First Standard Financial Advisory, LLC, based in Red Bank, New Jersey, has been sanctioned and barred from doing business in the State of New Jersey based on the New Jersey Bureau of Securities’ findings that First Standard engaged in unauthorized, excessive, and unsuitable trading resulting in almost $8.5 million of commissions, sales charges, and fees. The firm has also agreed to pay restitution to customers who were charged excessive and/or unauthorized fees.
According to the Consent Order, First Standard has a history of hiring and retaining agents with histories of regulatory run-ins and customer complaints. The Bureau of Securites found that over half (58%) of First Standard’s agents had disclosures on their regulatory record between 2016 and 2019. The disclosures include customer complaints, arbitration claims, regulatory investigations and actions, liens and judgments, internal investigations by prior firms, and terminations for cause by previous firms. There were thirty-one pending customer complaints against former and current First Standard agents filed between 2018 and 2019.
In addition, the Consent Order reports that some agents of First Standard engaged in unauthorized trading strategies to maximize commissions without regard for suitability for the firm’s customers. This strategy involved executing short-term trades in customer accounts in which the commission charges made it unlikely that customers would break even, much less receive a reasonable return. They also employed short-term trading in bonds and other securities intended to be held as long-term investments.
In an October 31, 2019 Verified Complaint, the Attorney General of New Jersey argued that First Standard was allegedly aware of their agents’ conduct yet still failed to take necessary steps to prevent the widespread and relentless “in-and-out” trading of its customers’ accounts. First Standard’s default responses to customer claims were to defend its actions or buy off complaints with minor commission refunds while reaping the benefits of its on-going fraud.
On the same date, the New Jersey Bureau of Securities issued a Summary Order revoking First Standard’s broker-dealer registration and obtained a court-order freezing its assets.
Customers who were wronged by agents of First Standard include a 72-year-old retired widow who lost almost two million in two years; a 75-year-old man who lost over one and a half million in less than a year; and a 57-year-old truck driver who lost almost five times the amount of his annual income.
The Consent Order reports that First Standard agents advised customers they would not be charged commissions for transactions and omitted (a) the amount of commissions to be charged for trades, (b) the margin of trading executed in customers’ accounts, and (c) that the agent would engage in unauthorized, excessive, and/or unsuitable trading. These trading strategies are evident in the turnover rates and cost-to-equity ratios released by the Consent Order.
The turnover rate measures how often the equity value in an investor’s portfolio is traded in a year. Turnover rates of six or more presumptively indicate excessive trading. The annualized turnover rates of many First Standard customers significantly exceeded six, indicating unsuitable trading strategies by agents.
The cost-to-equity ratio represents the percentage of investment returns needed to pay the cost and commissions of the brokerage firm and its agent before an investor can profit on his or her investments. Many of First Standard’s customers had cost-to-equity ratios ranging from approximately ten percent to twenty-five percent or higher. Those customers would have to achieve returns of ten percent or more just to cover the costs of First Standard’s trading strategies.