Initiated By
FINRA
Allegations
Reda was named a respondent in a FINRA complaint alleging that he willfully violated Section 10(b) of the Securities Exchange Act of 1934 and Exchange Act Rule 10b-5 and violated FINRA Rule 2020 by churning in customer accounts. The complaint alleges that Reda exercised de facto control of the trading in, and made the trading decisions for, 19 customers' accounts. The customers relied on Reda to make securities recommendations and consistently followed his recommendations. Reda also exercised control in instances when he made unauthorized transactions in the customer accounts. The complaint also alleges that Reda recommended securities transactions in the customers' accounts that were excessive and quantitatively unsuitable for each of the customers in light of their investment profiles. In excessively trading the customers' accounts, Reda maximized his own financial benefit at the expense of his customers, generating costs of $264,734 and causing realized losses of $232,043 on accounts with an aggregate average monthly account value of $262,234. While the investment profiles of the customers varied, none of the customers agreed to trade in such a way that would deplete their accounts with little hope of making a profit, while also enriching Reda. The complaint further alleges that Reda had no reasonable basis to believe that the investment strategy he recommended to his customers was, in light of the cumulative costs, suitable. Reda recommended his costly active trading strategy to his customers without understanding the potential risks and rewards, failed to consider the effect of the strategy's costs on his customers' ability to generate a profit and did not conduct any research or analysis, or seek any guidance, on whether his strategy could be profitable given the cumulative costs incurred through the implementation of his strategy. Reda did not understand what cost-to-equity ratios and turnover rates were and consequently failed to consider and calculate these metrics when recommending and executing his active trading investment strategy in his customers' accounts. In addition, the complaint alleges that although Reda had an obligation to know his customers prior to recommending a securities transaction or strategy to them, he recommended both a speculative investment strategy and, to implement that strategy, recommended speculative securities transactions to three customers without a reasonable basis to believe the recommended strategy and individual securities transactions were suitable for those customers based on their investment profiles, including their investment objectives of balanced growth or growth. As it relates to the three customers, Reda was unaware of their investment objectives, risk tolerances, and other information identified in their new account forms prior to making his recommendations to them. Moreover, the complaint alleges that Reda executed transactions in six customers' nondiscretionary accounts without their prior authorization or consent. Furthermore, the complaint alleges that when executing buy transactions in 22 customers' accounts using the proceeds of sale transactions three days earlier, Reda charged excessive commissions. Reda intentionally waited three days to execute the buy transactions to circumvent his member firm's supervisory review of commissions of more than five percent on proceeds transactions. The commissions Reda charged were excessive, unfair, and unreasonable taking into consideration all relevant circumstances, including that he did not disclose to his customers, prior to effecting the transactions, that he would charge such high commissions. The complaint alleges that Reda willfully failed to disclose customer complaints alleging sales practice violations on his Uniform Application for Securities Industry Registration or Transfer (Form U4) and also willfully failed to timely amend his Form U4 to disclose an unsatisfied tax lien and an unsatisfied tax warrant.
Resolution
Decision & Order of Offer of Settlement
Bar
Bar (Permanent)
Registration Capacities Affected
All Capacities
Duration
Indefinite
Start Date
3/21/2022
Sanctions
The settlement includes a finding that Reda willfully failed to disclose a material fact on a Form U4, and that under Section 3(a)(39)(F) of the Securities Exchange Act of 1934 and Article III, Section 4 of the FINRA By-Laws, this omission makes him subject to a statutory disqualification with respect to association with a member.
Regulator Statement
Without admitting or denying the allegations, Reda consented to the sanction and to the entry of findings that he willfully violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and violated FINRA Rule 2020 by churning in customer accounts. The findings stated that Reda exercised de facto control of the trading in his customers’ accounts. Reda made the trading decisions for the customers’ accounts, including which securities to trade, the volume, and the timing of when to buy or sell. The customers relied on Reda to make securities recommendations and consistently followed his recommendations. Reda also exercised control in instances when he made unauthorized transactions in customer accounts. The findings also stated that Reda recommended securities transactions in his customers’ accounts that were excessive and quantitatively unsuitable for each of the customers in light of their investment profiles, as evidenced by the high turnover rates and cost-to-equity ratios, the use of in-and-out trading, the frequency of the transactions, and the transaction costs incurred. In excessively trading these customers’ accounts, Reda maximized his own financial benefit at the expense of his customers, generating costs of $264,734 and causing realized losses of $232,043 on accounts with an aggregate average monthly account value of $262,234. The findings also included that Reda recommended his costly active trading strategy to his customers without understanding the potential risks and rewards. He failed to consider the effect of the strategy’s costs on his customers’ ability to generate a profit. He did not conduct any research or analysis, or seek any guidance, on whether his strategy could be profitable given the cumulative costs incurred through the implementation of his strategy. Reda did not understand what cost-to-equity ratios and turnover rates were and consequently failed to consider and calculate these metrics when recommending and executing his active trading investment strategy in his customers’ accounts. Reda had no reasonable basis to believe that the investment strategy he recommended to his customers was suitable. In addition, Reda had an obligation to know his customers prior to recommending a securities transaction or strategy to them. Reda, however, recommended both a speculative investment strategy and, to implement that strategy, recommended speculative securities transactions to customers without a reasonable basis to believe the recommended strategy and individual securities transactions were suitable for those customers based on their investment profiles, including their investment objectives of balanced growth or growth. FINRA found that the commissions Reda charged were excessive, unfair, and unreasonable taking into consideration all relevant circumstances, including that Reda did not disclose to his customers, prior to effecting the transactions, that he would charge such high commissions. Reda also intentionally circumvented his firm’s supervisory procedures in order to charge commissions well in excess of five percent on the proceeds transactions. FINRA also found that Reda willfully failed timely amend, his Uniform Application for Securities Industry Registration or Transfer (Form U4) to disclose eight customer complaints alleging sales practice violations. In addition, Reda willfully failed to amend his Form U4 to disclose an unsatisfied tax lien and an unsatisfied tax warrant, totaling $225,929.49.
