James Bradley Schwartz (Schwartz), recently faced a department of enforcement action in connection with allegations he churned (i.e. excessively traded) four customer accounts and also exercised discretion without authorization. As a result of the enforcement action, Schwartz was barred from the financial industry.
Schwartz (FINRA CRD No. 3043085) entered the financial industry in 1998 as general securities representative. Like many bad brokers, Schwartz worked for numerous firms throughout his career, including but not limited to John Thomas Financial (expelled); Aegis Capital Corp. (“Aegis”); First Standard Financial Company; and Joseph Gunnar & Co. LLC. Schwartz worked for Aegis during the relevant time period.
Schwartz’s FINRA BrokerCheck report discloses a pattern and practice of financial misconduct perpetrated upon his clients, including 11 negative disclosures, including eight (8) customer complaints related to various forms of financial misconduct and violations of federal and state securities laws. Schwartz also had a tax lien filed in 2016.
FINRA’s Department of Enforcement investigated Schwartz’s alleged misconduct and found while he was associated with LPL he engaged in churning, excessive and quantitatively unsuitable investment recommendations, and unauthorized trading in at least four customer accounts. According to FINRA, Schwartz executed approximately 535 trades in these customer accounts, which resulted in annualized turnover rates ranging from 19.9 to 54.7, and annualized cost-to-equity ratios (or break even points) ranging from 87% to 120%. The trading activity in the four customer accounts far exceeds industry norms and is often deemed evidence of per se churning. Schwartz generated approximately $277,705 in commissions from his illicit activity.
FINRA also alleged Schwartz exercised de facto control in the four customers’ accounts, which is a necessary element for a churning claim. However, Aegis did not approve the customers’ accounts for discretionary trading. Schwartz’s effort to control the accounts without proper written authorization from the customers constitutes the use of discretion and is a violation of federal law and company policy.
Based upon the foregoing alleged misconduct, FINRA found Schwartz violated Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 thereunder, and also violated FINRA Rules 2111, 2020 and 2010. FINRA Rule 2111 requires registered representatives to recommend suitable investment strategies to their clients (known as the suitability rule), which includes a prohibition against excessive trading (a/k/a churning). Typically, a claim for unsuitable investments is brought as a form of a negligence claim with the theory: the representative had a duty to recommend suitable investments; the representative breached the duty with unsuitable investments; and the representative’s unsuitable investments caused the investor damages.
Lufrano Law, LLC is a national investment litigation firm and has experience representing investors who have investment disputes with brokers and broker-dealers. Please contact us at (800) 627-2179 for more information if you have been the victim of investment negligence or fraud.