FINRA complaint slams California firm for 'ruinous' trading in senior client's account

FINRA’s department of enforcement has filed a complaint against Sutter Securities Inc. and its former chief executive over alleged excessive trading in the account of a 89-year-old retired client, accusing the San Francisco firm of allowing millions of dollars in commissions and losses to rack up while supervision and controls fell short.

According to the complaint filed Jan. 20 with FINRA’s Office of Hearing Officers, Sutter, acting through an unnamed former registered representative, recommended and executed 2,217 trades in two trust accounts belonging to a retired semiconductor executive between March 2020 and July 2021.

The complaint described how the customer, described as a California-based 89-year-old with a long-term growth objective and moderate risk tolerance, allegedly paid more than $2.9 million in trading costs and suffered about $1.2 million in realized losses over that 17-month period.

The enforcement department alleges that during the time Regulation Best Interest was in effect within the period in question, from June 30, 2020 through July 2021, the trading in the accounts generated roughly $2.5 million in trading costs and more than $1.8 million in realized losses, with annualized cost-to-equity ratios as high as 52%. Those ratios indicate how much an account must earn just to cover commissions and other costs.

During the relevant period, Sutter generated some $8.3 million in revenues from commissions charged to retail customers, according to the complaint.

The FINRA complaint noted that the trading strategy – assuming there was one, given the high frequency of movements in the accounts – bore little resemblance to the client’s stated profile. The accounts had turnover rates of up to 16, an average holding period of 17.3 days, and a pattern of frequent in-and-out trading, despite paperwork indicating a long-term growth objective and low liquidity needs. More than 90% of the trading allegedly involved margin, and by November 2020 the customer had a margin debit balance of about $7.66 million.

It also highlighted several individual round-trip trades where the representative quickly flipped large positions at small price changes, allegedly locking in losses for the client while generating sizable commissions. One transaction in June 2021 in a commodity-indexed trust, for example, produced a $44,000 loss but $28,400 in commissions, according to the complaint.

The enforcement department alleges the trading was “excessive, quantitatively unsuitable, and not in the customer's best interest,” citing the high costs, turnover, use of margin and realized losses. It further claims the representative “did not have a reasonable basis to believe” the series of trades was not excessive or in the customer’s best interest given the client’s profile and the substantial commissions involved.

Sutter is charged with willfully violating Regulation BI and FINRA Rule 2010 by permitting the alleged excessive trading. The complaint also seeks to hold Sutter and former Sutter executive Keith Charles Moore responsible for failing to supervise the activity and for ignoring multiple red flags.

Moore, a part owner of Sutter, served as chief executive officer and direct supervisor of the representative during the relevant period. The complaint says Sutter and Moore failed to identify or reasonably respond to “high trading volumes,” “substantial financial losses,” and other glaring red flags, even though Moore was the designated principal reviewing retail trading and commissions.

The FINRA complaint alleges that Moore relied on the representative's claims that he was using a “replication strategy," under which he would mirror trades of a third-party asset manager with a low-turnover approach. The alleged trading in the customer’s accounts, however, involved far more transactions in those same portfolio companies and frequent reentry into positions even after the asset manager had exited.

Beyond the individual account, FINRA says Sutter’s broader supervisory systems were not reasonably designed to catch excessive trading or email-related issues. The complaint alleges the firm’s written supervisory procedures did not spell out concrete metrics or processes for detecting excessive trading, required no quantitative reviews using turnover or cost-to-equity measures, and provided no guidance on how to respond when red flags appeared.

The complaint also raised concerns around electronic communications, claiming Sutter’s email review process was fragmented, largely undocumented, and lacked clear accountability or standardized methods, despite written policies stating that the compliance department and designated principals would conduct reviews.

The enforcement department is asking a FINRA hearing panel to find that Sutter and Moore violated multiple rules, impose sanctions including disgorgement or restitution with interest, and make a specific finding that Sutter willfully violated Regulation BI.