Cetera IBD failed to review trade alerts for 5 years, FINRA says
Cetera Financial Group’s smallest independent broker-dealer allegedly missed hundreds of alerts about excessive trading as its ownership was in flux.
For more than five years, Summit Brokerage Services didn’t review the alerts on turnover and cost-to-equity ratios sent by one of its clearing firms, FINRA said on July 2. The case comes two years after the regulator barred former Summit representative Christopher Jorgensen.
Jorgensen’s former clients have accused him of excessive trading; the firm’s settlement refers to the barred ex-Summit rep only by the initials “CJ.” One retiree with a net worth below $1 million paid $171,000 in commissions after the rep placed 533 trades over three years, FINRA says.
The clearing firm’s transaction alerts didn’t feed into the trade review blotter overseen by Summit’s three to six compliance principals between January 2012 and March 2017, according to the settlement. Summit missed more than 150 related to the ex-rep’s trades, FINRA says.
Summit also failed to supervise consolidated reports sent to clients of more than 100 advisors over a three-year span, according to the regulator. Without admitting or denying FINRA’s allegations, Summit agreed to pay more than $880,000 to settle the case. The Boca Raton, Florida-based firm has more than 400 advisors who generated $152.8 million in revenue last year as part of the $1.88 billion produced by Cetera’s six IBDs.
The affected clients “paid hundreds of thousands of dollars in commissions as a result of the excessive trading that occurred in their accounts,” FINRA Head of Enforcement Susan Schroeder said in a statement. “This enforcement action reflects the fact that obtaining restitution for harmed customers remains our highest priority.”
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Representatives for Cetera declined to comment beyond echoing language in FINRA’s press release noting that the firm consented to the entry of FINRA’s findings into its public database without admitting or denying the regulator’s charges.
FINRA representatives declined to discuss additional details of the case on top of what is included in the letter of acceptance, waiver and consent. An attorney who represented Jorgensen in the 2017 case before FINRA didn’t respond to requests for comment.
Of the two clearing firms disclosed in Summit’s current BrokerCheck disclosure, Wells Fargo’s First Clearing declined to comment and Pershing didn’t respond to an inquiry. It’s not clear which firm’s notifications did not get a review. It’s also not clear how many alerts were missed.
The case overlaps the June 2014 acquisition of Summit by RCS Capital as it was purchasing the larger Cetera network. The period FINRA examined also includes RCS’s January 2016 bankruptcy filing. Creditors sold the network to majority owner Genstar Capital last year.
Summit’s compliance principals didn’t notice the absence of the alerts from the trade blotter because the firm fed its other clearing partner’s alerts into the system, according to the settlement. Summit therefore never followed up on the red flags, the document states.
Meanwhile, the rep was racking up more than $650,000 in commissions by excessively trading in 14 clients’ accounts, according to FINRA. Another retired woman with a net worth below $500,000 paid $61,000 after the advisor recommended 267 trades, investigators say.
The barred advisor’s clients realized losses of more than $300,000. Summit agreed to pay restitution of $559,000 plus interest to settle the case. FINRA reduced the required restitution based on Summit’s previous settlements to affected clients, the document states.
Former clients of Jorgensen have received more than $142,000 under four settlements over his nearly three decades in the industry prior to the bar, according to FINRA BrokerCheck. The two most recent claims filed in the past two years included allegations involving excessive trading.
Before Jorgensen affiliated with Summit in 2012, Raymond James Financial Services discharged him over a client complaint of unauthorized discretion, BrokerCheck shows. Summit terminated him after a client alleged he had instructed her not to respond to a FINRA inquiry.
The regulator barred Jorgensen the following month after he refused to appear for testimony, according to his 2017 settlement. During the barred rep’s “excessive” trades, Summit had been relying on “a strictly manual review” of the blotter, according to FINRA’s case against the firm.
Its other supervisory failures revolved around the fact that only eight of the 103 reps sending consolidating reports submitted their templates for approval, investigators say. One report had material misstatements and 15 reps used unapproved outside vendors, according to FINRA.