Branch Manager Suspended at Firm Accused of Widespread Churning

"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 order states.

FINRA's complaint focuses on 114 accounts, which incurred nearly $10 million in total trading costs and suffered nearly $8 million in total investment losses, according to the order.

"The firm facilitated this churning and excessive trading, failing to take any meaningful steps to supervise the 39 registered reps who carried out this misconduct on the firm's behalf," FINRA said.

Spartan even permitted one rep to excessively trade in client accounts "after FINRA Enforcement filed a churning complaint against him, and until he was barred," the order states.

From Jan. 1, 2018, to April 30, 2022, Spartan Capital Securities — 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 about 16% to 491%, and turnover rates ranging from 5 to 184, the order explains.

Cost-to-equity ratios of 20% or higher are generally indicative of excessive trading, according to FINRA.

Post-Reg BI Churning

The misconduct included churning and excessive trading after Regulation Best Interest's June 30, 2020, effective date.

Between Reg BI's effective date and the end of the relevant period, Spartan excessively traded 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 order states.

Spartan allowed the reps to churn and excessively trade customer accounts "despite glaring red flags that those representatives were committing misconduct and harming customers," FINRA said.

Ignored Red Flags, Hired Reps With Regulatory Histories

During the relevant period, Spartan along with Kim Monchik, the firm's chief administrative officer and periodic chief compliance officer, as well as Cammarano ignored numerous red flags of excessive trading and churning in hundreds of Spartan customer accounts, according to FINRA.

Spartan also "routinely hired" registered reps with a history of customer complaints and regulatory inquiries into potential excessive and unsuitable trading of customer accounts.

Often, FINRA's order continues, the reps "also had a history of financial difficulties, including tax liens and judgments; several filed for bankruptcy while associated with Spartan."

Occasionally, Spartan placed reps on heightened supervision.

"But, in practice, Spartan did not stop its representatives from continuing to churn and excessively trade customer accounts," the order continues.

Spartan regularly charged both an agency commission or principal markup on trades, and an additional standard $75 "service charge" per trade, according to the order.

"The agency commission or principal markup was split between Spartan and its representatives (with typically around 75% of the commissions payable to the representatives)," FINRA said. "The 'service charge,' however, went exclusively to Spartan," and Spartan also earned revenue based on margin interest charged to its customer accounts.

"Even when Spartan received complaints or regulatory inquiries regarding the excessive trading in customer accounts — and even when representatives were subject to disciplinary actions finding excessive trading or churning — Spartan continued to allow its representatives to excessively trade customer accounts," FINRA said.