April 7, 2020
FINRA member firm Newport Coast Securities, Inc. was charged in part with failing to reasonably supervise. After an Office of Hearing Officers Extended Hearing, the Panel's finding was harsh: The firm, through its management, had utterly failed to properly supervise. Not just failed but utterly so. Armed with that finding, the Panel expelled the firm. On appeal to the SEC, the firm (now out of business) argued that FINRA's expulsion was punitive, inappropriately disproportionate treatment, and constituted an undue burden on competition. The SEC would have none of it and affirmed the expulsion.
Respondent Newport Coast Securities, Inc.
FINRA member firm Newport Coast Securities, Inc. f/k/a "Grant Bettingen, Inc." had been acquired in June 2008 by Rubicon Financial Services, which changed the name to "Newport Coast Securities, Inc." in the fall of 2009. In the Matter of Newport Coast Securities, Inc., Douglas A. Leone, and Andre V. LaBarbera, Respondents
(Extended Hearing Panel Decision, Office of Hearing Officers, Disc. Proc. No. 2012030564701 / October 17, 2016)
2012030564701_FDA_JMX3238%20%282019-1563164360193%29.pdf. By the end of 2010, Newport purportedly had up to 130 registered representatives. Based on Newport's alleged failure to pay fees to FINRA, and its having filed a Uniform Request for Broker-Dealer Withdrawal ("Form BDW") on August 3, 2016, the firm's FINRA membership was cancelled on September 6, 2016. Effective October 2, 2016, the United States Securities and Exchange Commission ("SEC") terminated Newport's SEC registration.
As set forth in the FINRA OHO Decision [Ed: footnotes omitted]:
Page 7 of the OHO Decision
Leone entered the securities industry in 1993 as an unregistered cold caller. He was first registered as a General Securities Representative with another firm in 1994, and moved frequently from firm to firm before becoming registered with Newport Coast in 2008. He left Newport Coast in 2013 and is currently registered through another FINRA member film. During his career, he has been registered with approximately 14 member firms. While with Newport Coast, Leone was assigned to the firm's Long Island, New York, branch office but worked primarily from his homes, first in New York and then in Connecticut. Throughout his career, Leone has generated customers primarily through cold calling; indeed, he testified that during his entire career he has only met one of his customers in person.
Respondent La Barbera
LaBarbera LaBarbera was first licensed as a General Securities Representative in 1990. Like Leone, he was associated with many FINRA member films over the succeeding years before becoming associated with Newport Coast in July 2008. He left Newport Coast in July 2012 and is currently associated with another FINRA member film. During the period prior to associating with Newport Coast, he fornied a partnership with defaulting Respondents Levy and Costanzo through which they shared commissions. Each of the partners, however, had his own customers and the Panel evaluated LaBarbera's conduct based solely on the evidence regarding his customers. Like Leone, throughout his career LaBarbera has obtained customers primarily through cold calling, and he did so while he was associated with Newport Coast.
Page 7 of the OHO Decision
2014 FINRA Complaint
As set forth in the OHO Decision:
The Department of Enforcement filed the Complaint in this matter on July 28, 2014, naming eight Respondents: Newport Coast Securities, Inc., a FINRA member firm, two former registered principals of the firm, Marc A. Arena and Roman Tyler Luckey; and five former registered representatives ("RRs") of the film, Douglas A. Leone, Andre V. LaBarbera, David M. Levy, Anthony Costanzo, and Donald A. Bartelt. The Complaint set out a total of nine causes of action against those Respondents. Arena and Luckey subsequently settled the charges against them, so those charges are not addressed in this Decision. Levy, Costanzo, and Bartelt defaulted. In accordance with FINRA Rule 9269, the Hearing Officer, rather than the Extended Hearing Panel, will issue a decision addressing the charges against the defaulting Respondents. Therefore, this Decision only addresses the charges in the Complaint against Newport Coast, Leone and LaBarbera. In order to resolve certain charges against Newport Coast that were based on the activities of all five Respondent RRs, however, the Panel was required to make findings and reach conclusions regarding some of the allegations against Levy, Costanzo, and Bartelt set forth in the Complaint.
Page 2 of the OHO Decision
2016 OHO Decision: Expulsion, Bars, and Fines
After 19 days of hearings during November 2015 and January 2016 during which testimony was taken from 32 witnesses, a FINRA Office of Hearing Officers Extended Hearing Panel found that:
(1) Respondents Leone and LaBarbera, and Respondent Newport Coast Securities, Inc., through Leone, LaBarbera and three other Registered Representatives, recommended quantitatively unsuitable trading in, and churned, the accounts of customers; (2) LaBarbera and Newport Coast, through LaBarbera and two other Registered Representatives, recommended qualitatively unsuitable investments to customers; (3) Newport Coast failed to properly supervise five Registered Representatives who recommended quantitatively unsuitable trading in, and churned, customer accounts; and (4) Leone conveyed inaccurate account values to a customer on several occasions.
For these violations, Newport Coast is expelled from FINRA membership and ordered to pay restitution and a fine; Leone is barred from association with any FINRA member firm and ordered to pay restitution and a fine; and LaBarbera is barred from association with any FINRA member firm and ordered to pay restitution and a fine. In addition, Respondents, jointly and severally, are ordered to pay hearing costs.
The additional charges that LaBarbera mismarked certain solicited trades as unsolicited and that Newport Coast failed to properly supervise the sale of Exchange Traded Products are dismissed.
at Pages 1 - 2 of the OHO Decision
Summarizing the OHO Decision, the Panel expelled Newport from FINRA membership and imposed a $1 million fine upon the firm. Further, the OHO Panel imposed a Bar upon both Leone and La Barbera plus respective fines of $400,000 and $125,000. Finally, the OHO Panel ordered that Newport pay restitution on a joint and several basis with Leone and separately with La Barbera (with the fines offset by proven restitution). In offering its rationale for the imposition of the Expulsion and the Bars, in part the OHO Panel states [Ed: footnotes omitted]:
The Panel first considered Enforcement's request that Leone and LaBarbera be barred and that Newport Coast be expelled. The primary violation in this case was the excessive trading of the customers' accounts. For excessive trading or churning, the Sanction Guidelines recommend a suspension in any or all capacities for a period of 10 business days to one year, or in egregious cases, a longer suspension ofup to two years or a bar. Similarly, for unsuitable recommendations, the Guidelines provide: "Where aggravating factors predominate, strongly consider a bar for an individual respondent." Leone's excessive trading and churning of eight customer accounts was plainly egregious. Several ofthe applicable relevant factors listed in the Guidelines apply to Leone: (1) Leone has accepted no responsibility for or acknowledged his misconduct; (2) Leone did not, prior to detection, attempt to remedy his misconduct or to pay restitution to the injured customers; (3) Leone engaged in numerous acts and a pattern of misconduct; (4) Leone engaged in the misconduct over an extended period oftime; and (5) the misconduct caused substantial injury to the affected customers. The Panel discerns no mitigating factors relating to Leone's excessive trading and churning violations. Accordingly, the Panel concludes that a bar is the appropriate sanction for those violations.
In comparison to Leone's misconduct, LaBarbera's appears less egregious. Enforcement offered evidence relating to only four ofhis customers, three ofwhom testified, and both the turnover rates and cost-to-equity percentages for LaBarbera's customers were somewhat lower than those for Leone's. Nevertheless, all ofthe aggravating factors applicable to Leone also applied to LaBarbera, and while LaBarbera's customers had somewhat lower turnover rates and cost-to-equity percentages than Leone's, the figures for LaBarbera's customers were substantially higher than the turnover rates and cost-to-equity figures identified by the NAC and the SEC as excessive. In addition, LaBarbera recommended qualitatively unsuitable purchases of ETPs, and the Panel finds that violation to also be egregious, with the same aggravating factors. Accordingly, the Panel concludes that LaBarbera, too, should be barred.
Enforcement's request that Newport Coast be expelled presents a more difficult issue. The expulsion of a member firm is a harsh remedy, with serious ramifications for the film's employees, RRs, customers, and owners, and therefore is appropriate only when necessary to protect the investing public. The Panel's determination that Newport Coast recommended quantitatively and qualitatively unsuitable trading and churned customer accounts is based on the imputed conduct of just five of more than 100 Newport Coast RRs during the relevant time period, and those five RRs are no longer associated with the film. By themselves, therefore, those violations might not support expulsion as the appropriate sanction.
But the Panel's determination of the appropriate sanctions here does not rest solely on the five RRs' violations. The firm, through its management, utterly failed to properly supervise at least four of the five RRs. . . .
At pages 64 - 65 of the OHO Decision
2018 NAC Appeal
Respondents Leone, La Barbera and Newport appealed the OHO Decision to FINRA's National Adjudicatory Counsel ("NAC"). On appeal, Leone and La Barbera contest the OHO's findings of liability and its Order to pay restitution; however, Newport is only contesting its expulsion.In the Matter of Newport Coast Securities, Inc.,, Douglas A. Leone, and Andre V. La Barbera, Respondents (Decision, National Adjudicatory Council, Disc. Proc. No. 2012030564701 / May 23, 2018) [Ed: Note that the OHO Decision refers to Respondent "LaBarbera," whereas his name has been changed in the NAC Decision to "La Barbera"]
As set forth in part in the NAC Decision:
We affirm the Hearing Panel's findings that Newport, Leone, and La Barbera engaged in excessive trading and churned customers' accounts; Newport and La Barbera made unsuitable recommendations to customers; Leone provided inaccurate information to a customer by overstating the customer's account value; and Newport failed to supervise reasonably the activities of Leone, La Barbera, Levy, and Costanzo. Accordingly, and in summary for the foregoing violations, Newport is expelled and fined $403,000; Leone is barred and fined $185,000; and La Barbera is barred and fined $125,000. Newport shall pay to its customers, as set forth in Addendum A, restitution totaling $853,617.04. Leone shall pay to his customers, as set forth in Addendum A, jointly and severally with Newport, restitution totaling $325,853. La Barbera shall pay to his customers, as set forth in Addendum A, jointly and severally with Newport, restitution totaling $86,940.35. We further order that the respondents make full restitution to their customers before paying the fines. We affirm the Hearing Panel's order that Newport, Leone, and La Barbera pay, jointly and severally, hearing costs totaling $40,353.38, and we impose appeal costs, jointly and severally, of $1,680.42. The expulsion and bars are effective upon service of this decision.
At page 88 of the NAC Decision
In affirming the OHO's credibility findings, the NAC explained in part that [Ed: footnote omitted]:
We determine that the evidence establishes that Leone, La Barbera, and Newport engaged in excessive trading with scienter, in violation of NASD and FINRA rules and in violation of the federal antifraud provisions. Central to our findings that the respondents excessively traded and churned customer accounts is the evidentiary issue of the Hearing Panel's adverse credibility findings in response to hearing Leone's and La Barbera's testimony when compared with their customers' "highly credible" testimony as well as the credible testimony of the customers of the Defaulting Respondents. The Hearing Panel made extensive credibility findings and gave specific, cogent reasons for its disbelief of Leone and La Barbera. Neither answered questions directly nor accepted any responsibility for trading the customers' accounts in a way that resulted in exorbitant costs to customers. In comparison, the customers nearly all accepted some personal responsibility for trusting their Newport representative, their failure to review closely their Newport new account documentation, and their failure to monitor their Newport accounts.
At Page 34 of the NAC Decision
Appropriateness of Expulsion
In affirming the OHO's expulsion of Newport, the NAC noted, in part, that:
[T]he firm never critically questioned
the high trade activity, commissions, and mark-ups in the customers' accounts, despite the
amount of total commissions or mark-ups charged relative to the total account value and the
accounts' many appearances on exception reports. Newport readily approved customers' new
account documentation that permitted these representatives to use margin to support their trading
without probing whether such trading was suitable for customers. The firm also permitted La
Barbera, Levy, and Costanzo to make unsuitable recommendations of exchange-traded products
to unsuspecting retail customers. Newport, despite its awareness of the many red flags, did not
limit the trading of any of these representatives because they were significant financial producers
for the firm.
Newport has admitted that its "underlying conduct was egregious" and that the
Guidelines "would permit expulsion of the firm." Nonetheless Newport argues that expulsion is
impermissibly punitive. Expulsion of a firm such as this one is precisely the consequence
necessary to protect the investing public and well-within FINRA's discretion under the
Guidelines. Newport ignored over and over for years the glaring red flags that enabled Leone,
La Barbera, and the Defaulting Respondents to engage in securities fraud by churning vulnerable
customers' accounts that enriched the firm and these individual respondents and caused real and
substantial injury to the affected customers.
Although Newport is no longer in business,'" a number of Newport representatives have
subsequently associated with another member firm, Firm 2. Thus, Enforcement argues in favor
of expulsion because it would trigger the tape recording of conversations at Firm 2. Newport, in
response, contends that the expulsion is an "undue burden on competition" because Firm 2
would be required to tape "all of its calls or fire half the Newport brokers and staff that it hired."
FINRA Rule 3170 is known as the "Taping Rule." The collateral application of the
Taping Rule is not relevant to a determination of sanctions. . . .
At Page 80 of the NAC Decision
In its affirmation of FINRA's findings and sanctions, the SEC noted that [Ed: footnotes omitted]:
[N]ewport has waived any challenge to the findings of violations. Since the hearing panel issued its decision, Newport has raised only constitutional and procedural objections and objections to the appropriateness of expelling it from FINRA membership. Newport did not challenge the findings of violations when it appealed the hearing panel's decision to the NAC, and it does not challenge the findings of violations on appeal to the Commission. Under the circumstances, we hold that Newport has waived any arguments regarding the findings of violations or the appropriate sanctions except with respect to its expulsion from FINRA membership. Nonetheless, consistent with our standard of review discussed above, we review FINRA's findings of violations before considering the expulsion.
At Page 4 of the SEC Opinion
In affirming FINRA's findings of violations, the SEC found that Newport was liable for the excessive trading, churning, and unsuitability by its registered representatives, who were deemed to be acting within the scope of their employment. As to the issue of the firm's failure to reasonably supervise, in affirming FINRA's findings, the SEC noted, in part, that:
Newport's senior management knew about red flags surrounding its representatives' trading. They received exception reports from Newport's clearing firms showing that the trading in Leone's, La Barbera's, Levy's, and Costanzo's customers' accounts repeatedly exceeded specified thresholds. Indeed, Newport's chief compliance officer ("CCO") testified that he knew about Leone's, La Barbera's, Levy's, and Costanzo's excessive trading and the firm's failure to respond. For example, he admitted that he knew Leone was excessively trading customers' accounts and that he never directed Arena or the trading desk to stop Leone from doing so. Nor was he aware of any other member of Newport's management that did so.
The CCO also explained that, although Newport placed its representatives on heightened supervision in May 2012 in response to FINRA's investigation, he did not order the firm's compliance department to review or investigate those representatives' customer accounts. He reasoned that "there weren't any secrets about what was taking place with these" registered representatives, that Newport's then-CEO "was fully cognizant of what was going on," and that he didn't "know what it would have accomplished other than to paper some files, but I don't think it would have resulted in any changes." The CCO testified further that Newport had received numerous customer complaints about La Barbera, Costanzo, and Levy and that he informed the firm's CEO about them. But the CCO had no ability to limit the trading of these representatives or terminate them because, according to him, Newport's CEO "ruled with an iron fist" and "there wasn't anything that was said or done without her approval." The CCO acknowledged that Newport's supervisory structure "was less than adequate."
At Page 15 of the SEC Opinion
Order of Expulsion
As to the contentious issue pertaining to FINRA's expulsion of Newport, the firm argued that its expulsion was
In affirming FINRA's sancttions, the SEC noted, in part, that [Ed: footnotes omitted]:
- punitive because it was out of business;
- inappropriately disproportionate treatment; and
- an undue burden on competition given the collateral consequences for its former associated person.
[N]ewport abused its customers' trust and confidence by excessively trading and churning their accounts and by making qualitatively unsuitable recommendations. These were not isolated incidents; rather, they were repeated, years-long securities law violations committed against more than twenty customers by multiple representatives and across multiple offices.
Newport's failure to respond to indications that misconduct was occurring was especially egregious. Exception reports repeatedly identified red flags about its representatives' trading, but the firm took no action in response. Indeed, the firm's CCO testified that Newport received numerous customer complaints about La Barbera, Costanzo, and Levy and that the firm's CEO prevented him from disciplining them. Newport's inaction harmed its customers by imposing unnecessary commissions, markups, and markdowns from excessive trading and churning. The firm benefited financially from this misconduct by retaining a portion of the commissions, markups, markdowns, and its customers suffered substantial losses.
At Page 17 of the SEC Opinion
The Punitive Argument
As to Newport's argument that its expulsion by FINRA was "punitive," the SEC noted, in part, that [Ed; footnotes omitted]:
Regardless of whether Newport would seek to reenter the industry, moreover, expelling the firm provides additional important protections for investors. Specifically, an expulsion triggers FINRA Rule 3170 ("the Taping Rule"). The Taping Rule requires certain member firms to record all telephone conversations with existing and prospective customers if a certain percentage of the firm's registered persons have been employed by a firm "that, in connection with sales practices involving the offer, purchase, or sale of any security, has been expelled from membership or participation in any securities industry self-regulatory organization or is subject to an order of the SEC revoking its registration as a broker-dealer." In approving the Taping Rule, we found that its provisions would "discourage the revival of disciplined firms that have been barred by the industry or that have had their registrations revoked by the Commission." We explained that, "[i]n essence, firms that decide to hire significant numbers of employees from disciplined firms will be required to ensure a proper supervisory environment that protects investors and prevents fraudulent and manipulative telemarketing acts and practices." Thus, the purpose of the Taping Rule is remedial and not punitive as was FINRA's determination on this record that it was necessary to expel Newport (which could trigger the rule).
Newport argues that expulsion is punitive because it may trigger the Taping Rule for some of its former representatives who move to another firm but who may not have engaged in misconduct. Expulsion and the Taping Rule are no less remedial in this situation. We have noted previously that, under the Taping Rule, "[t]he monitoring of registered persons' telephone conversations will help to provide additional supervision of individuals who formerly worked at a disciplined firm where they were inadequately trained and supervised." Indeed, as discussed above Newport has a history of deficient supervision. We thus find that expelling Newport protects investors should Newport seek to reenter the industry and, because expulsion triggers the Taping Rule, regardless of whether Newport should ever seek to reenter the industry.
At Pages 19 - 20 of the SEC Opinion
The Disparate Treatment Argument
In rejecting Newport's arguments citing FINRA purported selective prosecution, the SEC noted, in part, that such a claim needed to prove that the firm had been [Ed: footnotes omitted]:
unfairly singled out for enforcement action when others who were similarly situated were not and that the applicant's prosecution was motivated by improper considerations such as race, religion, or the desire to prevent the exercise of a constitutionally protected right. Here, there is no evidence substantiating Newport's claim that FINRA unfairly singled out the firm for investigation or enforcement based on any of those grounds. Newport provides only broad, unsupported generalities about what it claims is the unequal prosecution of small and large firms. That is not an adequate basis for us to conclude that FINRA's expulsion of the firm resulted in inappropriately disparate treatment.
Nor can Newport succeed under the Equal Protection Clause on a "class-of-one" theory, under which someone who is not a member of a protected class nonetheless may assert an equal protection claim by showing that he or "she has been intentionally treated differently from others similarly situated and that there is no rational basis for the difference in treatment." The Supreme Court held in Engquist v. Oregon Department of Agriculture that a class-of-one claim is not cognizable in the context of activities or decisions that "by their nature involve discretionary decisionmaking based on a vast array of subjective, individualized assessments." Because self-regulatory organization "disciplinary proceedings are treated as an exercise of prosecutorial discretion," and "Engquist precludes [class-of-one] challenges to prosecutors' decisions about whom, how, and where to prosecute," Newport's claim fails as a matter of law. Newport's claim also fails because those asserting such a claim "must show an extremely high degree of similarity between themselves and the persons to whom they compare themselves"- something that Newport has not done.
Newport contends further that its expulsion is inappropriately disproportionate because "[t]he big firms, most of which have hundreds of disclosures, simply pay a fine no matter how egregious the conduct" and asks why, here, the two "direct line supervisors were only suspended but somehow an entire firm has to be expelled?" As discussed above, Newport does not identify a litigated proceeding involving a "big firm" that was found liable for excessive trading, churning, qualitatively unsuitable recommendations, and failures to supervise and that resulted in disproportionate sanctions to those at issue here. As for the two supervisors to whom Newport compares its sanction, they settled their proceedings. We have observed repeatedly that " 'comparisons to sanctions in settled cases are inappropriate.' "
At Pages 22 - 23 of the SEC Opinion
Bill Singer's Comment
Now that's what a Class-A bit of Wall Street regulation looks like! Compliments all the way down the line from FINRA's OHO to FINRA's NAC and to the SEC for publishing compelling decisions replete with sufficient content and context.