NEWARK – In the latest action in its ongoing investigation of First Standard Financial Company, LLC, in Red Bank, the New Jersey Bureau of Securities today announced it has revoked the broker-dealer’s registration and obtained a court-ordered freeze of the firm’s assets amid findings that its agents raked in more than $28.7 million through pervasive unauthorized, unsuitable, and excessive trading that unjustly enriched the firm and its agents at the expense of its customers.
According to documents issued by the Bureau and filed in Superior Court, First Standard routinely hired agents with a history of customer complaints and regulatory problems involving excessive, unsuitable, and unauthorized trading. First Standard and these agents then defrauded the firm’s clients through unsuitable and frequently unauthorized in-and-out trading for the purpose of generating sales commissions at their clients’ expense. This included short-term trading in bonds and other securities for which active trading is unsuitable.
First Standard was complicit in its agents’ unlawful conduct, the Bureau found. The Bureau also found that the sales commissions were so high that the accounts would have had to generate extraordinary returns simply to break even, much less earn a profit for the client.
"Investors are exposed to significant risks when financial services firms turn a blind eye to excessive, unauthorized trading on clients’ accounts and happily profit from the commissions and fees generated by such misconduct,” said Attorney General Gurbir S. Grewal. “By revoking First Standard’s registration and freezing their assets, we’re sending a clear message to broker-dealers in New Jersey today that they are responsible for the supervision of their agents and will face serious consequences if they fail to do so.”
In addition to issuing a Summary Order revoking First Standard’s broker-dealer
Registration on October 31, the Bureau filed documents in New Jersey Superior Court in Essex County asking the court to temporarily restrain First Standard from destroying any documents, computer files, or other business records; to freeze the bank accounts and other assets of the firm; and to order First Standard to provide the Bureau with a list of all its assets and liabilities.
The Honorable James R. Paganelli, J.S.C. granted all of the Bureau’s requests including the freeze of First Standard’s assets.
The Bureau has also asked the court to assess civil monetary penalties against First Standard for each violation of the Securities Law and to require the firm to pay restitution to clients and disgorge all profits or funds gained through violations of the Securities Law.
The actions announced today are the latest in the Bureau’s ongoing investigation of First Standard, which has seen an exodus of its agents and principals in recent months.
Last month, the Bureau revoked the registration of First Standard agent Philip J. Sparacino, who was the last producing agent at First Standard, and assessed him $250,000 in civil penalties for defrauding clients through excessive, unsuitable trading activities that earned him and First Standard more than $1.4 million in commissions and fees at their clients’ expense.
In May, the Bureau revoked the registration of former First Standard agent Gabriel Block and assessed him $750,000 in civil penalties for engaging in unsuitable, high-cost, fraudulent trading strategies that generated at least $1.6 million in commissions and fees for himself and his associated broker-dealers at the expense of his clients.
“Our investigation into excessive, unsuitable, and unauthorized trading at First Standard isn’t over,” said Paul R. Rodríguez, Acting Director of the Division of Consumer Affairs. “We fully intend to hold accountable everyone who contributed to their egregious abuse of the trust investors placed in them.”
The Bureau determined that First Standard was “keenly aware” of its agents’ conduct, as evidenced by the numerous client complaints and client-initiated arbitration filings, daily trade reports, exception reports, and regulatory inquiries. Yet, the firm continued to defend the conduct, or placate complainants with minor commission refunds, while continuing to reap the benefits of its ongoing fraud.
At the end of 2018, First Standard had 44 agents registered with the Bureau and had branch offices in New York. More recently, however, it saw an exodus of agents and principals leaving to join other broker-dealers. As agents left, many of their clients still maintained accounts at First Standard, thus creating the opportunity for other agents to access dozens of newly inherited client accounts and to generate exorbitant commissions at the clients’ expense.
Such was the case with Sparacino, whose unlawful trading activities increased as other agents left the firm. In April and May 2019, Sparacino generated a total of only $24,258 in commissions and fees. By comparison, from June 1, 2019 through October 4, 2019, Sparacino generated $1,452,514 in commissions and fees. Sparacino’s registration as an agent was revoked by the Bureau on October 8, 2019.
“First Standard held itself out as a legitimate financial services firm but in reality the firm served as a haven for greedy, dishonest agents who traded clients’ accounts like sharks in a feeding frenzy,” said Christopher W. Gerold, Chief of the Bureau of Securities. “Through the actions announced today, we put an end to First Standard’s unlawful boiler room operation and secured a court order to preserve what’s left of its ill-gotten gains to potentially reimburse clients for the money they lost.”
Deputy Bureau Chief Amy Kopleton, Director of Examinations Stephen Bouchard, and Investigators Dorian Gross, Perry Traina and Judith Keilp investigated the matter for the Bureau. Assistant Attorney General Brian F. McDonough, Deputy Attorneys General Andrew H. Yang, Alex Schmidt, Isabella Trifilio Stempler and Evan A. Showell, and Special Services Employee H. Onno Chekemian of the Securities Fraud Prosecution Section within the Division of Law’s Affirmative Civil Enforcement Practice Group represented the Bureau in this matter.
The Bureau is charged with protecting investors from investment fraud and regulating the securities industry in New Jersey. It is critical that investors "Check Before You Invest." Investors can obtain information, including the registration status and disciplinary history, of any financial professional doing business to or from New Jersey, by contracting the Bureau toll-free within New Jersey at 1-866-I-INVEST (1-866-446-8378) or from outside New Jersey at 973-504-3600, or by visiting the Bureau's website. Investors can also contact the Bureau for assistance or to raise issues or complaints about New Jersey-based financial professionals or investments.
To learn how to spot the red flags of Excessive Trading and avoid falling victim to it, visit the Investor Education page on the Bureau of Securities’ website.