[Photograph:  Churning Butter]

by Howard Haykin

FINRA CASE #2012030564701.    Like many similar cases, this plot revolves around 5 central characters: (i) the broker; (ii) the customer; (iii) the broker’s direct supervisor; (iv) the firm’s chief compliance officer (CCO); and, (v) the firm, as represented by senior management. And even though direct supervisors, the CCO and senior management of the firm were all aware of the broker's violative conduct, nothing was done to rein in the excessive trading that lasted from September 2008 through May 2013. After all, it was simply too profitable.

TAKE FOR EXAMPLE, BROKER DOUGLAS LEONE, …  who was 25 years old in 1993 when he entered the securities industry. By the time he associated with Newport Coast Securities in October 2008, he had been associated with 12 firms and had been the subject of at least 7 customer complaints and a proceeding by the Ohio Department of Commerce to revoke his Securities Salesperson license. At Newport Coast, Leone was part of a 10-person office located in Long Island, NY, but he seldom appeared in the office. Instead, he worked from his home office, where he acquired customers through cold calling. Once he hooked a lead, Leone 'pounced' on his new customer's account, sometimes executing trades before documents were signed and accounts were funded. 

“DG”, ONE OF LEONE'S CUSTOMERS, … was president and part-owner of a family-owned sheet metal company in Los Alamitos, CA. Before receiving Leone's cold call and opening a brokerage account, his only investing involved holding mutual funds in a retirement account. That didn't deter Leone from filling out a handwritten New Account Approval Form for DG that contained inaccuracies and exaggerations - for example:

EXCESSIVE TRADING IN DG’S ACCOUNT.    DG funded his Newport Coast account with $159,000 in cash and securities. In the first 2 months, Leone executed 97 transactions - trading over $3.5 Million worth of securities and generating over $22,000 in commissions and charges, despite the modest balance of DG's account and the fact that Leone hardly spoke with his customer. From February 2009 through early April 2010, Leone executed 654 trades in DG's account, generating $76,000 in total charges and fees. During this same period, Leone managed to trade Bank of America stock 111 times, Dry Ships Inc. stock 41 times, and Cel-Sci Corporation stock 40 times. 

In 2010, long after opening the account, Leone instructed DG to sign an "Active Trading Authorization" form – a ‘CYA’ document for the broker – which, if signed by the customer, acknowledged that he was a ”sophisticated investor with substantial personal experience in trading stocks." Leone also mismarked DG's account objective or risk tolerance as "high risk." DG drew a large “X” through the document and returned the form unsigned. Nevertheless, someone (Leone?) 'whited out' the "X" and forged DG's signature on the form. Shortly thereafter, DG closed his account – having sustained losses of $114,000.

COLD CALL INVESTING TAKE AWAYS.    'Cold call investors' can gain tremendous perspective by hearing about the experiences of other cold call investors. For example, during FINRA's investigation into the unsuitable sales practices at Newport Coast, DG testified that he ...

[For further details in this case, click on ... SEC Admin. Proceeding File #3-18555, and FINRA Case #2012030564701]

[For Attorney Bill Singer's perspective into the decisions taken by FINRA and the SEC against Newport Coast, click on … 4/7/20 Blog on BrokerAndBroker.com.]