FINRA Sanctions Joseph Stone Capital for Excessive Trading in Customer Accounts

On September 8, 2022, FINRA announced that it had ordered Joseph Stone Capital L.L.C. (“Joseph Stone”) to pay restitution of approximately $825,000 to customers whose accounts were excessively traded by the firm’s representatives.

In related settlements, FINRA suspended eight current or former Joseph Stone representatives and required them to pay, collectively, an additional $211,000 in restitution to impacted customers. Additionally, FINRA suspended three Joseph Stone supervisors for failing to reasonably identify or respond to red flags of excessive trading and barred two representatives for refusing to respond to FINRA’s requests for information in connection with the investigation.

If you suspect your account was excessively traded at Joseph Stone Capital L.L.C., contact New York securities arbitration lawyers Iorio Altamirano LLP for a free and confidential evaluation of your account.

Iorio Altamirano LLP represents investors nationwide that have disputes with their financial advisors or brokerage firms.

FINRA Letter of Acceptance, Waiver, and Consent No. 2019063821607

FINRA found that from January 2015 to June 2020, Joseph Stone failed to implement a supervisory system reasonably designed to comply with FINRA’s rules relating to excessive trading. As a result, the firm failed to identify or address representatives’ excessive and unsuitable trading in 25 customer accounts that caused the customers to pay more than $1 million in commissions, fees, and margin interest. The trading in these accounts generated cost-to-equity ratios—that is, the amount the accounts must increase in value just to cover commissions and other trading expenses—ranging from 21%-96%.

According to FINRA’s press release, the excessive trading in these accounts was evident in exception reports made available to Joseph Stone by its clearing firm, including an “active account report” that flagged accounts with high commission-to-equity ratios. However, the designated principal responsible for reviewing actively traded accounts often did not review this report. Even when a supervisor flagged an account for potential excessive trading, Joseph Stone did not respond appropriately. For example, in several instances, when the firm identified red flags of excessive trading, the firm responded by prospectively restricting the commission that the representative could charge for certain trades in the account. The firm, however, did not restrict the number of trades the representative could execute in the account or the aggregate commissions that could be charged—in other words, representatives could simply place more frequent trades in the account, earning higher commissions on a larger number of trades.

By this conduct, Joseph Stone violated FINRA Rules 3110(a) and (b) and FINRA Rule 2010.

FINRA Rules 3110, 2111 & 2010

FINRA Rule 3110(a) requires that member firms “establish and maintain a system to supervise the activities of each associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable FINRA rules.” FINRA Rule 3110 (b) requires that each FINRA member “establish, maintain, and enforce written procedures to supervise the types of business in which it engages and the activities of its associated persons that are reasonably designed to achieve compliance with the applicable securities laws and regulations, and with applicable FINRA Rules.” To comply with these obligations, a firm must reasonably investigate red flags of potential misconduct and take appropriate action when misconduct has occurred. A violation of FINRA Rule 3110 also constitutes a violation of FINRA Rule 2010, which requires FINRA members and associated persons to “observe high standards of commercial honor and just and equitable principles of trade” in the conduct of their business.

FINRA Rule 2111 requires that member firms and their associated persons “have a reasonable basis to believe that a recommended securities transaction or investment strategy involving a security or securities is suitable for the customer, based on information obtained through the reasonable diligence of the firm or associated person to ascertain the customer’s investment profile.” The rule imposes a “quantitative suitability” obligation that requires a member or associated person who has actual or de facto control over trading in a customer account to have a reasonable basis for believing that a series of recommended securities transactions are not excessive and unsuitable for the customer when taken together in light of the customer’s investment profile.

The Supplementary Material to FINRA Rule 2111 at Rule 2111.05(c) also states that “[n]o single test defines excessive activity, but factors such as the turnover rate, the cost-to-equity ratio, and the use of in-and-out trading in a customer’s account may provide a basis for a finding that a member or associated person has violated the quantitative suitability obligation.” Turnover rate represents the number of times that a portfolio of securities is exchanged for another portfolio of securities. The cost-to-equity ratio is the percentage of return on the customer’s average net equity needed to pay commissions and other expenses. A turnover rate above six or a cost-to-equity ratio above 20 percent generally indicates that an account has been excessively traded.

You can read more about excessive trading here.

Related Settlements

In related settlements involving Joseph Stone:

In settling these matters, the respondents consented to the entry of FINRA’s findings while neither admitting nor denying the charges.

How to Recover Losses or Obtain a Free Consultation

If you suspect your account was excessively traded at Joseph Stone Capital L.L.C., contact FINRA arbitration lawyers August Iorio and Jorge Altamirano of Iorio Altamirano LLP at or toll-free at (855) 430-4010 for a free and confidential evaluation of your account.

Iorio Altamirano LLP is a securities arbitration law firm based in New York, NY. We pursue FINRA arbitration claims nationwide on behalf of investors to recover financial losses arising out of wrongful conduct by financial advisors and brokerage firms.

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