On September 28, 2017, the Securities and Exchange Commission charged three New York-based brokers with making unsuitable recommendations that resulted in substantial losses to customers and hefty commissions for the brokers. One of the brokers agreed to pay more than $400,000 to settle the charges.
Brokers must make recommendations that are compatible with their customers’ financial needs, investment objectives, and risk tolerances. An SEC examination of the firm Alexander Capital L.P. detected potential misconduct among certain brokers, and the ensuing investigation has led to the filing of an SEC complaint against William C. Gennity and Rocco Roveccio. The SEC also issued an order against Laurence M. Torres.
The SEC’s complaint alleged that Gennity and Roveccio recommended investments that involved frequent buying and selling of securities without any reasonable basis to believe their customers would profit. According to the complaint, since customers incur costs with every transaction, the price of the security must increase significantly during the brief period it is held in an account for even a minimal profit to be realized.
The SEC further claimed that Gennity and Roveccio churned customer accounts, engaged in unauthorized trading, and concealed material information from their customers – namely that the transaction costs associated with their recommendations (commissions, markups, markdowns, postage, fees, and margin interest) would almost certainly outstrip any potential monetary gains in the accounts. According to the SEC’s complaint, customer losses totaled $683,038 while Gennity and Roveccio received approximately $280,000 and $206,000, respectively, in commissions and fees.
The SEC’s order against Torres found that he had no reasonable basis to believe it was suitable to recommend a high-cost pattern of frequent trading that gave his customers virtually no chance of making even a minimal profit. Torres also engaged in churning and made unauthorized trades. Without admitting or denying the findings, Torres agreed to be barred from the securities industry and penny stock trading, and he must pay $225,359.36 in disgorgement plus $25,748.02 in interest, and a $160,000 penalty.