The Financial Industry Regulatory Authority (FINRA) announced today that it has expelled Monmouth Capital Management for churning and excessively trading customer accounts in violation of Regulation Best Interest (Reg BI), failing to supervise its representatives, and providing false and misleading disclosures to retail customers on its client relationship summary.
FINRA found that between August 2020 and February 2023, Monmouth, acting through six representatives, excessively traded 110 accounts, 42 of which were also churned, causing customers to incur approximately $3.9 million in commissions and trading costs and to suffer substantial losses, in violation of the Care Obligation of Reg BI and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.
In one instance, a customer’s account had an annualized cost-to-equity ratio of more than 103 percent—meaning the customer’s account would have had to grow by more than 103 percent just to cover commissions and trading costs. In another instance, a customer’s account had an annualized cost-to-equity ratio of more than 72 percent, resulting in a loss of $158,078.
Monmouth failed to take reasonable steps to supervise the trading in these customers’ accounts, despite numerous red flags indicative of churning. For example, one customer’s account appeared on 24 consecutive monthly exception reports that flagged the account for churning. However, no one at Monmouth reviewed any of these 24 reports and thus the firm failed to detect the churning.
Several of the churned or excessively traded accounts were owned by Gold Star Families who had funded their accounts with a military death gratuity payment or a Servicemembers’ Group Life Insurance (SGLI) payment following the death of a family member who had served in the Armed Forces.
FINRA also found that between Nov. 9, 2020, and Feb. 28, 2023, Monmouth made false and misleading statements on its Form CRS. These misrepresentations included a statement that Monmouth monitored customer accounts through daily exception reports, though the firm never utilized such reports.
This matter originated from a customer complaint made to FINRA concerning a former Monmouth registered representative.
In settling these matters, Monmouth accepted and consented to the entry of FINRA’s findings without admitting or denying them.
This is the second firm expulsion that has included violations of Reg BI, to date. In May, FINRA expelled broker-dealer SW Financial for multiple violations, including making misrepresentations to customers in its sales of private placement offerings of pre-initial public offering (pre-IPO) securities, churning customer accounts, and failing to supervise its representatives.
