A New Jersey-based brokerage firm has been kicked out of the industry for violating best interest standards, failing to supervise its reps and disclosure failings. In addition, a former rep of that firm is facing related criminal charges.
The U.S. Financial Industry Regulatory Authority Inc. (FINRA) expelled the firm, Monmouth Capital Management, for violating the Regulation Best Interest (Reg BI) standard by churning and excessively trading investors’ accounts, among other violations.
FINRA found that between August 2020 and February 2023, six Monmouth reps engaged in excessive trading in 110 client accounts and churned 42 of those accounts, costing clients approximately US$3.9 million in commissions and trading costs, and causing substantial losses.
The SRO noted that the victims included so-called “Gold Star families” — families of members of the U.S. military who died in the line of duty — who had funded their brokerage accounts with military death benefits and insurance payouts.
In addition to the Reg BI violations, FINRA said the firm failed to supervise its reps and provided false and misleading disclosures to retail investors.
“Monmouth abdicated its responsibility to reasonably supervise its representatives’ trading, resulting in substantial harm to customers, including Gold Star families. The egregiousness of the firm’s sales practice and supervisory violations necessitated expulsion of the firm from FINRA membership,” said Christopher Kelly, senior vice-president and acting head of FINRA’s enforcement department, in a release.
The firm settled the allegations and consented to the entry of FINRA’s findings without admitting or denying them.
Separately, the U.S. Department of Justice (DoJ) and the U.S. Securities and Exchange Commission (SEC), charged a former Monmouth broker and former U.S. Army financial counselor, Caz Craffy, for allegedly defrauding Gold Star families through excessive trading and risky, unsuitable investment strategies.
“Craffy used his position as an Army financial counselor to identify and target Gold Star families and other military families. He encouraged the Gold Star families to invest their survivor benefits in investment accounts that he managed in his outside, private employment,” the DoJ alleged.
According to authorities, Craffy generated US$1.4 million in commissions from his clients, who lost more than US$3.4 million from their trading.
Craffy was charged with six counts of wire fraud, one count of securities fraud and other charges.
The SEC’s complaint charged Craffy with violating federal securities laws and Reg BI. The regulator is seeking permanent injunctions, disgorgement, interest and civil penalties.
Those allegations have not been proven.