What Are The Main Allegations Against Spartan Capital Securities In The Lawsuit?
In the Spartan Capital Securities lawsuit, the main allegations was against Spartan Capital Securities including multiple instances of failure to disclose or timely disclose various reportable events on Forms U4 and Forms U5, as well as failure to file or timely file amendments to these forms for registered representatives.
Specifically, the allegations involve the firm’s failure to disclose the filing and resolution of customer arbitrations, customer complaints, and certain financial events related to its registered representatives (OHO Order 22-09 (2019061528001) page 2).
The complaint also alleges that the firm’s CEO and sole owner, John D. Lowry, and the Chief Compliance Officer, Kim M. Monchik, wilfully failed to amend their own Forms U4 to disclose the filing or resolution of arbitration claims in which they were named as respondents.
These alleged violations are said to have violated Article V, Sections 2(c) and 3(b) of FINRA’s By-Laws and FINRA Rules 1122 and 2010 (OHO Order 23-20 (2019061528001) page 2).
Additionally, the firm and its executives are accused of engaging in repeated violative actions over an extended period, which deprived customers of valuable information when considering whether to retain the services of the firm and various broker.
Who Are The Respondents Named In The Lawsuit Alongside Spartan Capital Securities?
The respondents named in the lawsuit alongside Spartan Capital Securities are John D. Lowry, the firm’s CEO and sole owner, and Kim M. Monchik, who served as Spartan’s Chief Compliance Officer during the relevant period.
Both Lowry and Monchik are accused of knowingly and wilfully failing to disclose or timely disclose the filing and resolution of customer arbitrations in which they were named as respondents.
On What Grounds Did Spartan Capital Securities Fail To File Or Timely File Amendments To Forms U4 And U5?
Spartan Capital Securities allegedly failed to file or timely file amendments to Forms U4 and U5 on several grounds.
The Enforcement’s Complaint alleges that Spartan Capital Securities wilfully failed to file or timely file amendments to Forms U4 and Form U5 of approximately 70 current or former registered representatives in 223 instances.
This failure included the failure to disclose the filing and resolution of customer arbitrations, customer complaints, and certain financial events related to its registered representatives.
Specifically, the firm allegedly failed to file or timely file 162 amendments relating to the filing and resolution of certain customer arbitrations, failed to disclose other customer complaints that were not the subject of an arbitration in ten instances, and did not disclose certain financial events, including bankruptcies and unsatisfied judgments or liens, against its registered representatives in 51 instances (OHO Order 22-09 (2019061528001) page 2).
How Does FINRA Define The Wilful Failure To Disclose Required Information On Forms U4 And U5
FINRA defines the wilful failure to disclose required information on Forms U4 and U5 as the intentional or deliberate act of not disclosing reportable events or failing to timely disclose them.
In the case of Spartan Capital Securities, the wilful failure to disclose involved over 200 reportable events, including customer arbitrations, customer complaints, and financial events related to registered representatives (OHO Order 23-20 (2019061528001) page 11).
The failure to disclose financial events, some of which were considered egregious occurrences, was particularly concerning as customers would find these events material to their investment decisions.
Additionally, the firm’s failure to timely disclose a broker’s financial event even after being informed of the event was considered a wilful failure to disclose.
The Panel found that the firm, its CEO, and the Chief Compliance Officer exhibited a culture of regulatory noncompliance, and the failure to disclose was considered intentional and an attempt to conceal misconduct, despite receiving warnings and guidance from FINRA staff.
The wilful failure to disclose was also found to violate Article V, Sections 2(c) and 3(b) of FINRA’s By-Laws and FINRA Rules 1122 and 2010 (OHO Order 23-20 (2019061528001) page 2).
What Are The Implications Of A Wilful Violation Of FINRA Rules For A Broker-Dealer And Its Registered Representatives?
A wilful violation of FINRA rules by a broker-dealer and its registered representatives can have significant implications.
In the Spartan Capital Securities lawsuit, the firm was censured and fined $600,000, and required to retain an independent consultant to review its supervisory procedures and to amend the Forms U4 and Forms U5 of its registered persons to reflect the filing and disposition of customer arbitrations and customer written complaints.
Additionally, the firm’s CEO, John D. Lowry, and the Chief Compliance Officer, Kim M. Monchik, were fined $40,000 and $30,000, respectively, and suspended for two years from associating with any member firm in any capacity.
They were also ordered to amend their Forms U4 to disclose customer arbitration filings and arbitration dispositions they had not yet disclosed.
Furthermore, the wilful violation led to the statutory disqualification of the respondents pursuant to FINRA’s By-Laws and Section 3(a)(39) of the Securities Exchange Act of 1934.
This disqualification can have serious consequences for their ability to work in the securities industry.
The firm and its executives were found to have engaged in repeated violative actions over an extended period, which deprived customers of valuable information when considering whether to retain the services of the firm and various brokers.
These implications highlight the severe repercussions of wilful violations of FINRA rules for broker-dealers and their registered representatives, including financial penalties, suspensions, and disqualifications.
How Does the Respondent in the Spartan Capital Securities Lawsuit Defend Against The Allegations Of Wilful Non-Disclosure?
Spartan Capital Securities defends against the allegations of wilful non-disclosure by asserting several key points.
Firstly, the firm argues that the requirement for a monthly questionnaire to all current associated persons is “unduly burdensome and not standard within the industry” and that employees are already required to certify annually that they have disclosed reportable events, making the monthly questionnaire unnecessary and burdensome.
Additionally, Spartan represents that it will follow the procedures implemented by its compliance consultant concerning the method and frequency of employee compliance questionnaires, indicating its commitment to compliance with industry standards (OHO Order 23-20 (2019061528001) page 11).
Furthermore, Spartan objects to the requirement for all associated persons to complete one hour of continuing education or training every six months on FINRA’s Form U4 and Form U5 disclosure obligations, arguing that it is not tailored to the misconduct found by the Panel and that the firm’s other associated persons were not found to have failed in their disclosure obligations.
Respondents also argue that they did not act wilfully, but instead acted in good faith based on advice from the Firm’s CCOs, outside counsel, and discussions with FINRA staff, and that their actions were consistent with industry practice (OHO Order 22-09 (2019061528001) page 2).
Overall, Spartan Capital Securities defends against the allegations of wilful non-disclosure by challenging the necessity and appropriateness of certain proposed conditions and restrictions, and by asserting that it has taken steps to comply with the directives of the Decision and to address its reporting obligations.
How Does The Spartan Capital Securities Lawsuit Address The Issue Of Whether A CEO Or Other Senior Officers Are Required To Disclose Customer Arbitrations On Their Form U4?
The lawsuit addresses the issue of whether a CEO or other senior officers are required to disclose customer arbitrations on their Form U4 through a motion filed by the respondents for leave to offer expert testimony.
The proposed expert testimony primarily aimed to address whether an officer of a broker-dealer, including a chief executive officer (CEO), is required to disclose the existence of a customer arbitration that names the officer as a respondent, in addition to the customer’s registered representative, on a Uniform Application for Securities Industry Registration or Transfer (Form U4).
The Department of Enforcement opposed the motion, arguing that any proposed expert testimony would address legal issues properly reserved for the Hearing Panel.
The motion was ultimately denied, indicating that the issue of whether a CEO or other senior officers are required to disclose customer arbitrations on their Form U4 was to be determined by the Hearing Panel and not through expert testimony.
On What Basis Was The Respondents’ Motion For Leave To Offer Expert Testimony Denied?
The respondents’ motion for leave to offer expert testimony was denied based on several key factors.
Firstly, the motion failed to comply with the requirements set forth by the Chief Hearing Officer (CMSO) for presenting expert testimony, as it did not provide sufficient information about the qualifications of the proposed expert witnesses or how their testimony could assist the Hearing Panel.
Additionally, the motion indicated that the proposed experts would provide opinions on legal standards and ultimate legal issues, which is not the role of expert testimony.
The Hearing Officer determined that the principal issues in the case did not require expert testimony, particularly regarding whether the respondents were obligated to disclose arbitrations on their Forms U4 (OHO Order 22-09 (2019061528001) page 6).
As a result, the motion was denied, but the respondents were allowed to list the proposed persons as fact witnesses, with their testimony not being treated as expert testimony.
What Significance Does The Lucosky Report Hold In The Spartan Capital Securities Lawsuit, And Why Was It Considered?
The Lucosky Report holds significance in the Spartan Capital Securities lawsuit as it was intended to support the respondents’ decision not to disclose arbitrations on the Forms U4 and to provide insight into FINRA’s interpretation of the enforcement of reporting rules and guidance.
The report reviewed Forms U4 associated with nearly 1,000 registered broker-dealers in the New York City area over a ten-year period and claimed that there were only four instances of alleged “failure to supervise” reported on the Form U4 of a firm CEO (OHO Order 22-09 (2019061528001) page 5).
The respondents argued that the information in the Lucosky Report formed part of the basis for their decision not to disclose the arbitrations on the Form U4.
However, the report was considered as potentially expert in nature, and the respondents sought permission to treat the witnesses’ testimony as expert testimony.
Ultimately, the report was brought to the attention of the Hearing Officer, but the motion for leave to offer expert testimony, including the Lucosky Report, was denied due to non-compliance with the requirements for presenting expert testimony and the belief that the report would not be helpful to the Hearing Panel (OHO Order 22-09 (2019061528001) page 6).
What Potential Impact Does The Timing Of The Lucosky Report’s Preparation Have On Its Relevance To The Case?
The timing of the Lucosky Report’s preparation is crucial to its relevance to the case because it was prepared in 2020, after all but one of the arbitrations against Lowry and Monchik at issue in this proceeding took place.
This timing raises questions about the report’s applicability to the events in question and its ability to provide relevant insights into the respondents’ decision not to disclose the arbitrations on the Forms U4.
Additionally, the report’s preparation after the relevant events occurred may diminish its value in assisting the Hearing Panel in understanding the circumstances surrounding the non-disclosure of the arbitrations.
How Does The Spartan Capital Securities Lawsuit Interpret The Obligation To Report Customer Complaints And Arbitrations Involving Registered Representatives?
The lawsuit interprets the obligation to report customer complaints and arbitrations involving registered representatives as a critical requirement to protect the investing public.
The Panel found that Spartan Capital Securities failed to disclose or timely disclose over 200 reportable events, including customer complaints and arbitrations (OHO Order 23-20 (2019061528001) page 11).
The failure to disclose these events deprived customers of valuable information about the firm and its registered persons, which could have influenced their investment decisions.
The lawsuit emphasises the necessity of prompt and accurate disclosure of customer complaints and arbitrations to prevent customer harm and ensure compliance with FINRA rules, ultimately aiming to safeguard the interests of investors.
How Does The Enforcement Action Against Spartan Capital Securities Fit Within The Broader Context Of Finra’s Regulatory Enforcement Efforts?
The enforcement action against Spartan Capital Securities fits within the broader context of FINRA’s regulatory enforcement efforts as a demonstration of the organisation’s commitment to investor protection and market integrity.
The disciplinary proceeding against Spartan Capital Securities, its CEO, and Chief Compliance Officer stemmed from the firm’s failure to disclose or timely disclose over 200 reportable events, including customer complaints, arbitrations, and financial events related to its registered representatives.
This enforcement action reflects FINRA’s dedication to upholding industry standards and ensuring that firms and their associated persons comply with disclosure requirements, thereby safeguarding investors’ interests.
Furthermore, the imposition of sanctions, including censure, fines, and suspensions, underscores FINRA’s commitment to holding firms and individuals accountable for their actions.
The sanctions imposed on Spartan Capital Securities, its CEO, and Chief Compliance Officer serve as a deterrent to similar misconduct within the industry, reinforcing the importance of timely and accurate disclosure of reportable events.
Additionally, the introduction of Rule 9285, effective from April 15, 2021, further demonstrates FINRA’s proactive approach to enhancing investor protection by potentially preventing associated persons and firms found to have violated statutes or rules from engaging in additional misconduct during the appeal process.
References
- Black, Barbara. “Punishing bad brokers: Self-regulation and FINRA sanctions.” Brook. J. Corp. Fin. & Com. L. 8 (2013): 23.
- Frolova, Evgenia, Agnessa Inshakova, and Vladimira Dolinskaya. “The concept and legal framework for judging corporate conflicts on the US financial market.” “Conflict-Free” Socio-Economic Systems: Perspectives and Contradictions. Emerald Publishing Limited, 2019. 101-108.
- Gross, Jill I. “Post-Pandemic FINRA Arbitration: To Zoom or Not to Zoom?.” Stetson L. Rev. 52 (2022): 363.
