by Howard Haykin

A Westbury, NY-based broker-dealer, Vanderbilt Securities, and its Chief Compliance Officer agreed to settle FINRA charges that they failed to establish and maintain a supervisory system, including WSPs, reasonably designed to identify and prevent unsuitable excessive trading and churning in customer accounts.

►    Vanderbilt, which employs 140 registered individuals in 37 branch offices, agreed to pay a $100K fine.

►    The CCO, who will go unnamed, has 37 years’ experience and no prior regulatory disclosures; he agreed to pay a $5K fine and to serve a 3-month principal-capacity suspension.

FINRA FINDINGS.    In March 2011, Vanderbilt hired broker Mark Kaplan, who brought with him the accounts of an elderly customer (“BP”). The firm’s CCO, who participated in the hiring process and then served as Kaplan’s direct supervisor, was aware that at least 2 customers at Kaplan's prior firm had alleged that Kaplan traded excessively in their accounts. The CCO was also aware that Kaplan had been terminated by that firm because of a client complaint and other concerns about the activity in his customers' accounts.  

NOTE:  Perhaps some ‘heightened supervision’ might have been appropriate.

Notwithstanding the advanced warnings, over the next 4 years - between March 2011 and March 2015 - Kaplan exercised de facto control over his 86-year-old customer’s accounts while he churned his way through the customer’s accounts. Over that period, Kaplan effected more than 3,500 transactions (an average of 73 trades per month), leading to $723,000 in trading losses and $735,000 in commissions and markups.

NOTE:  In April 2016, Vanderbilt and Kaplan made a settlement payment totaling $470,000 to the guardian for Customer BP's accounts. In March 2018, Kaplan was barred from the industry by FINRA (AWC No. 2015045984001).

WHAT WENT WRONG.    Although the Firm's WSPs acknowledged that frequent transactions in the same security could be unsuitable, they did not provide any guidance for detecting or preventing excessive trading or churning. Apparently, this deficiency contributed significantly to the fact that Vanderbilt Securities and its Chief Compliance Officer failed to reasonably supervise Kaplan’s churning and unsuitable excessive trading.

Specific deficiencies were, as follows:

• The Firm did not systemically track the turnover rates and cost-to-equity ratios in customer accounts.
  • Such calculations were performed - manually, and generally on an ad-hoc basis – only when a customer complained.

• The Firm prepared a monthly "Activity Report" that identified accounts with >40 trades in any particular month.
  • The WSPs didn’t address the Activity Report or provide any guidance about how to use it.
  • The WSPs didn’t require that any action be taken when a customer's account appeared on the Activity Report.
  • The Activity Report did not capture patterns of activity across multiple months.

• The CCO observed numerous red flags indicating that Kaplan was engaging in misconduct in BP's accounts, yet didn’t reasonably respond to these red flags.
  • By September 2011, Kaplan had generated $167,000 in net losses and commissions of almost $63,000, prompting the CCO to send a “Satisfaction Letter” to customer BP.
  • This form letter never mentioned anything about the level of trading in the accounts or any losses or commissions associated with those transactions. Needless to say, nothing further came of this mailing.
  • Over the 4 years, the CCO met with BP only once – in July 2013 – regarding BP’s misplaced debit card. However, at that meeting neither Kaplan nor the CCO discussed the extensive losses and commissions associated with the accounts.
  • Neither the CCO nor Kaplan responded to an email sent to Kaplan in February 2013 by BP’s son, after BP had sustained substantial losses, acknowledging the depth of his father's interest in the markets and in seeing his money grow, and urging him to be careful with his father's accounts.

This case was reported in FINRA Disciplinary Actions for September 2018.

For details on this case, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2015045984002.