Initiated By
FINRA
Allegations
Sloane was named a respondent in a FINRA complaint alleging that he recommended an unsuitable investment strategy to retail customers. The complaint alleges that Sloane recommended that the customers engage in active, short-term trading of U.S. Treasuries with 10 and 30-year maturities, without conducting reasonable diligence to understand the effect of the strategy's costs on the customers' potential returns. Sloane, therefore, did not have a reasonable basis to recommend the strategy. Sloane did not do any research or seek any guidance about whether the trading strategy could be profitable at the costs the customers paid. Sloane also made no attempt to calculate either the returns he expected to generate from active trading or whether those returns would breakeven with the cumulative costs of his trading strategy. Sloane received approximately $220,000 in compensation from implementing his strategy for the customers, representing his share of the $510,025 in markups and markdowns he charged to execute the trades for the customers. By contrast, after paying markups, markdowns, and other transactional service fees, the customers realized total trading losses, exclusive of interest, of $329,811, as a result of Sloane's investment strategy. Sloane's member firm instructed him to reduce his trading costs. When that firm fired him for disregarding its directive, Sloane moved to another member firm where he continued executing the same unsuitable strategy. The complaint also alleges that Sloane charged excessive and unfair markups. Sloane recommended that some customers use the proceeds from sales of treasury securities to purchase treasury securities the following day. The markups resulted in those customers' trades on those days occurring at prices not reasonably related to prevailing market prices.
Resolution
Decision
Bar
Bar (Permanent)
Registration Capacities Affected
All Capacities
Duration
Indefinite
Start Date
1/5/2021
Sanctions
Restitution
Amount
$175,823.03
Sanctions
plus interest
Regulator Statement
Default decision rendered December 8, 2020. The sanctions are based on findings that Sloane recommended to 14 customers, 12 of which were over 65 years of age, an unsuitable investment strategy involving short-term trading of 10-year and 30-year treasuries without having a reasonable basis to do so. The findings stated that Sloane recommended to the customers that they buy treasuries with 10-year and 30-year maturities in the secondary market, then wait for some event that would cause treasury prices to rise. When Sloane determined that such an event had occurred, he recommended selling the securities and using the sales proceeds to repeat the process by buying other 10-year or 30-year treasuries. One of Sloan's member firm's conducted reviews of his trading activity in his customer accounts after spotting costly trading activity. The firm met with Sloane and instructed him to reduce the costs and frequency of his trading and he temporarily complied with the directive. The firm later discovered Sloane had resumed his active trading in treasuries. After terminating Sloane, the firm retroactively reduced the markups and markdowns he had charged the customers, crediting them $78,727. Sloane moved to another firm and 12 of the customers followed him, where he pursued the same trading strategy in treasuries. Before making the recommendations, Sloane did not perform the reasonable diligence required to provide him with a reasonable basis to recommend the strategy. Sloane failed to consider the effect of the strategy on the customers' investment returns and did not conduct research, and made no calculations, to determine if the strategy would be profitable given the costs the customers incurred as a result of the active trading he recommended. As a result, Sloane lacked an understanding of the potential risks and rewards associated with his recommended investment strategy. Sloane failed to evaluate the costs of the active trading, and he recommended the strategy without considering the likely risks and rewards of the high costs of the frequent trading. Sloane had to have known that the frequent trading was generating significant markups, markdowns, and commissions that would outweigh any potential profits to the customers. Sloane earned commissions of approximately $220,000 at his customers' expense. The customers incurred $329,811 in trading losses. Notwithstanding payments the first firm made to customers, half of the customers still have outstanding losses of $175,823. Sloane received approximately $220,000 in compensation from implementing the investment strategy for the customers. The findings also stated that Sloane charged five customers unreasonable markups and markdowns. For each of the five sets of transactions for the customers, Sloane used the proceeds of the customers sales of treasuries to buy other treasuries the next day. The customers' purchases, therefore, were executed at or about the same time as the customers' sales. The markups and markdowns Sloane charged for the transactions, which each exceeded five percent, were unreasonable, unfair, and excessive after considering all the circumstances, including the nature of the widely traded 10-year and 30-year treasuries. The markups and markdowns the customers paid resulted in trades that did not take place at prices reasonably related to prevailing market prices. The decision became final on January 5, 2021.
