Holy cow, FINRA ACTUALLY expelled a member!! Monmouth Capital Management LLC. Monmouth excessively traded 110 accounts: "Over a 20-month period, Monmouth effected 61 trades in the 13-year old’s account

https://www.finra.org/sites/default/files/fda_documents/2022076459303%20Monmouth%20Capital%20Management%20LLC%20CRD%20290248%20AWC%20vr.pdf

Good evening Superstonk and Happy weekend!! I would like to share some more FINRA 'discipline' with y'all--this one is 'real'.

As these releases convey a ton of information I am going to try a bit of a different approach, I hope this format makes sense.

• First, I am going to outline what Monmouth did in points from the filing.
• Next, I am going to try and break each section against Monmouth down a bit further and provide 'Wut means' where possible.

Let's hit it!

Outline of the violations that caused FINRA to throw them out:

1. From August 2020 to February 2023, Monmouth, through six of their reps, traded excessively in 110 customer accounts, 42 of which were also churned (meaning they traded a lot to generate commissions). This caused the customers to rack up nearly $4 million in total trading costs. The trading in these accounts resulted in super high cost-to-equity ratios and turnover rates, and all of the accounts suffered big losses.
2. Because of this, Monmouth broke the Care Obligation of Regulation Best Interest, Section 10(b) of the Securities Exchange Act of 1934, and Exchange Act Rule 10b-5, as well as FINRA Rules 2020 and 2010.
3. From August 2020 to now, Monmouth also didn't have a good enough supervisory system and written supervisory procedures (WSPs) to make sure they were following the rules about excessive trading and churning. They told FINRA they had improved their system in July 2020, but that wasn't true. Until at least December 2022, the firm's supervisors didn't take any of the promised steps to fix things.
4. Between November 2020 and February 2023, Monmouth gave false and misleading info on its client relationship summary (Form CRS) about its account monitoring services and certain trading costs. They said they would monitor customer accounts using daily exception reports, but they didn't actually do that. Because of this, they broke Section 17(a)(1) of the Exchange Act and Exchange Act Rule 17a-14, as well as FINRA Rule 2010.
5. During this same period, Monmouth also didn't have a good enough supervisory system, including WSPs, to make sure its customer disclosures on Form CRS were accurate. Because of this, they broke FINRA Rules 3110 and 2010.

So, in short, Monmouth did a lot of excessive trading, lied about their supervisory system, and gave false info to customers.

Monmouth Excessively Traded and Churned Customer Accounts. Monmouth excessively traded 110 accounts:

Wut mean?

1. Monmouth, through six of their reps, excessively traded 110 accounts from August 2020 to February 2023. They recommended a pattern of trading where customers would put all their money into a few securities, hold each for a short time, and then switch to new ones.
2. This trading resulted in super high cost-to-equity ratios (from 21.75% to 128.5%, with an average of 52.18%) and turnover rates (from 6.05 to 35.24, with an average of 11.78). This means the accounts had to grow a lot just to cover costs, and the securities in the accounts were being replaced a lot. The total trading costs for these accounts was nearly $4 million, including over $3.5 million in commissions.
3. A turnover rate of 6 or a cost-to-equity ratio above 20% generally indicates that the trading was excessive. And 57 of these accounts belonged to senior customers.
4. As an example, two siblings who were 13 and 14 years old opened accounts at Monmouth in July 2021. The accounts were funded by life insurance payments they received after their dad, an active military service member, passed away. Monmouth recommended short-term, in-and-out trading in both siblings' accounts, causing them to lose money and pay high trading costs.

Monmouth churned 42 of the 110 excessively-traded accounts:

Wut mean?

1. Section 10(b) of the Exchange Act and Rule 10b-5 make it illegal to use any deceptive or manipulative tactics when buying or selling securities. FINRA Rule 2020 says the same thing.
2. Churning, which is when a firm controls a customer's account and trades excessively with the intent to defraud or without considering the customer's interests, is a violation of these rules. This also breaks FINRA Rule 2010, which says firms and their reps must act honorably and fairly.
3. Monmouth, through four of its reps, churned 42 out of the 110 excessively traded accounts. Many of these customers were inexperienced investors, and 29 of the accounts belonged to senior customers. These customers usually followed their reps' recommendations, so Monmouth effectively controlled their accounts.
4. These 42 accounts had super high turnover rates and cost-to-equity ratios, showing a reckless disregard for the customers' interests. The total trading costs for these accounts were over $1.8 million, including over $1.6 million in commissions.
5. For example, Monmouth recommended short-term, in-and-out trading to a customer with limited investment experience and a moderate risk tolerance. Over a 16-month period, this led to high costs and losses for the customer. In another example, over a 29-month period, a customer's account had high costs and losses due to Monmouth's recommendations.
6. By churning these 42 accounts, Monmouth broke Section 10(b) of the Exchange Act, Rule 10b-5, and FINRA Rules 2020 and 2010.

Monmouth Failed to Reasonably Supervise Its Representatives’ Trading:

Wut mean?

1. Broker-dealers like Monmouth are supposed to have written policies and procedures to make sure they're following Reg BI, which includes the Care Obligation. This means they need to act in the best interest of their customers and not trade excessively. They also need to prevent, detect, and correct any violations. FINRA Rules 3110(a) and 3110(b) also require them to supervise their reps' activities and have written procedures to make sure they're following the rules.
2. In 2020, FINRA told Monmouth that they weren't supervising for excessive trading well enough. Monmouth said they had made improvements, but this wasn't true. They still didn't have a good enough system or procedures to prevent excessive trading and churning.
3. Monmouth's system and procedures were unreasonable in several ways. For example, their procedures didn't mention Reg BI until April 2021, and then they wrongly said that Reg BI didn't apply to them because they didn't make recommendations to customers. Their procedures also didn't give any guidance on what turnover rates or cost-to-equity ratios would be red flags for excessive trading and churning.
4. Monmouth's procedures said they should use exception reports to monitor for potentially excessive trading, but they didn't do this until at least December 2022. Instead, they mostly just manually reviewed the daily trade blotter, which only showed the previous day's trading and didn't give any info about patterns of trading, turnover rates, cost-to-equity ratios, or cumulative costs.
5. If Monmouth had reviewed the exception reports, they would have seen that many customer accounts were flagged for things like high turnover rates, high commission-to-equity ratios, large numbers of trades, and losses. But they didn't review these reports, so they didn't detect the excessive trading and churning.
6. Monmouth didn't call the customers to ask about the level of trading in their accounts, didn't send the customers any activity letters, and didn't restrict the trading in or commissions charged to the customers' accounts. They did nothing for all 110 affected customer accounts, allowing them to be excessively traded or churned.
7. Because of this lack of supervision, Monmouth broke Exchange Act Rule 15l-1(a)(2)(iv) and FINRA Rules 3110 and 2010.

Monmouth Provided False and Misleading Information on its Form CRS:

Wut mean?

1. Form CRS is a document that SEC-registered broker-dealers like Monmouth have to prepare and update. It gives customers info about the services the firm offers, the fees and costs associated with those services, any conflicts of interest, the firm's standard of conduct, any legal or disciplinary history, and how to get more info about the firm. All the info in the Form CRS has to be true and not misleading.
2. In October 2020, FINRA told Monmouth that there were a bunch of problems with their Form CRS, like not including a description of certain fees and costs paid by customers and not describing how often they monitor accounts. Monmouth updated their Form CRS in November 2020, but the updated form still wasn't accurate.
3. From November 2020 to February 2023, Monmouth gave inaccurate and untrue info on their Form CRS. For example, they said they monitor accounts through daily exception reports and that they review accounts daily or at least monthly if there's no trading activity. But they never used daily exception reports and didn't start using monthly exception reports until December 2022. They also didn't do any ongoing monitoring for inactive accounts.
4. Monmouth also inaccurately described their postage and handling charges, which were $50 to $75 per trade, as costs they were passing on to customers. But these fees weren't actually pass-through charges from any vendors and weren't related to any actual postage and handling costs. They were just additional fees charged by the firm. These fees made up a significant part of Monmouth's revenue. For example, from January 2021 to March 2022, Monmouth made nearly $4 million in total revenue, and over $470,000 of that was from postage and handling fees.

Monmouth Failed to Reasonably Supervise Its Form CRS Disclosures:

Wut mean?

1. From November 2020 to February 2023, Monmouth didn't have a good enough supervisory system, including written supervisory procedures (WSPs), to make sure they were following the requirements for Form CRS.
2. Their WSPs didn't even mention Form CRS until April 2021, and throughout this whole period, they didn't have any system in place to review Forms CRS.

How Monmouth's actions could potentially impact GameStop:

1. Excessive Trading and Churning: Monmouth excessively traded and churned customer accounts. Churning involves excessive buying and selling in a customer's account primarily to generate commissions. This kind of activity could potentially be used to manipulate a stock's price, including GameStop's. For example, excessive trading could create artificial volume, which might mislead other investors about the stock's popularity or value.
2. Lack of Supervision: Monmouth's lack of proper supervision and controls could potentially allow for manipulative practices like naked shorting to occur. Naked shorting is when a broker sells shares that they don't have and haven't borrowed, hoping to buy them later at a lower price to make a profit. This can artificially increase the supply of a stock, like GameStop's, and depress its price. If a broker-dealer isn't properly supervising its reps' activities, these kinds of practices could potentially go unnoticed.
3. Misleading Disclosures: Monmouth provided inaccurate and untrue information on its Form CRS disclosures. While this doesn't directly relate to naked shorting or other manipulative tactics, it does suggest a lack of transparency and honesty, which could potentially extend to other areas of the firm's operations.

Remember, these are potential impacts. We don't (yet) have specific evidence that Monmouth engaged in naked shorting or manipulated GameStop's stock but with FINRA taking the extraordinary step to KICK them out, eyes should be kept on them!

Punishment:

TLDRS:

• FINRA kicked them out!
• From August 2020 to February 2023, Monmouth, through six of their reps, traded excessively in 110 customer accounts, 42 of which were also churned (meaning they traded a lot to generate commissions). This caused the customers to rack up nearly $4 million in total trading costs. The trading in these accounts resulted in super high cost-to-equity ratios and turnover rates, and all of the accounts suffered big losses.

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