FINRA Expels Reid & Rudiger, Bars Cofounders

Member Firm and Registered Representatives Violated Regulation Best Interest by Excessively Trading and Churning Numerous Customer Accounts

WASHINGTON--(BUSINESS WIRE)--FINRA has expelled from membership Reid & Rudiger LLC (the firm) and barred cofounders Clifford Reid and CEO Edward Rudiger, Jr. from association with any member firm for churning and excessively trading customer accounts in violation of Regulation Best Interest (Reg BI) and FINRA rules.

Separately, FINRA suspended the firm’s supervisors, Marc Harrison and Kelli Mezzatesta, who both failed to identify and investigate red flags related to Rudiger’s and Reid’s pervasive misconduct, for three months in all principal capacities. FINRA also fined them $5,000 each and required them to complete 20 hours of supervision-related continuing education.

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

“This action underscores FINRA’s unique role as a self-regulatory organization committed to protecting retail investors from misconduct,” said Bill St. Louis, Executive Vice President and Head of Enforcement at FINRA. “The egregious churning and excessive trading in this case resulted in significant customer losses over nearly six years, warranting the firm’s expulsion and permanent bars for the registered representatives responsible.”

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. This misconduct caused customers to incur approximately $2 million in commissions and trading costs and approximately $2.7 million in losses.

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. This misconduct violated the Care Obligation of Reg BI, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and FINRA Rules 2111, 2020 and 2010.

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. This included:

• An account with an annualized cost-to-equity ratio of more than 111%, which means the account would have needed to generate returns of 111% just to break even;
• An account with an annualized cost-to-equity ratio of more than 69% and a resulting loss of more than $345,000; and
• An account with an annualized cost-to-equity ratio of more than 67% and a resulting loss of nearly $400,000.

The firm and Rudiger, as CEO, failed to establish and maintain a supervisory system reasonably designed to detect and act upon churning and excessive trading.

In addition, the firm, as well as Harrison and Mezzatesta, failed to take reasonable steps to supervise the trading in the affected customers’ accounts, despite numerous red flags indicative of excessive trading and churning. They also did not consider customers’ cost-to-equity ratios in the course of trading supervision or use available exception reports that could have assisted in identifying the violative trading.

In settling these matters, the firm, as well as Reid, Rudiger, Harrison and Mezzatesta accepted and consented to the entry of FINRA’s findings without admitting or denying them.

FINRA makes available disciplinary actions and other information on its Disciplinary Actions Online database. In addition, FINRA publishes on its Monthly Disciplinary Actions page a summary of disciplinary actions against firms and individuals for violations of FINRA rules; federal securities laws, rules and regulations; and the rules of the Municipal Securities Rulemaking Board. FINRA’s use of fine monies is limited to specific purposes set forth in its public Financial Guiding Principles, which are approved by its Board of Governors. FINRA publicly itemizes and discloses how it uses fine monies each year.

About FINRA

FINRA is a not-for-profit organization dedicated to investor protection and market integrity. FINRA regulates one critical part of the securities industry—member brokerage firms doing business in the U.S. FINRA, overseen by the SEC, writes rules, examines for and enforces compliance with FINRA rules and federal securities laws, registers broker-dealer personnel and offers them education and training, and informs the investing public. In addition, FINRA provides surveillance and other regulatory services for equities and options markets, as well as trade reporting and other industry utilities. FINRA also administers a dispute resolution forum for investors and brokerage firms and their registered employees. For more information, visit www.finra.org.