Newport Coast Securities, Inc. was recently expelled from FINRA membership fined $403,000 and ordered to pay $853,617.04 plus interest to customers in restitution for excessively trading in and churning customer accounts through five representatives and two registered principals.
The FINRA findings stated that:
- Newport’s customers impacted by their misconduct were predominantly older, nearing retirement, had little to no investment experience, and were primarily retail customers who were interested in investments with minimal risk and expressed no support for high trading levels. With this knowledge, Newport’s representatives “exercised de facto control over the customer accounts.”
- Newport Coast Securities violated both the Securities Exchange Act of 1934 and FINRA Rule 2020 by “churning” customer accounts, or encouraging frequent turnover of the investments to generate commissions while ignoring the clients’ interests.
- Newport’s representatives, “made qualitatively unsuitable recommendations regarding certain exchange-traded products.” One of the recommendations to customers was to purchase leveraged or inverse exchange-traded funds, or “ETFs,” with no reasonable basis to do so. During the FINRA proceedings, testimonies showed that the recommending representative did not have a full understanding of the ETFs or the correlating risks despite the expressed registration statements for those funds describe them as “high-risk investments intended for sophisticated investors.”
- Newport Coast Securities violated FINRA Rule 2010 and NASD Rules 3010 and 2110 by “failing to reasonably supervise the trading of its representatives.” The firm had knowledge of concerning issues regarding the questionable trading practices and received exception reports which provided evidence of continuous exceeding of specified thresholds. In short, the firm failed to respond in any manner to the trading.
In April 2020, Newport appealed the FINRA decision on the grounds that the proceedings were “constitutionally and procedurally defective,” containing an “excessive and oppressive” expulsion order. The SEC sustained the sanctions imposed by the National Adjudicatory Counsel (NAC) which became final.