Six years ago, in 2017, FINRA expelled member firm Craig Scott Capital over allegations about about excessive trading in customer accounts. The self-regulatory-organization then turned its gaze upon the firm's President/Chief Executive Officer Craig Scott Taddonio, Chief Operating Officer Brent Morgan Porges, and registered representative Edward Beyn. In the ensuing years, this regulatory saga passed before FINRA's Office of Hearing Officers, then to its National Adjudicatory Council, and, by 2023, to the Securities and Exchange Commission. For those unfamiliar with FINRA's regulatory process and the attendant appellate route, these cases are the equivalent of a driver's manual.
September 2017: Craig Scott Capital Expelled From FINRA
As set forth in "Disciplinary and Other FINRA Actions / November 2017"
Craig Scott Capital, LLC (CRD #155924, Uniondale, New York)
September 7, 2017 - An Office of Hearing Officers (OHO) decision became final in which the firm was expelled from FINRA membership. In light of the expulsion, no monetary sanctions were imposed. The sanction was based on findings that the firm, acting through three registered representatives, excessively traded in customer accounts. The findings stated the trading in the affected customer accounts was excessive based on the cost-to-equity ratios and turnover rates. The registered representatives had de facto control over the trading in the accounts. In light of the level of commissions, markups, markdowns and other charges to the customers, the level of trading was inconsistent with the customers' objectives and financial situations. The firm was responsible for the excessive trading of customer accounts by its registered representatives and was responsible for the representatives' excessive trading under principles of respondeat superior.
The findings also stated that the excessive trading in customer accounts constituted churning. Accordingly, by churning customer accounts, the firm violated Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5, and FINRA Rules 2010 and 2020. The findings also included that the firm failed to establish, maintain and enforce a reasonable supervisory system, including written supervisory procedures (WSPs) to prevent excessive trading and churning of customer accounts, and failed to reasonably supervise its registered representatives to prevent these behaviors. The firm's owners were aware of "red flags" indicating that registered representatives were, or might be, excessively trading and churning customer accounts. Nonetheless, the owners failed to reasonably respond to those red flags and thus failed to exercise reasonable supervision. FINRA found that the firm failed to establish a reasonable system and procedures to ensure that its sales force avoided contacting persons on the firm-specific do-not-call list and the national do-not-call list. The firm relied on an honor system, whereby members of the sales force would provide names to a sales assistant to place on the firm's do-not-call list, which was periodically circulated to the registered representatives. Generally, the firm's cold-callers routinely failed to check, or ignored, the internal list. FINRA also found that the firm provided false information to FINRA regarding the use of recording equipment and the recording of telephone calls at the firm. (FINRA Case #2015044823501)
July 2017: FINRA OHO Imposes Bars on Former Craig Scott Capital LLC's Edward Beyn, Craig Scott Taddonio, and Bren Morgan Porges
In the Matter of FINRA Department of Enforcement, Complainant, v. Craig Scott Taddonio and Brent Morgan Porges, Respondents (FINRA Office of Hearing Officers Extended Hearing Panel Decision; Discip. Proc. No. 2015044823501 / July 31, 2017)
In the Matter of FINRA Department of Enforcement, Complainant, v. Edward Beyn, Respondent (FINRA Office of Hearing Officers Extended Hearing Panel Decision; Discip. Proc. No. 2015044823502 / July 31, 2017)
The above FINRA enforcement cases were consolidated and all Respondents appeared pro se. As noted in the OHO Hearing Panel Decision:
These consolidated cases arise out of the operations of former FINRA member firm Craig Scott Capital, LLC (“CSC”). Respondent Craig Scott Taddonio was the President, Chief Executive Officer (“CEO”) and majority owner of CSC, while Respondent Brent Morgan Porges was the firm’s Chief Operating Officer (“COO”) and a minority owner. Respondent Edward Beyn was associated with CSC as a registered representative (“RR”).
As set forth in the "Summary" portion of the OHO Decisions:
Respondent Beyn excessively traded customer accounts, in violation of NASD Rule 2310 and FINRA Rules 2111 and 2010, and churned customer accounts in violation of Section 10(b) of the Securities Exchange Act of 1934, Exchange Act Rule 10b-5, and FINRA Rules 2020 and 2010. Beyn also made qualitatively unsuitable recommendations to a customer, in violation of NASD Rule 2310 and FINRA Rules 2111 and 2010. For those violations, Beyn is barred from associating with any FINRA member firm in any capacity.
Respondents Taddonio and Porges failed to exercise reasonable supervision in light of red flags indicating that Beyn and other registered representatives were, or might be, excessively trading customer accounts, and thereby violated NASD Rules 3010(a) and (b) and FINRA Rule 2010. For that violation, Taddonio and Porges are each barred from associating with any FINRA member firm in any principal or supervisory capacity.
Taddonio and Porges also each gave false testimony to FINRA in an on-the-record interview, in violation of FINRA Rules 8210 and 2010. For that violation, Taddonio and Porges are each barred from associating with any FINRA member firm in any capacity.
OHO: Principal/Supervisory-only Bars for Taddonio and Porge / No Fines
Notwithstanding its findings, the OHO Panel exercised some sanctioning restraint [Ed: footnotes omitted]:
Applying the same reasoning, the Panel concludes that, while barring Taddonio and Porges in all principal capacities is required to protect the investing public, the facts do not support a bar in all capacities.
With regard to fines or restitution, it appears from both the record in this proceeding and Taddonio’s CRD record that he filed for bankruptcy under Chapter 7 of the Bankruptcy Act in September 2016. Accordingly, the Panel will not impose any monetary sanctions against Taddonio. Porges, on the other hand, has not filed for bankruptcy, and thus could be subject to monetary sanctions. Given that the Panel cannot impose monetary sanctions on Taddonio, however, and considering Porges’ somewhat lesser responsibility for the failure to supervise, the Panel has determined to also not impose monetary sanctions against Porges for his failure to supervise. As with Beyn, but for Taddonio’s bankruptcy, the Panel would have imposed fines at the top of the range recommended in the Sanction Guidelines and would have considered whether to order restitution to at least some customers.
at Page 53 of the OHO Decision
January 2019: FINRA NAC Imposes Plenary Bars on Former Craig Scott Capital LLC's Taddonio and Beyn
Again acting pro se, Respondents Taddonio and Beyn appealed the FINRA OHO Extended Hearing Panel Decision to FINRA's National Adjudicatory Council ("NAC"). Although Respondent Porges had filed a Notice of Appeal, he withdrew it on April 23, 2018, and the OHO Decision against him is final.
In the Matter of FINRA Department of Enforcement, Complainant, v. Craig Scott Taddonio, Brent Morgan Porges, and Edward Beyn (FINRA National Adjudicatory Council Decision, 2015044823501 and 2015044823502 / January 29, 2019)
As set forth in the NAC Decision:
On appeal, both Taddonio and Beyn deny any wrong-doing. Beyn argues that his customers were sophisticated and were aware of and approved all the trading in their accounts. Beyn also denies the sale of unsuitable investments to one customer. Taddonio primarily argues that he delegated all supervisory responsibilities to the firm's chief compliance officers and that he himself had no supervisory duties. Taddonio also argues that the trading at the firm was approved by the customers and not excessive.
After an independent review of the record, we affirm the Hearing Panel's findings of violation and the sanction imposed on Beyn. With respect to Taddonio, we affirm the findings of violation, but modify the sanctions to impose a bar in all capacities for Taddonio's egregious supervisory violations. Our findings, and the sanctions we impose, are supported by the record and the Hearing Panel's extensive credibility findings.
at Page 1 of the NAC Decision
As to the rationale for increasing the Bar against Taddonio from a Principal/Supervisory-only to a plenary one, the NAC Decision states in part that:
For his supervisory violations, the Hearing Panel imposed a bar in all principal and supervisory capacities on Taddonio. We find this sanction insufficient given Taddonio's egregious supervisory violations and modify the sanction to impose a bar in all capacities. See, e.g., William J. Murphy, Exchange Act Release No. 69923, 2013 SEC LEXIS 1933, at *112 & n.155 (July 2, 2013) (sustaining an all-capacities bar imposed for egregious supervisory violations and noting that "[b]ecause proper supervision serves such an important role in protecting investors, egregious violations of supervisory rules often warrant the most severe sanctions"); Studer, 57 S.E.C. at 1026 (affirming a bar in all capacities for failure to supervise.
The record demonstrates that Taddonio played a key role in creating a culture at the firm that allowed, and even encouraged, excessive trading by brokers. Taddonio's communications with brokers emphasized generating revenue, and he gave monthly awards to brokers for accomplishments such as opening more accounts and generating the most revenue. This focus, combined with Taddonio's complete failure to respond to numerous red flags that brokers were excessively trading customer accounts to generate that revenue, demonstrates that Taddonio is unable to comply with the standards of conduct expected of securities industry professionals. We find that Taddonio presents a danger to the investing public and that a bar in all capacities is the appropriately remedial sanction for his violations.
at Pages 33 - 34 of the NAC Decision
February 2019: SEC Appeal Filed
On February 26, 2019, Beyn and Taddonio, appearing pro se, appealed the NAC findings and sanctions to the United States Securities and Exchange Commission.
In the Matter of the Applications of Edward Beyn and Craig S. Taddonio For Review of Disciplinary Action Taken by FINRA (SEC Opinion, '34 Act Rel. No. 97325; Admin. Proc. File Nos. 3-19007 and 3-19012 / April 19, 2023)
As explained in part in the SEC Decision:
Edward Beyn and Craig Scott Taddonio (“Applicants”) seek review of a FINRA disciplinary action barring them from association with any FINRA member firm in any capacity after FINRA found that they violated FINRA and NASD rules.1 FINRA barred Beyn after it found that, as a registered representative at member firm Craig Scott Capital, LLC (“CSC”), he (i) excessively traded and churned nine customer accounts; and (ii) recommended that a customer purchase unsuitable exchange traded notes (“ETNs”). FINRA barred Taddonio after it found that as the president, CEO, and sales-force supervisor at CSC, he (i) failed to exercise reasonable supervision in light of red flags of excessive trading; and (ii) gave false testimony at an on-the-record interview (“OTR”) that CSC did not possess and its personnel did not use recording devices. We sustain FINRA’s findings of violations and imposition of sanctions.2
= = =
1 Dep’t of Enforcement v. Taddonio, Complaint Nos. 2015044823501, 2015044823502, 2019 WL 397998 (FINRA NAC Jan. 29, 2019).
2 We deny applicants’ request for oral argument because we find that it would not significantly aid our ability to resolve this case. See Rule of Practice 451, 17 C.F.R. §201.451(a) (the Commission considers appeals from self-regulatory organizations based on the briefs alone, unless oral argument would “significantly aid”the decisional process).
at Page 2 of the SEC Decision
The SEC Decision offers a succinct summary of the the nature of Craig Scott Capital's business [Ed: footnotes omitted]:
In 2012, Taddonio and Porges founded CSC.Taddonio was the majority owner, president, and CEO, and Porges was the minority owner and COO. From 2012 to 2015, CSC had 15 to 40 registered representatives. Junior brokers cold-called prospective investors to open an account and make an initial trade. Senior brokers took over new accounts and solicited the customers to invest more money with CSC and continue trading. Beyn was a senior broker.
For every customer trade, CSC charged (i) a flat $99 fee; and (ii) up to the firm limit of 5% of the trade (reduced in May 2013 to 3.2%) as either a commission for agency transactions or a markup or markdown for riskless principal transactions. Brokers had discretion to run trades as either agency or riskless principal transactions, and to set the amount of the commission, markup, or markdown. Most trades at CSC were riskless principal transactions. CSC retained the entire $99 fee but paid the broker part of the commission, markup, or markdown. Most of CSC’s revenue came from commissions, markups, and markdowns.
For riskless principal transactions, CSC did not disclose in writing the amount of the markup or markdown. The customer account statements did not include that information, and the trade confirmations highlighted only three factors: (1) the “Principal” amount of the trade (the price per share times the total shares); (2) the $99 fee, referred to as the “Firm Commission”; and (3) the “Net Amount” of the trade (the “Principal” minus the “Firm Commission”). Although in a separate section for “[s]pecial remarks” the trade confirmations provided the “commission equivalent $ per share,” they did not explain that this number could be multiplied by the shares traded to determine the total markup or markdown, or even that this number related to a markup or markdown. For example, one trade confirmation stated “commission equivalent $0.77990 per share,” but did not explain that this could be multiplied by the 3,200 shares purchased to determine that there was a $2,495.68 markup. Customers could only learn if they were being charged a markup or markdown in addition to the $99 fee if they asked their brokers.
at Pages 3 - 4 of the SEC Opinion
FINRA Bar of Beyn Neither Excessive Nor Oppressive
As to Respondent Beyn's arguments that the FINRA Bar imposed upon him was excessive, the SEC responded with this sobering retort [Ed: footnotes omitted]:
Beyn acted with scienter, and aggravating factors predominate. Beyn intentionally defrauded six customers for more than two years to enrich himself by harming them. And Beyn blames his victims, asserting on appeal that the four who testified “lied under oath.” We agree with the NAC that Beyn “is a danger to investors” and “has no place in the securities industry.” Accordingly, we conclude that the bar FINRA imposed on Beyn from associating with any member firm in any capacity is neither excessive nor oppressive and is remedial.
Beyn contends that the oversight of Taddonio and the CCOs mitigates his misconduct. According to Beyn, they took steps “to protect client[s’] interests” by reducing commissions and sending the Affidavits of Support, and they authorized all trades and never told him any trades he executed “were prohibited or not in line with CSC’s Compliance policies.” He contends that CSC, Taddonio, and the CCOs should be the only ones held liable because they were responsible for his actions. These attempts at blame shifting fail because Beyn “is responsible for his actions and cannot shift that responsibility to the firm or his supervisors.” The fact that others also might have been remiss in their duties does not mitigate Beyn’s responsibility.
at Pages 12 - 13 of the SEC Opinion
Taddonio Presents a Danger to the Investing Public
In similar fashion, the SEC shredded through Respondent Taddonio's arguments:
[W]e agree with the NAC that Taddonio’s supervisory failures demonstrate that he “is unable to comply with the standards of conduct expected of securities industry professionals” and that he “presents a danger to the investing public.” Accordingly, we conclude that the bar imposed on Taddonio from associating with any firm in any capacity was neither excessive nor oppressive and appropriately remedial.
Taddonio contends that the bar is excessive because there is “no evidence that [he] ever suggested a broker should actively trade or churn a customer’s account,” and that there is no evidence he gave awards for “active trading.” But the absence of even more aggravating factors does not make Taddonio’s misconduct any less egregious. And the two mitigating factors Taddonio raises are not compelling. First, Taddonio states that he fired Crockett as CCO despite the firm having just received a “spotless cycle-exam” because he thought Crockett “was not doing enough compliance-wise,” and Gentile then enhanced compliance efforts. Second, Taddonio states that after the relevant period of January 2012 through December 2014, Gentile and another employee enhanced compliance efforts further by reaching out to clients more regularly about active trading and Active Account Letters, by placing Beyn on heightened supervision, and by getting “rid of the few brokers we had issue with.” These facts, which pertain to either the firm’s compliance generally or the period of time after the misconduct at issue, do not outweigh Taddonio’s egregious failure to implement any procedures reasonably designed to prevent the excessive trading of which he was aware.
Furthermore, we do not find mitigating Taddonio’s statement that he has some responsibility for hiring the people to whom he delegated supervisory responsibility and that he “should not have sat back and relied on them completely.” According to Taddonio, with “the benefit of hindsight,” there are areas that he “could have acted on sooner as CEO, and that [he] would act on immediately if they occurred today.” As discussed above, the record does not establish that Taddonio delegated his responsibility for supervising the brokers. As a result, these assertions reflect Taddonio’s effort to shift blame to the CCOs and are not mitigating. They do not demonstrate that he recognizes and accepts responsibility for his wrongdoing.
at Pages 18 - 19 of the SEC Opinion
FINRA Attorney Advised NAC and Handled SEC Appeal
One interesting -- perhaps even "odd" -- aspect of Taddonio's appeal is his contention that:
[I]t was improper for a FINRA staff attorney to advise the NAC and then handle this appeal. But we have found no conflict of interest where staff participates in a decision and its defense.107 In any event, we have conducted our own independent review of the record and have determined based on that review that Beyn and Taddonio committed the violations FINRA found and that the sanctions are not excessive.108
= = =
107 Richard F. Kresge, Exchange Act Release No. 55988, 2007 WL 1892137, at *15 (June 29, 2007) (finding no conflict where an NASD attorney “work[ed] on a brief [to the SEC] defending [an] earlier decision” he participated in as chairman of the NAC panel).
108 Asensio & Co., Inc., Exchange Act Release No. 68505, 2012 WL 6642666, at *13 (Dec.20, 2012) (finding no improper contact between FINRA’s Office of the General Counsel and its Department of Member Regulation but finding in any event that the Commission’s independent review of the record supported FINRA’s decision).
at Pages 29 - 30 of the SEC Decision
Accordingly, the SEC sustained FINRA's disciplinary action against Respondents Beyn and Taddonio.
Bill Singer's Comment
Congratulations to FINRA for penning and publishing exhaustive and compelling OHO and NAC Decisions, each of which is extremely well written. Overall, I am persuaded by FINRA's and the SEC's presentations and take no issue with the findings or the sanctions.
One issue that I think that is worth addressing is Taddonio's allegation that a FINRA staff attorney had advised the NAC, and, thereafter, that same attorney handled aspects of FINRA's defense against the appeal to the SEC. Taddonio tagged that attorney's dual roles of advice to the NAC and subsequent appellate conduct as presenting a "conflict of interest."
The SEC disagreed with Taddonio's position and cited Richard F. Kresge as having established the precedent that an NASD attorney, who had "participated in as chairman of the NAC panel" was not conflicted when he worked on NASD's appellate brief to the SEC.
Ummm . . . seriously? The SEC thinks that it's okay for an individual to serve as the Chair of a regulator's disciplinary panel and, thereafter, also work on that same regulator's appellate brief defending the panel's decision?
I can't even begin to wrap my head around that one -- imagine that a member of a District Attorney's staff sits on a jury during her office's criminal trial and then that same staffer helps the DA's office draft its appellate brief in response to the convicted Defendant's appeal?
I never liked Kresge nor agreed with its rationale. Someone is going to have to explain to me why an NASD attorney was seated as the Chair of an appellate NAC panel. And when you're done walking me through that, then explain to me why that NASD attorney/NAC Chair would be asked to work on the regulator's appellate brief to the SEC. That seems so wrong a proposition on so many levels that I can't even imagine how any "reasonable" third-party could objectionably find it okay for a regulator's staff lawyer to Chair a disciplinary panel, and, thereafter, participate in the drafting of the regulator's appellate brief or in any appellate argument thereafter.
Before you're too quick to weigh in with your opinion, please consider: In the Matter of Department of Enforcement, Complainant, v. Devin Lamarr Wicker, Respondent (FINRA NAC Decision, Complaint No. 2016052104101 / December 15, 2021) (the "Wicker NAC Decision")
In Wicker, an OHO Hearing Panel Decision found in June 2020 that Respondent Wicker had converted customer funds in violation of FINRA Rules 2150 and 2010; and he was barred in all capacities and ordered to pay $50,000 in restitution. All in all, a somewhat mundane fact pattern and decision, except for this:
[P]rior to the June 2020 Hearing Panel decision that is the subject of this appeal, a different FINRA Hearing Panel conducted a hearing in February 2019 regarding the same alleged misconduct and issued a decision in March 2019. The March 2019 decision found that Wicker converted customer funds, barred him, and ordered that he pay the customer $50,000 in restitution.
FINRA’s Chief Hearing Officer, however, vacated the March 2019 decision because after it was issued, she learned that circumstances existed where the fairness of the presiding Hearing Officer who authored the March 2019 decision (the “Former Hearing Officer”) might reasonably be questioned. The Chief Hearing Officer based her decision to vacate the March 2019 decision on the fact that several months after the decision was issued, the Former Hearing Officer left the Office of Hearing Officers and joined Enforcement in a senior role. To address this situation, the Chief Hearing Officer vacated the March 2019 decision in its entirety, directed that no weight or presumption of correctness be given to any prior decisions, orders, or rulings previously issued in the matter, and appointed a new Hearing Officer and hearing panel to conduct a new proceeding. Further, procedures were put into place to ensure that the Former Hearing Officer did not have any role in the new proceeding. The new Hearing Panel conducted a new proceeding and issued the decision in June 2020 that is the subject of this appeal.
at Page 2 of the Wicker NAC Decision
In addressing Respondent Wicker's appellate arguments that he was prejudiced by what he characterized as the OHO Hearing Officer's conflict, the NAC found in part that:
Finally, even assuming that the record had demonstrated that Enforcement engaged in negotiations with the Former Hearing Officer while the case was under consideration by the First Hearing Panel (which it does not) such that the Former Hearing Officer had an actual conflict of interest and not merely an appearance of a conflict, we find that the appropriate remedy would have been to vacate the First Hearing Panel’s decision in its entirety and order a new hearing, as was done here. Cf., e.g., Williams v. Pennsylvania, 136 S. Ct. 1899 (2016) (vacating and remanding case so that appellant could present his claims where judge who sat on appellate panel that vacated lower court’s penalty-phase relief and reinstated death sentence had been the district attorney who participated in the case below and finding that his failure to recuse himself presented an unconstitutional risk of actual bias); Shell Oil Co. v. U.S., 672 F. 3d 1283 (Fed. Cir. 2012) (vacating summary judgment orders in favor of plaintiffs and remanding case with instructions to reassign it to a different judge where trial judge should have recused himself based upon a conflict of interest because he and his wife held financial interests in several of the plaintiffs’ parent companies); Parker v. Connors Steel Co., 855 F.2d 1510, 1527-28 (11th Cir. 1988), cert. denied, 490 U.S. 1066 (1989) (stating that in fashioning relief to address an adjudicator’s appearance of partiality or an actual conflict under federal statute addressing disqualification of adjudicators, the same balancing approach applies).
at Pages 20 - 21 of the Wicker NAC Decision
JPMorgan Seeks TRO Against Advisor Who Fled to Morgan Stanley / In a complaint filed last week, JPMorgan accused the advisor of criticizing its investment offerings and the advisor who replaced him, to induce clients to make the jump to Morgan Stanley. (Financial Advisor IQ by Glenn Koch)
CFPB Issues Guidance to Protect Homeowners from Illegal Collection Tactics on Zombie Mortgages / It is illegal for debt collectors to sue or threaten to sue to collect debts past the statute of limitations (CFPB Release)
Georgia Man Indicted for Scheme to Defraud Elderly Suffolk County Victim of More Than $5 Million / Defendant and his Co-Conspirators Falsely Told Victim to Send Millions of Dollars to Claim Certificate Needed for "Inheritance" (DOJ Release)