Securities Arbitration Lawyer Blog
The Financial Industry Regulatory Authority (“FINRA”) has suspended financial advisor Hebert Frey from the securities industry for sixteen months. Mr. Frey consented to the suspension after FINRA alleged that he excessively traded a customer’s account and placed unauthorized trades. The customer was a 54-year-old disabled homemaker. FINRA also fined Mr. Frey $15,000 and ordered him to disgorge $76,137 in commissions.
The alleged conduct occurred while Mr. Frey was employed by Lincoln Douglas Investments, LLC in Mt. Vernon, Ohio, and Union Capital Company in Tucson, Arizona.
As discussed more fully below, Mr. Frey has a long history of customer complaints, run-ins with regulators, and employment terminations. Throughout his career, Mr. Frey has been suspended six times by regulators, ordered to pay nearly $50,000 in fines, and been the subject of at least six customer complaints.
If you have suffered financial losses investing with Herbert Frey, Lincoln Douglas Investments, LLC, or Union Capital Company, or suspect that Mr. Frey did not have your best interest in mind when recommending investments or making account transactions, contact New York securities arbitration law firm Iorio Altamirano LLP for a free and confidential review of your legal rights.
Iorio Altamirano LLP represents investors that have disputes with their financial advisors or brokerage firms, such as Lincoln Douglas Investments, LLC and Union Capital Company.
FINRA Letter of Acceptance, Waiver, and Consent No. 2019063960201
FINRA and Mr. Frey entered into a Letter of Acceptance, Waiver, and Consent No. 2019063960201 on March 29, 2021, after FINRA alleged that during the period March 1, 2018, through February 28, 2019, while associated with Union Capital and Lincoln Douglas, Mr. Frey excessively traded a customer’s account and placed unauthorized trades in same customer’s account, in violation of FINRA Rules 2111 and 2010. Additionally, FINRA alleged that Mr. Frey caused Lincoln Douglas’s books and records to be inaccurate when he completed the customer’s new account forms with inaccurate information and sent the customer misleading and inaccurate consolidated account summaries. Accordingly, Mr. Frey also violated FINRA Rules 4511 and 2010. Specifically, FINRA alleged:
- Frey engaged in quantitatively unsuitable trading in a customer’s account.
- The customer was a 54-year-old disabled homemaker who was gifted the securities account that she maintained with Frey.
- The customer’s investment objectives were capital preservation and growth.
- Frey executed 679 unauthorized trades in the customer’s account during the relevant period and therefore exercised actual control over the account.
- The trading caused the customer to pay $135,210 in fees and commissions, and Mr. Frey retained $76,137 of these commissions.
- Frey’s trading in the customer’s account resulted in an annualized cost-to-equity ratio of 63.88%.
- The trading in the customer’s account also resulted in the customer incurring a realized loss of $142,805.
- Frey’s trading in the customer’s account was excessive and unsuitable given the customer’s investment profile.
- In January and February of 2019, Mr. Frey provided inaccurate and misleading consolidated account summaries to the customer, making it appear that the customer’s account value was much higher than its true value.
- Frey also directed the customer to sign blank new account forms at Lincoln Douglas, which he then completed with inaccurate information regarding the customer’s investment experience and risk tolerance.
- In both instances, Mr. Frey caused Lincoln Douglas to maintain inaccurate books and records.
Excessive trading occurs when a financial advisor makes many trades in a customer’s account, not to benefit the customer but to generate commissions for the broker.
There are two primary indicators used to evaluate whether a financial advisor excessively traded an account. The first is turnover rate, which represents the number of times a portfolio of investments is replaced for another portfolio of investments. Generally, a turnover rate of six suggests excessive trading, but a turnover rate below four can be excessive in some cases.
The second indicator used to assess whether trading is excessive in an investment account is its cost-to-equity ratio. The cost-to-equity ratio measures the amount an account must appreciate to cover commissions and other expenses. That is, how much the account needs to grow just to break even. A cost-to-equity ratio of 20% generally indicates excessive trading has occurred. The accounts at issue had cost-to-equity ratios of 63.88%.
Unauthorized trading often occurs in non-discretionary accounts, where a customer retains discretion. In non-discretionary accounts, brokers must obtain a customer’s permission every time before placing a trade.
Excessive trading and unauthorized trading are unethical and illegal practices. They are also violations of securities rules and regulations and can cause enormous harm to customers.
Financial Advisor Hebert Garrett Frey (CRD No. 214237)
Herbert Garrett Frey, who has 52 years of experience in the securities industry, has a long history of customer complaints, run-ins with regulators, and employment terminations.
Throughout his career, Mr. Frey has been associated with 12 different brokerage firms. On three occasions, his employment was terminated after allegations of misconduct.
- Lincoln Douglas Investments, LLC in Mt. Vernon, Ohio, from August 2018 to December 2020.
- Union Capital Company in Tucson, Arizona, from November 2017 to September 2018.
- Landolt Securities, Inc., in Cincinnati, Ohio, from July 2016 to December 2017.
- Sigma Financial Corporation, in Cincinnati, Ohio, from June 2015 to June 2016.
- LaSalle St Securities, L.L.C. in Cincinnati, Ohio, from January 2015 to June 2015.
- M. Kohn & Company in Cincinnati, Ohio, from May 2014 to January 2015.
- Jettrade, Inc. in Cincinnati, Ohio, from April 2000 to August 2014.
- M. Kohn & Company in Cincinnati, Ohio, from May 1997 to April 2000.
- Birchtree Financial Services, Inc. in Minneapolis, Minnesota, from June 1992 to April 1997.
- Robert Todd Financial Corp. in New York, New York, from November 1990 to April 1991.
- Queen City Securities Corporation in Cincinnati, Ohio, from November 1979 to January 1990.
- Bache Halsey Stuart Shields Incorporated, from March 1978 to November 1979.
- Harrison and Company, from July 1966 to October 1979.
Mr. Frey’s current suspension is not the first time regulators have sanctioned him. In fact, this is the eighth time Mr. Frey has been sanctioned and the sixth time he has been suspended. Collectively, Mr. Frey has been fined almost $50,000 by regulators throughout his career.
- In 2016 Mr. Frey was suspended for 45 days and fined $5,000. Frey, who was acting as FINOP, caused his firm to fail to maintain its minimum net capital requirements.
- In 1997, the SEC affirmed the NASD’s findings that Mr. Frey failed to comply with and satisfy an arbitration award. Mr. Frey was suspended for 180 days.
- In 1991, Mr. Frey was suspended and fined $10,000 for causing his firm to fail to maintain the required minimum net capital and failing to accurately compute net capital.
- In 1990, Mr. Frey was censured and fined $5,000 to resolve charges in two matters that his firm conducted securities business while failing to accurately compute and maintain net capital requirements.
- 1983, Mr. Frey was censured, fined $5,000, and suspended for five days as a principal. The violations related to, among other things, his failure to reconcile the firm’s checking account and general ledger, to properly post all purchases and sales, to make determinations relative to possession and control of customer securities, and to maintain required net capital.
- In 1978, Mr. Frey was censured, fined $7,500, and barred from being employed in any supervisory capacity for a period of three years. The sanctions were a result of supervisory failures and for filing inaccurate and misleading reports and net capital violations.
- In 1977, Mr. Frey was censured and fined $2,000 for inadequately supervising back-office practices.
Mr. Fry has also been the subject of at least six customer disputes:
- Customer Dispute (November 2019): A customer filed a securities arbitration complaint, alleging over $599,194 in damages as a result of excessive trading since 2012, primarily using an options covered call strategy. The claim was filed against five brokerage firms. Four of the firms settled: Landolt Securities, Inc. contributed $40,000, Union Capital Company contributed $32,500, Sigma Financial Corporation contributed $50,000, and LaSalle St. Securities, LLC contributed $25,000. Lincoln Douglas Investments, LLC did not settle with the customer. The case proceeded to arbitration, and the customer was awarded $45,000.
- Customer Dispute (September 2019): A customer filed a written complaint with Sigma Financial Corp, alleging potential claims for negligence, negligent investment advice, unjust enrichment, unsuitability, churning/overtrading, breach of fiduciary duty, breach of contract, misrepresentation, and margin violations. The customer also purportedly made a claim in connection with Mr. Frey’s personal bankruptcy filing, and the matter was deemed closed by the firm.
- Customer Dispute (November 1989): A customer filed a securities arbitration complaint, alleging nearly $30,000 in damages. The client alleged that Mr. Frey omitted material information in connection with his recommendation to purchase corporate bonds. The customer was awarded $8,000 in damages.
- Customer Dispute (October 1989): A customer filed a complaint alleging $170,000 in damages as a result of violations of federal securities laws, fraud and deceit, and breach of fiduciary duty. The case was settled for $93,585.
- Customer Dispute (September 1989): A customer filed a complaint alleging $10,000 in damages as a result of unauthorized trades. The case was settled for $19,106.
- Customer Dispute (January 1975): A customer filed a litigation after suffering losses from an investment in commercial paper after the issuer filed for bankruptcy. The matter was settled for $37,500.
Mr. Frey’s BrokerCheck report also discloses that he filed for bankruptcy in or about January 2017.
Lincoln Douglas Investments, LLC and Union Capital Company – A Duty to Supervise
Financial institutions like Lincoln Douglas Investments, LLC and Union Capital Company must properly supervise financial advisors and customer accounts. Brokerage firms must establish and maintain a reasonably designed system to oversee account activity, such as excessive trading, to ensure compliance with securities laws and industry regulations. When a brokerage firm fails to supervise its financial advisors or the investment account activity sufficiently, it may be liable for investment losses sustained by customers.
How to Recover Financial Losses or Obtain a Free Consultation
If you have suffered investment losses with Hebert Frey, Lincoln Douglas Investments, LLC, Union Capital Company, Landolt Securities, Inc., Sigma Financial Corporation, or LaSalle St Securities, L.L.C., contact New York securities arbitration attorney August Iorio of Iorio Altamirano LLP. August Iorio can be reached at august@ia-law.com or toll-free at (855) 430-4010 for a free and confidential review of your legal rights.
Iorio Altamirano LLP is a securities arbitration law firm based in New York, NY. Iorio Altamirano LLP pursues FINRA claims nationwide on behalf of investors to recover financial losses arising out of wrongful conduct by stockbrokers and brokerage firms.