The Financial Industry Regulatory Authority (FINRA) announced it had expelled from its membership Reid & Rudiger LLC and barred its co-founder Clifford Reid and CEO Edward Rudiger, Jr. from association with any FINRA members for rules violations.
According to the regulatory agency, the firm, Reid and Rudiger violated the Regulation Best Interest and FINRA rules by churning and excessively trading customer accounts. Separately, FINRA suspended the firm’s supervisors, Marc Harrison and Kelli Messatesta, who both failed to identify and investigate the firm’s pervasive misconduct despite numerous red flags. Harrison and Mezzatesta were suspended for three months in all principal capacities, and fined $5,000 each, as well as being required to complete 20 hours of supervision-related continuing education.
“This action underscores FINRA’s unique role as a self-regulatory organization committed to protecting retail investors from misconduct,” Bill St. Louis, Executive Vice President and Head of Enforcement at FINRA. “The egregious churning and excessive trading in this case resulted in significant customer losses over nearly six years, warranting the firm’s expulsion and permanent bars for the registered representatives responsible.”
Officials said FINRA determined the firm and its cofounders excessively traded a total of 20 accounts, several of which were also churned over the course of six years. Excessive trading is trading in a customer’s accounts that generates commissions for the broker but is not in the customer’s best interest. Churning is excessive trading undertaken with an intent to defraud or with reckless disregard for a customer’s interests. The misconduct caused customers to incur an estimated $2 million in commissions and trading costs and approximately $2.76 million in losses.
FINRA said both Reid and Rudger recommended high-volume, high-cost market-timing strategies to customers that made it virtually impossible for customers to make a profit. The misconduct violated the Care Obligation of Reg BI, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and FINRA Rules 2111, 2020 and 2010. FINRA said the misconduct was evident through disproportionate commissions and trading costs that resulted in high cost-to-equity ratios, which represents the return on a customer’s investments that would have been needed to cover commissions and expenses.