The Financial Industry Regulatory Authority (FINRA) has expelled from membership Reid & Rudiger LLC and barred cofounders Clifford Reid and CEO Edward Rudiger, Jr. from association with any member firm for churning and excessively trading customer accounts in violation of Regulation Best Interest (Reg BI) and FINRA rules.

Separately, FINRA suspended the firm’s supervisors, Marc Harrison and Kelli Mezzatesta, who both failed to identify and investigate red flags related to Rudiger’s and Reid’s pervasive misconduct, for three months in all principal capacities. FINRA also fined them $5,000 each and required them to complete 20 hours of supervision-related continuing education.

Excessive trading in a customer’s account is trading that generates commissions for the broker but is not in the customer’s best interest. Churning is excessive trading undertaken with an intent to defraud or with reckless disregard for a customer’s interests.

FINRA determined that the firm and its cofounders excessively traded a total of 20 accounts, several of which were also churned over the course of six years with an intent to defraud or with reckless disregard for customers’ interests. This misconduct caused customers to incur approximately $2 million in commissions and trading costs and approximately $2.7 million in losses.

Both Reid and Rudiger recommended to customers a high-volume, high-cost market-timing strategy that made it virtually impossible for customers to make a profit. This misconduct violated the Care Obligation of Reg BI, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and FINRA Rules 2111, 2020 and 2010.

The misconduct was evident through disproportionate commissions and trading costs that resulted in high cost-to-equity ratios, which represents the return on a customer’s investments that would have been needed to cover commissions and expenses. This included:

• An account with an annualized cost-to-equity ratio of more than 111%, which means the account would have needed to generate returns of 111% just to break even;
• An account with an annualized cost-to-equity ratio of more than 69% and a resulting loss of more than $345,000; and
• An account with an annualized cost-to-equity ratio of more than 67% and a resulting loss of nearly $400,000.

The firm and Rudiger, as CEO, failed to establish and maintain a supervisory system reasonably designed to detect and act upon churning and excessive trading.

In addition, the firm, as well as Harrison and Mezzatesta, failed to take reasonable steps to supervise the trading in the affected customers’ accounts, despite numerous red flags indicative of excessive trading and churning. They also did not consider customers’ cost-to-equity ratios in the course of trading supervision or use available exception reports that could have assisted in identifying the violative trading.

In settling these matters, the firm, as well as Reid, Rudiger, Harrison and Mezzatesta accepted and consented to the entry of FINRA’s findings without admitting or denying them.