“Or Worse, Expelled.”

Hermione Granger (yes, from Harry Potter) is famously attributed with the following quote: “I’m going to bed before either of you come up with another clever idea to get us killed. Or worse, expelled.” Unfortunately, cleverness failed to save Salomon Whitney Financial, LLC (SW Financial) recently when FINRA announced that it had followed through with its threats of increased enforcement efforts and expelled the firm and suspended its co-owner and CEO, Thomas Diamante.

FINRA announced on Friday, May 12, that it was expelling SW Financial, in part, because it had violated Regulation Best Interest (Reg BI). This is the first time FINRA has expelled a firm since Reg BI took effect in June 2020. The move by FINRA, however, tracks with its increased rhetoric that it will be cracking down on brokerage firms for Reg BI violations. As we have previously reported, the Division of Examinations of the Securities and Exchange Commission (the Division) has been busy implementing broker-dealer examinations to assess compliance with the regulation.

FINRA announced that it expelled SW Financial for multiple violations, including making misrepresentations to customers in its sales of private placement offerings of pre-initial public offering (pre-IPO) securities, churning customer accounts and failing to supervise its representatives. Christopher J. Kelly, Senior Vice President and Acting Head of FINRA’s Department of Enforcement, stated “serious misconduct in this case exposed customers to significant risk of harm and necessitated expulsion of SW Financial from FINRA membership.”

FINRA’s Reg BI-based determination arises from SW Financial’s and Diamante’s conduct concerning private placement offerings of pre-IPO securities between January 2018 and December 2021. FINRA found that for conduct after June 30, 2020, it violated Reg BI in the following ways:

  • Reg BI Disclosure Obligation. SW Financial told investors that it would receive a 10 percent sales commission from its sale of the Offerings. SW Financial, however, had entered into an agreement with the issuer to receive an additional 5 percent in selling compensation as well as half of any carried interest. SW Financial did not disclose this agreement to investors, and it made misrepresentations to FINRA concerning the amount of compensation it would receive.
  • Reg BI Care Obligation. Before recommending and selling the Offerings, SW Financial did not confirm that the issuer possessed or had access to the pre-IPO shares identified in the offering documents or that the issuer’s markups were reasonable and not excessive. According to FINRA, SW Financial “lacked a reasonable basis to believe that the Offerings were suitable for, or in the best interests of, at least some customers.”

According to FINRA, SW Financial sold the private offerings to 171 investors, including 163 retail customers, and the firm and its owners received approximately $2 million in undisclosed compensation.

FINRA also determined on other non-Reg BI grounds that two former registered representatives improperly churned nine customer accounts causing them to incur $350,000 in total trading costs and realized losses of more than $465,000.

It is likely SW Financial and Diamante were already on FINRA’s radar. In the Letter of Acceptance, Waiver and Consent (AWC) [? Define: 1st use in document] notice, FINRA details SW Financial’s long history of FINRA violations, including a September 2011 AWC, April 2014 AWC and February 2018 AWC. FINRA also identifies a March 2011 Consent Order with the State of Connecticut, where SW Financial consented to findings that it willfully violated Connecticut law.

In this case, both SW Financial and Diamante agreed to the settlements with FINRA without admitting or denying its findings. They probably should have followed Hermione Granger’s advice and gone to bed.

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About the Author: Sandra D. Grannum

Sandra Dawn Grannum concentrates her practice on securities, broker/dealer arbitration, litigation, mediation and regulatory defense. She is co-chair of the Commercial Litigation Team.

Sandy has tried complex multimillion-dollar arbitrations before FINRA, AAA and JAMS across the country. She has represented brokerage firms, banks, clearing firms, and associated persons in over 60 arbitrations before the NASD and FINRA which have been tried through award. In addition, she has successfully pursued cases in state and federal courts and in adversarial proceedings before bankruptcy courts.

About the Author: Jamie L. Helman

Jamie L. Helman concentrates her practice on securities, broker-dealer arbitration, litigation, mediation, employment matters, and regulatory defense. She has experience first-chairing FINRA arbitrations, defended on-the-record testimony of broker-dealer employees before FINRA, and is presently involved in the representation of broker-dealers in several pending FINRA cases as well as regulatory matters.

About the Author: Justin M. Ginter

Justin Ginter is a litigator and advocate for a wide range of individual and corporate clients spanning multiple industries, including financial services and securities, business solutions, products and manufacturing, telecommunications, and real estate. Justin is known for his sensitivity and understanding of client needs and his dedication to achieving excellent results.

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