Securities Arbitration Lawyer Blog
Financial Industry Regulatory Authority (“FINRA”) Office of Hearing Officers has barred stockbroker James W. Flower from the securities industry for excessively trading in five customers’ accounts, executing 17 unauthorized trades, and mismarking 58 transactions. According to the findings, although he is based in New York, Mr. Flower generated business by cold calling people all over the country, focusing primarily on senior and elderly customers who are small business owners and retirees. Cold-calling customers is a common tactic for “boiler room” brokerage firms.
Mr. Flower was also ordered to pay restitution plus prejudgment interest to harmed customers. However, it is unclear whether he will be able to satisfy the judgment.
Mr. Flower was associated with Spartan Capital Securities, LLC since June 2019. Previously, he was associated with SW Financial from December 2015 to June 2019.
Customers of Mr. Flower, including customers that have been notified that they may be receiving restitution, should consult with a securities arbitration law firm. If you or a loved one were a customer of James Flower, contact New York securities arbitration law firm Iorio Altamirano LLP for a free and confidential consultation.
Iorio Altamirano LLP represents investors nationwide that have disputes with their financial advisors or brokerage firms, such as Spartan Capital Securities, LLC and SW Financial.
FINRA Disciplinary Proceeding No. 2017052701101
Mr. Flower was a registered representative with SW Financial, from January 1, 2016, through July 31, 2018. He is now registered with another FINRA member firm. Although he is in New York, he generates business by cold calling people all over the country, focusing primarily on older customers who are small business owners and retirees.
The five customers involved in this case resided in Louisiana, Maryland, Oklahoma, and Texas when they started working with Flower. They ranged in age from mid-fifties to late-seventies. Four of the customers own small businesses; the fifth is a retired aircraft maintenance worker.
After a six-day hearing conducted in January 2021, the FINRA Hearing Officers “Hearing Officers” held that Mr. Flower excessively traded in five customers’ accounts, executed 17 unauthorized trades, and mismarked 58 transactions:
Excessive Trading and Churning
The FINRA Hearing Officers “Hearing Officers” concluded that Mr. Flower engaged in excessive trading and churning in five customers’ accounts for his own benefit in reckless disregard for his customers’ interests.
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.
Churning is a more egregious variation of excessive trading. Churning refers to a situation where the broker executed an excessive number of trades and did so with the intent to defraud or reckless disregard for the customer’s interest.
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 Hearing Officers found that the accounts at issue had annualized turnover rates ranging from 16 to 33.
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 examined by FINRA had cost-to-equity ratios ranging from 69% to 176%.
The Hearing Officers also found that Mr. Flower engaged in in-and-out trading in the accounts, buying and then selling the same stock in a matter of days. In-and-Out trading is a hallmark sign of excessive trading. For example, in one account, Mr. Flower bought 5,000 shares of Advanced Micro Devices, Inc. on November 13, 2017, but then sold all the shares two days later, on November 15, 2017, for a realized loss of $2,668. Among others, he made similar trades in stocks of Cirrus Logic Inc. and OPKO Health Inc.
Further, the Hearing Officers found that the customers were unsophisticated investors. None of the investors had actively traded securities before; none of them tracked what was happening in their accounts in any meaningful way, and none of them had much of an understanding about the way securities brokers are paid or, or Mr. Flower was paid. They had no idea of the costs they were incurring from the frequent trading and use of margin in the accounts. In fact, the Hearing Officers concluded that Mr. Flower discouraged the customers from trying to understand what was going on in their accounts.
Mr. Flower’s accounts decimated the value of the customers’ accounts. The five customers together suffered realized losses (including all trade costs, fees, and margin interest) totaling roughly $223,000. During the same period, Mr. Flower charged commissions on the trading in the five accounts of nearly $185,000, of which he received 70%, or nearly $130,000.
FINRA’s investigation began in September 2017, then a nephew of one of Mr. Hicks’ customers called FINRA’s Senior Helpline. The customer was 90 years old, suffering from dementia, and needed to sell her shares to help pay for the cost of her nursing home care. Mr. Hicks had sold the customer two REITs, one when she was 87 years old and the second when she was 88.
In April 2018, the Senior Helpline received another call. This time, the call came from the son of an 85-year-old woman who had 90 percent of her investment in non-traded REITS.
Unauthorized Trading
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.
The account of the retired aircraft maintenance worker was a non-discretionary account. The Hearing Officers held that Mr. Flower did not seek prior authorization from the retired aircraft maintenance worker for 17 trades. Mr. Flower executed 16 of those trades while the customer was experiencing serious medical issues that interfered with his daily living. The unauthorized trading resulted in more than $30,000 in market losses. The Hearing Officers concluded that the misconduct aided Mr. Flower’s excessive trading and churning.
Excessive trading, churning, and unauthorized trading are unethical and illegal practices. They are all also violations of securities rules and regulations and can cause enormous harm to customers.
Mismarked Orders
A “solicited” trade is a trade that was the broker’s idea. It is a trade where the financial advisor initiated and recommended the buy or sell transaction to the client. An “unsolicited” trade is a trade that the customer initiated. It is a trade made by the client on their own initiative, without recommendations, suggestions, or prompting from the broker.
The distinction between solicited and unsolicited is important to determine whether the broker’s suitability and best interest duties arise. If the trade is solicited, or recommended by the broker, the broker has a duty to make a suitable recommendation that is in the best interest of the customer. Click here to read more about solicited v. unsolicited trades.
The Hearing Officers found that Mr. Flower mismarked 58 sales in various accounts as unsolicited, when in fact, the trades were solicited. According to the Hearing Officers, Mr. Flower’s own testimony revealed that he prompted the customers to act. The trades occurred after he called his customers to tell them a stock in their portfolio was losing value, to suggest that there was a profit to be taken, or to recommend a purchase that would require the sale of an existing position. Most of the purported unsolicited trades were sales at a loss. The mismarking of the sales as unsolicited made it seem that the customers had chosen to take the losses and helped obscure Mr. Flower’s excessive trading and churning. This misconduct caused SW Financial’s books and records to be false and inaccurate.
Financial Advisor James William Flower (CRD No. 2817701)
James Flower had 23 years of experience in the securities industry and has been associated with 16 different firms, including eight firms that have been expelled by FINRA:
- Spartan Capital Securities, LLC in Garden City, NY, from June 2019 to the present.
- SW Financial in Melville, NY, from December 2015 to June 2019.
- Laidlaw & Company (UK) Ltd. in Melville, NY, from May 2014 to December 2015.
- Global Arena Capital Corp (expelled by FINRA) in Melville, NY, from November 2010 to May 2014.
- Prestige Financial Center, Inc. (expelled by FINRA) in Melville, NY, from October 2009 to November 2010.
- Brookstone Securities, Inc. (expelled by FINRA) in Garden City, NY, from August 2009 to November 2009.
- Prestige Financial Center, Inc. (expelled by FINRA) in Garden City, NY, from April 2008 to September 2009.
- Obsidian Financial Group, LLC (expelled by FINRA) in Woodbury, NY, from April 2008 to May 2008.
- Westrock Advisors, Inc. (expelled by FINRA) in Woodbury, NY, from April 2006 to April 2018.
- P. Turner & Company, L.L.C. in Garden City, NY, from August 2004 to May 2006.
- Westrock Advisors, Inc. (expelled by FINRA) in New York, NY, from August 2004 to August 2004.
- Granite Associates, Inc. in Delray Beach, FL, from January 2007 to July 2004.
- Continental Broker-Dealer Corp. in Carle Place, NY, from April 2003 to January 2004.
- Harrison Securities, Inc. (expelled by FINRA) in Port Washington, NY, from January 2001 to May 2003.
- Whitehall Wellington Investments, Inc. in Port Washington, NY, from September 1998 o December 2000.
- Tasin & Company, Inc. (expelled by FINRA) in Hauppauge, NY, from January 1998 to September 1998.
- Duke & Co., Inc. in New York, NY, from December 1997 to January 1998.
- Gaines, Berland Inc. in Bethpage, NY, from September 1997 to November 1997.
Historically, Long Island, New York, has been a haven for boiler-room brokerage firms. This notoriety has inspired blockbuster movies such as “Boiler Room” and “The Wolf of Wall Street.” The Wolf of Wall Street was based on the true story of broker Jordan Belfort and his firm, Stratton Oakmont. Jordan Belfort pleaded guilty to securities fraud and money laundering in 1999.
The term “boiler room” often refers to an outbound call center that sells questionable investments through unfair, dishonest, and high-pressure sales tactics.
Many broker-dealers still use boiler room tactics such as cold-calling customers and high-pressure or aggressive sales tactics. Other modern-day boiler room brokerage firms have a propensity for broker misconduct, such as excessive trading, churning, and unauthorized trades. Mr. Flower has been accused of doing all of the above.
Regulatory Disclosure
In 2017, Mr. Flower was suspended for three months by FINRA for recommending that 13 of his customers invest in a highly volatile exchange-traded note without having a reasonable basis for recommending the transactions. The findings stated that at the time Mr. Flower was recommending the exchange-traded note, Mr. Flower incorrectly believed that it traded inverse to the S&P 500 index. This erroneous perception led him to recommend that customers purchase and hold the exchange-traded note as a hedge to an anticipated overall market decline. Based on Mr. Flower’s recommendations, 13 customers suffered losses in excess of $249,000 after holding their shares for periods ranging from two weeks to over one year. Mr. Flower lacked a sufficient understanding of the mechanics of the exchange-traded note to form a reasonable basis upon which to recommend the purchase of it to his customers.
Customer Disputes
According to his BrokerCheck report, Mr. Flower has been the subject of at least three customer complaints:
- Customer Dispute (September 2015): A customer submitted a written complaint to Laidlaw and Company (UK) Ltd alleging that Mr. Flower churned the customer’s account and made unsuitable investment recommendations. The complaint alleged $90,000 in damages. The firm settled the matter for $45,000.
- Customer Dispute (September 2015): A customer filed a securities arbitration complaint alleging $250,000 in damages. The customer alleged over-concentration, unsuitability, excessive use of margin, and churning. The dispute was stayed due to Mr. Flower filing for bankruptcy in 2016.
- Customer Dispute (April 2010): A customer filed a securities arbitration complaint alleging $100,000 in damages. The customer alleged that Mr. Flower misrepresented the characteristics and risks associated with multiple purchases of an Exchange-Traded Fund and that he failed to execute a stop-loss order. The customer also alleged that Mr. Flower made misrepresentation in connection with using margin in the account. The dispute settled for $67,500.
Spartan Capital Securities, LLC and SW Financial – Supervisory Duties
Brokerage firms like Spartan Capital Securities, LLC and SW Financial must properly supervise financial advisors and customer accounts. Brokerage firms must also establish and maintain a reasonably designed system to oversee account activity, such as excessive trading, churning, and unauthorized trading, to ensure compliance with securities laws and industry regulations. When a brokerage firm fails to sufficiently supervise its financial advisors or the investment account activity, it may be liable for investment losses sustained by customers.
How to Recover Financial Losses or Obtain a Free Consultation
If you have lost money with financial advisor James William Flower, Spartan Capital Securities, LLC, or SW Financial, 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 evaluation of your account.
Iorio Altamirano LLP is a securities arbitration law firm based in New York, NY. Iorio Altamirano LLP pursues FINRA arbitration claims nationwide on behalf of investors to recover financial losses arising out of wrongful conduct by stockbrokers and brokerage firms.