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Regulation and Compliance > Federal Regulation > FINRA

FINRA Slams Ex-Morgan Stanley Rep for Unsuitable, Costly Investments

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After an investigation, the Financial Industry Regulatory Authority’s Department of Enforcement filed a complaint Monday against a former Morgan Stanley broker and current WestPark Capital rep, claiming he repeatedly recommended costly and unsuitable investments for his clients while representing both firms.

From January 2014 to January 2018, Stephen Sloane recommended an unsuitable investment strategy to 14 retail customers, according to the complaint.

Morgan Stanley, WestPark and Sloane did not immediately respond to requests for comment on Tuesday.

Specifically, Sloane recommended that customers “engage in active, short-term trading of U.S. Treasuries with 10- and 30-year maturities, without conducting reasonable diligence to understand the effect of the strategy’s costs on the Treasury customers’ potential returns,” the regulator alleged.

“Sloane, therefore, did not have a reasonable basis to recommend the strategy,” FINRA said, adding that after he recommended that strategy, the customers “actively bought and sold long-term Treasuries every few months.”

Sloane was a rep with Morgan Stanley from June 2009 until it fired him Feb. 29, 2016 over concerns “regarding cost-related issues associated with” his trading of U.S. treasuries, FINRA said, quoting a Form U5 filed by the wirehouse. The firm had earlier requested that he reduce the costs to customers going forward, which he did but only temporarily, according to FINRA.

Sloane joined Boca Raton, Florida-based WestPark on March 10, 2016, according to FINRA. Twelve of the 14 Treasury customers followed Sloane from Morgan Stanley to WestPark, where he “continued recommending and implementing the same strategy of short-term Treasury trading in those customers’ accounts,” the regulator alleged.

During the period in question, Sloane executed 546 Treasury transactions in the clients’ accounts, FINRA said, noting more than 40% of the clients’ sales of 10- and 30-year Treasury securities during the period occurred within just three months of the purchase and more than three-fourths happened within just nine months of purchase.

“Sloane’s investment strategy was profitable for him but not for his customers,” according to FINRA. Sloane received about $220,000 in compensation from implementing his strategy for the Treasury customers during the period, which represented Sloane’s share of the $510,025 in markups and markdowns he charged to execute the 546 Treasury trades for the Treasury customers during the period, FINRA claimed.

In stark contrast, “after paying markups, markdowns, and other transactional service fees, the Treasury customers realized total trading losses, exclusive of interest,” totaling $329,811 during the period, as a result of Sloane’s investment strategy, FINRA alleged.

Sloane also recommended that five Treasury customers use the proceeds from sales of Treasury securities on Jan. 30, 2017, to buy Treasury securities on Jan. 31, 2017, according to FINRA. “The markups for those ‘proceeds trades’ ranged from 6.11% to 7.92%,” it alleged, calling those markups “excessive and unfair,” and saying they resulted in those customers’ Treasury trades on those days occurring at prices not reasonably related to prevailing market prices.

As a result of his actions, Sloane violated FINRA Rules 2010, 2111 and 2121, FINRA said.


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