The Financial Industry Regulatory Authority (FINRA) has filed a complaint against Spartan Capital Securities, LLC.

The FINRA Department of Enforcement alleges that, for more than four years, Spartan Capital Securities, LLC, defrauded customers by engaging in widespread churning, generating millions in revenue and causing customers millions in harm.

According to the complaint, Spartan’s business model depended on this misconduct –approximately two- thirds of the firm’s trading revenue and one-third of its overall revenue, more than $46 million in total, was generated from more than 1,200 accounts with a cost-to-equity ratio greater than 20% from January 2018 to April 2022.

The complaint focuses on 114 of those accounts, which incurred nearly $10 million in total trading costs and suffered nearly $8 million in total investment losses. The firm allegedly facilitated this churning and excessive trading, failing to take any meaningful steps to supervise the 39 registered representatives who carried out this misconduct on the firm’s behalf.

Spartan allegedly permitted one representative to excessively trade in client accounts after FINRA Enforcement filed a churning complaint against him, and until he was barred.

The complaint alleges that, from January 1, 2018, to April 30, 2022 (the “relevant period”), Spartan – acting through James Pecoraro, John Stapleton, and Michael Darvish, and through 36 non-respondent Spartan Representatives, all but one of whom FINRA has already barred or otherwise disciplined – excessively traded 114 customer accounts, 35 of which were churned.

The trading in the 114 customer accounts, which included 53 accounts belonging to senior customers, resulted in cost-to-equity ratios ranging from approximately 16% to 491%, and turnover rates ranging from 5 to 184.

This misconduct included churning and excessive trading after the June 30, 2020 effective date of Regulation Best Interest (“Reg BI”). Between Reg BI’s effective date and the end of the relevant period, Spartan allegedly traded excessively 92 retail customer accounts, many of which were churned. Spartan’s post-Reg BI churning and excessive trading of these customers’ accounts resulted in nearly $7 million in total trading costs and nearly $6 million in total losses.

The complaint alleges that, by churning customer accounts, Spartan, Pecoraro, and Stapleton willfully violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and violated FINRA Rules 2020 and 2010. By excessively trading customer accounts, Spartan and the Respondent Representatives willfully violated Reg BI (for conduct on or after June 30, 2020), Spartan, Pecoraro, and Darvish violated FINRA Rule 2111 (for conduct before June 30, 2020 and for conduct after June 30, 2020, with respect to two non-retail customers’ accounts), and Spartan and the Respondent Representatives violated FINRA Rule 2010.

Spartan allegedly allowed the Spartan Representatives to churn and excessively trade customer accounts despite glaring red flags that those representatives were committing misconduct and harming customers.

During the relevant period, Spartan, Respondent Kim Monchik (the firm’s Chief Administrative Officer and periodic Chief Compliance Officer) and Respondent Frederick Joseph Cammarano III (the firm’s Regional Branch Manager and direct supervisor of many of the Spartan Representatives) allegedly ignored numerous red flags of excessive trading and churning in hundreds of Spartan customer accounts, including:

1. large trading volumes;
2. high losses;
3. cost-to-equity ratios over 20%;
4. turnover rates greater than six;
5. in-and-out trading;
6. frequent use of margin;
7. notifications from FINRA that the firm’s representatives were excessively trading their customers’ accounts and that the firm’s supervision of those representatives was unreasonable;
8. representatives who were experiencing significant financial pressures and were the subject of customer complaints; and
9. accounts and representatives appearing on active account exception reports month after month.

Finally, the complaint alleges that, by failing to reasonably supervise the trading in customer accounts – including failing to supervise churning in violation of Section 10(b) and Rule 10b-5 – and by failing to reasonably investigate and address red flags of excessive trading and churning, Spartan, Monchik, and Cammarano violated FINRA Rules 3110 and 2010.

The FINRA Department of Enforcement requests (inter alia):

• order that one or more of the sanctions provided under FINRA Rule 8310(a) be imposed, including that Respondents be required to disgorge fully any and all ill- gotten gains and/or make full and complete restitution, together with interest;
• make specific findings that Spartan, Pecoraro, and Stapleton willfully violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and that Spartan, Pecoraro, Stapleton, and Darvish willfully violated Regulation BI under the Exchange Act; and
• make specific findings that Spartan, Monchik, and Cammarano failed to reasonably supervise 14 Spartan Representatives (Pecoraro, Stapleton, and Spartan Representatives 1-8, 10, 13, 35, and 36, ) who willfully violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and failed to reasonably supervise 35 Spartan Representatives (Pecoraro, Stapleton, Darvish, and Spartan Representatives 1-6, 8-9, 11-12, 14-22, and 24-36) who willfully violated Regulation BI under the Exchange Act.