December 16, 2020
On December 8, 2020, the Financial Industry Regulatory Authority (FINRA) Office of Hearing Officers released a Default Decision barring former registered representative Stephen Sloane from associating with any FINRA member firm in any capacity.
According to the Complaint filed by FINRA Department of Enforcement, Sloane made unsuitable recommendations to fourteen retail customers, directing them to engage in active, short-term trading of U.S. Treasuries with 10- and 30-year maturities that were unsuitable for these customers. This alleged misconduct occurred between January 2014 and January 2018 when Sloane was associated with Morgan Stanley (June 2009 to March 2016) and Westpark Capital, Inc. (March 2016 to August 2020) in New York City. Morgan Stanley discharged him for “cost-related issues associated with [Sloane’s] trading of U.S. treasuries.”
The Complaint alleged that Sloane recommended buying Treasuries in the secondary market and recommended that his customers wait until “unspecified future geopolitical or economic event that would cause Treasury prices to rise” to sell the Treasuries. When Sloane decided that such an event occurred, he directed his customers to sell the Treasuries.
However, Sloane failed to conduct reasonable due diligence to understand the effect of the strategy’s costs on the customers’ potential returns. Under Sloane’s guidance, the customers bought and sold long-term Treasuries every few months, with three-quarters of their sales occurring within nine months of purchase. Sloane also recommended that five customers use proceeds from sales of Treasury securities to purchase Treasury securities again the next day. The markups for these trades ranged from 6.11% to 7.92%.
Sloane received compensation at both firms, earning a $2,000 base salary at Morgan Stanley and additional compensation from a percent of the markups, markdowns and commissions he charged. Sloane received approximately $220,000 in total compensation for his customers’ Treasury sales and purchases. The customers, however, experienced $329,811 in losses, exclusive of interest, and paid $510,025 in markups and markdowns, as a result of Sloane’s investment strategy.
Based on the foregoing, Sloane violated FINRA Rules 2111(a), 2121 and 2010. FINRA Department of Enforcement sent numerous Orders directing Sloane to file a rule-compliant Answer to this Complaint. Sloane defaulted by failing to file Answers as requested and failed to appear at two pre-hearing conference.
The Default Decision orders Sloane to be barred from associating with any FINRA member firm in any capacity and to pay restitution totaling $175,823.03 to seven customers, plus interest on the unpaid balance.