The Financial Industry Regulatory Authority has expelled Monmouth Capital Management, a New Jersey-based independent broker/dealer, for violating Regulation Best Interest, failing to supervise its reps and providing false and misleading disclosures on its client relationship summary. The regulator found six of Monmouth’s reps excessively traded and churned client accounts, many of which were those of Gold Star families, those of fallen service members.
In a parallel action, the Securities and Exchange Commission charged former U.S. Army financial counselor Caz Craffy with defrauding Gold Star families.
The SEC alleges that between May 2018 and November 2022, Craffy directed military families to transfer their benefits into brokerage accounts he managed outside of his official duties with the U.S. Army. He then engaged in excessive trading and trading outside of those clients’ risks profiles, resulting in realized losses of approximately $1.79 million and unrealized losses of about $1.8 million. Meanwhile, clients paid commissions and fees of more than $1.64 million, most of which he kept for himself.
The SEC pointed to one particularly egregious case, where he misappropriated $50,000 from a minor whose parent died on active duty.
“Rather than help Gold Star families best use their survivor benefits, we allege that Mr. Craffy manipulated them to profit from their grief,” said Gurbir S. Grewal, director of the SEC’s Enforcement Division, in a statement. “We owe an incredible debt of gratitude to these families who have sacrificed so much in service to our country. I am grateful to the SEC staff for holding Mr. Craffy accountable for his shameless conduct and delivering some measure of justice to these incredible families.”
The SEC is seeking a permanent injunctions, disgorgement plus interest and civil penalties. Craffy was barred by FINRA last December.
Craffy was not the only Monmouth advisor who harmed investors, FINRA claims. Between August 2020 and February 2023, six Monmouth reps excessively traded 110 accounts, 42 of which were also churned, causing substantial losses to client accounts and resulting in about $3.9 million in commissions and trading costs. This violated the Care Obligation of Reg BI, as well as Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.
FINRA alleged that Monmouth failed to supervise the trading in these accounts, and ignored red flags.
“For example, one customer’s account appeared on 24 consecutive monthly exception reports that flagged the account for churning. However, no one at Monmouth reviewed any of these 24 reports and thus the firm failed to detect the churning,” FINRA said.
Several of these accounts were owned by Gold Star families, who funded them with a military death gratuity payment or a Servicemembers’ Group Life Insurance (SGLI) payment following the death of a family member who had served in the Armed Forces.
The regulator also said between Nov. 9, 2020, and Feb. 28, 2023, Monmouth made false and misleading statements on its Form CRS, including a statement it monitored accounts through daily exception reports. FINRA claims the firm never used such reports.
Monmouth did not admit nor deny FINRA’s findings.
Monmouth did not answer a phone call seeking comment, and Craffy did not respond to a request for comment by publication time.