent investors nationwide to help recover investment losses due to stockbroker misconduct. If you have any questions about how your account has been handled, call to speak with an experienced securities attorney. Most cases are handled on a contingent fee basis, meaning that you won’t owe us until we recover your money for you. Contact us today at (800) 975-4345 and let us know how we can help.