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Unscrupulous Brokers and Their Supervisors: FINRA Should Stick to Them Like ‘White On Rice’
by Howard Haykin
It seems as though so many FINRA disciplinary actions involve excessive and unsuitable trading over extended periods of time. Which prompts the question: What can be done to better serve and protect unsuspecting and financially unsophisticated customers who time and again incur significant losses that oftentimes can never be recovered?
“It takes 2 to tango,” and the perfect dance partners for unscrupulous brokers are direct supervisors who (intentionally or not) fail to conduct basic supervisory procedures – such as monitoring for … high turnover ratios, undue concentrations, suspicious ‘unsolicited’ orders across multiple accounts, short-term trading of mutual fund shares, and trading of penny stocks in retirement accounts.
As we observe from the below-cited cases, if firms and/or their supervisory personnel are often unwilling to conduct, or are incapable of conducting, basic supervision, then perhaps FINRA should take the mantle and conduct these techniques itself - on a direct, regular and ongoing basis. FINRA has demonstrated with insider trading that it's willing to expend significant resources – technological and personnel hours – on finding “needles in the haystack.” Why, then, would it not be willing to utilize similar effort on detecting and preventing violations that potentially hurt many more investors, rather than the few?
In July 2018, FINRA reported that Philip Fatta agreed to pay a $5K fine and serve a 4-month suspension to settle FINRA charges that he engaged in quantitatively unsuitable trading in a customer’s account. In August 2018, FINRA reported that Franklin Ogele agreed to pay a $5K fine and to not serve in a principal capacity for 45 days to settle FINRA charges that he failed to supervise the unsuitable and excessive trading activity of ‘PF’, one of his firm’s registered reps. Each case involved violative conduct that occurred at Blackbook Capital LLC.
BACKGROUND INFO. Blackbook Capital LLC was a New York, NY-based broker-dealer that, from 2003 until June 2016, employed around 35 registered persons operating out of 3 offices. It was expelled by FINRA for failing to pay a $50,000 fine.
Frank Ogele was CEO, President, FinOp, CCO and principal owner of Blackbook Capital. According to FINRA Brokercheck, Ogele is a self-described attorney who maintains a private law practice in Newark, NJ – a practice that “often requires [him] to act as an officer/member or shareholder of companies incorporated by [him] such as Blackbook Investments Inc. which may invest in real estate and Blackbook Income LLC which may invest in start up companies and real estate. Applicant intends to devote requisite time to his law practice. Applicant devotes less than 1 hr a month on the companies.” Ogele lists other companies (in his stable), for which he supposedly also devotes limited time.
Philip Fatta, when he joined Blackbook Capital in August 2014, had 18 years’ experience with 13 firms. Notwithstanding the fact that he was a ‘rolling stone’ of sorts, Fatta was apparently the top producer in Blackbook’s New York City office – that, according to FINRA’s case write-up on Frank Ogele.
WHAT WENT WRONG – FATTA. Between August 2014 and April 2016, Fatta engaged in quantitatively unsuitable trading in the account of a customer who is now retired and had limited financial wherewithal. Fatta exercised de facto control by recommending excessive and unsuitable trading in the customer’s account – recommendations that the customer followed. This trading, which resulted in an annualized turnover rate of 7 and an annualized cost-to-equity ratio of 41%, led to $98,000 in losses. [In violation of FINRA Rule 2111.]
WHAT WENT WRONG – OGELE. Between August 2014 and June 2015, Ogele permitted ‘PF’ – i.e., Philip Fatta, who was the top-producing broker in Blackbook’s Lexington Avenue (New York) branch office - to self-supervise his trading activity. As a consequence, Ogele failed to identify unsuitable excessive trading by PF in a customer's account. The significant losses and outsized cost-to-equity ratio and a turnover rate should have resulted in a review or investigation by Ogele and BlackBook. Yet, because no supervisory review of PF's customer activity was conducted, this activity went undetected.
NOTE: In 2017, the customer obtained an arbitration award against Blackbook Capital and Philip Fatta. According to BrokerCheck, the award has not been paid – and, in my opinion, will likely never be paid.
FINANCIALISH TAKE AWAY. While the above prescribed oversight that I recommend for FINRA might be a departure from the regulator’s day-to-day routines, the procedures might just be the sort of “out-of-the-box” approach that can lead to tremendous benefits. If nothing else, it’s worth a try.
