The Financial Industry Regulatory Authority (FINRA) has expelled broker-dealer SW Financial for multiple violations.
The violations include making misrepresentations to customers in its sales of private placement offerings of pre-initial public offering (pre-IPO) securities. The firm is also charged with churning customer accounts and failing to supervise its representatives.
“The serious misconduct in this case exposed customers to significant risk of harm and necessitated expulsion of SW Financial from FINRA membership,” Christopher Kelly, senior vice president and acting head of FINRA’s Department of Enforcement, said. “Firms cannot make material misstatements or omissions when they sell securities to customers. Firms also must reasonably surveil for, and respond to, red flags of excessive trading and churning. When firms, particularly those with significant disciplinary histories, commit egregious sales practice and supervisory violations, expulsion from FINRA membership may be warranted.”
In addition, FINRA suspended the firm’s co-owner and CEO, Thomas Diamante, for nine months in all capacities followed by a three-month suspension in all principal capacities. He was also fined $50,000 and is required to requalify by examination if he seeks to register with FINRA in the future.
Between January 2018 and December 2021, Diamante and SW Financial made material misrepresentations and omitted material information in connection with the sale of private placement offerings of pre-IPO securities in violation of Regulation Best Interest (Reg BI), FINRA said. Reg BI’s Disclosure Obligation requires broker-dealers to provide retail customers with full written disclosure of all material facts relating to conflicts of interest associated with the recommendation.
SW Financial informed potential investors that it would receive only a 10 percent sales commission in connection with its sale of certain pre-IPO securities. In fact, however, Diamante had entered into an undisclosed agreement with the issuer under which SW Financial would receive an additional 5 percent in selling compensation and half of any carried interest. SW Financial sold the private offerings to 171 investors, including 163 retail customers, and the firm received approximately $2 million in undisclosed compensation. FINRA said this is a potential conflict of interest that could have influenced SW Financial’s recommendations and should have been fully disclosed.
Diamante and SW Financial also failed to conduct reasonable due diligence on the private offerings and did not confirm that the issuer actually held or had access to the shares it purported to sell. As a result, SW Financial had no reasonable basis to recommend the offerings to customers, in violation of both FINRA regulations.
In addition, FINRA found that between January 2016 and May 2019, SW Financial, acting through two former representatives, churned nine customer accounts, causing the customers to incur more than $350,000 in total trading costs and realized losses of more than $465,000. In one instance, a retired customer whose account was excessively traded paid $101,806 in commissions, and incurred realized losses of $131,979. SW Financial failed to follow up on red flags of the excessive trading in this customer’s accounts.
SW Financial and Diamante accepted and consented to FINRA’s findings without admitting or denying them.