FINRA boots small New York B-D from industry over churning

Already dead in the water, Reid & Rudiger, a New York broker-dealer with nine brokers, was expelled from the securities industry officially on Wednesday by FINRA, according to a settlement posted on FINRA’s website.  

The cause? The firm and its owners engaged in churning and excessive trading in customer accounts that led to millions of dollars in extra costs to clients, according to FINRA, violating Regulation Best Interest and industry rules. 

FINRA also barred the firm’s two founders, Clifford Reid and Edward Rudiger Jr., from working with any other broker-dealer, according to a statement from FINRA.

With offices at 40 Wall Street, Reid & Rudiger has been in the process of shutting down for weeks; at the end of April, the firm filed with FINRA what’s known as a “broker-dealer withdrawal” request. At the start of June, FINRA cancelled the firm’s registration after it didn’t pay industry fees.

Reid & Rudiger opened in 1999, the height of the dot.com stock boom. A call to the firm on Wednesday afternoon was not returned.

“FINRA determined that the firm and its cofounders excessively traded a total of 20 accounts, several of which were also churned over the course of six years with an intent to defraud or with reckless disregard for customers’ interests,” according to the self-regulatory organization. “This misconduct caused customers to incur approximately $2 million in commissions and trading costs and approximately $2.7 million in losses.”

“Excessive trading in a customer's account is trading that generates commissions for the broker but is not in the customer’s best interest,” according to FINRA. “Churning is excessive trading undertaken with an intent to defraud or with reckless disregard for a customer’s interests.”

Both Reid and Rudiger recommended to customers a high-volume, high-cost market-timing strategy that made it virtually impossible for customers to make a profit, according to FINRA. This activity was in violation of the Care Obligation of Reg BI as well as various industry rules.

“The misconduct was evident through disproportionate commissions and trading costs that resulted in high cost-to-equity ratios, which represents the return on a customer’s investments that would have been needed to cover commissions and expenses,” according to FINRA.

FINRA also suspended the Reid & Rudiger’s supervisors, Marc Harrison and Kelli Mezzatesta, who both failed to identify and investigate red flags related to the firm’s “pervasive misconduct,” for three months in all principal capacities, according to FINRA.

They both were also fined $5,000 each and required to complete 20 hours of supervision-related continuing education. 

In the settlement, the firm, as well as the executives Reid, Rudiger, Harrison and Mezzatesta, agreed to FINRA’s findings without admission or denial.