• September 6, 2023
• Network 1 Financial Securities

FINRA recently issued a sanction against Network 1 Financial Securities, Inc. and supervisor Michael Molinaro after it was alleged that Network 1 and Michael Molinaro, “did not establish, maintain, and enforce a supervisory system.” Network 1 Financial Securities, Inc., has been a FINRA member since 1983. The company’s main office is in Red Bank, NJ 07701 and it serves customers with a team of 100 registered representatives working out of 14 branch offices. Michael Molinaro first registered with FINRA in 1993, and in February of 2014 he registered as a General Securities Representative and General Securities Principal, among other registrations through an association with Network 1. He became Network 1’s Chief Compliance Office in 2017.

Current Allegations of Conduct

According to publicly available records released by the Financial Industry Regulatory Authority (FINRA) in August 2023, FINRA issued a sanction to Network 1 Financial Securities, Inc., that included a censure; a $200,000 fine; restitution of $533,587 plus interest as described below; and an undertaking that within 90 days of the date of the notice of acceptance of this AWC, a member of Network 1’s senior management who is a registered principal of the firm shall certify in writing that, as of the date of the certification, the firm has remediated the issues identified in this AWC and implemented a supervisory system, including WSPs, reasonably designed to achieve compliance with Reg BI and FINRA Rules 3110 and 2010 regarding the issues identified in this AWC. For Molinaro, the sanction included a three-month suspension from association with any FINRA member in all principal capacities; and a $5,000 fine.

The FINRA sanction alleges, “From January 2016 through March 2022, Network 1’s WSPs were not reasonably designed to achieve compliance with FINRA Rule 2111 and the Care Obligation of Reg BI as they pertain to trading. Beginning in July 2017, the firm’s WSPs designated Molinaro as the principal responsible for developing supervisory procedures for Network 1 with respect to all “products, services, or line functions that need to be the subject of written compliance policies and written supervisory procedures.” Additionally, “Prior to June 30, 2020, the firm’s WSPs were not reasonably designed to achieve compliance with the suitability requirements of FINRA Rule 2111 with respect to excessive trading. Network 1’s WSPs also were not reasonably designed to achieve compliance with Reg BI.”

In addition, the sanction also alleges, “As a result of these supervisory failures, Network 1 did not identify or address red flags of excessive trading in eight customer accounts. In each account, Network 1’s representatives recommended that the customers place frequent trades, and the customers routinely relied on those recommendations. The level of trading in each account, which resulted in a cost-to-equity ratio in excess of 20 percent, and in some cases cost-to-equity ratios in excess of 50 percent, was inconsistent with the customers’ investment profiles and was not in the customers’ best interest. Collectively, the recommended trading caused these eight customers to pay more than $533,500 in commissions and trading costs.”

For a copy of the FINRA sanction, click here.

Network 1 Securities, Inc., has been the subject of twenty three disclosures, for a copy of their BrokerCheck, click here.
Michael Robert Molinaro has been the subject of eight other disclosures. For a copy of his BrokerCheck, click here.

We Help Investors Recover Investment Losses

Financial advisors have a legal and regulatory obligation to recommend only suitable investments that are appropriate for their clients’ needs and objectives. Their employing brokerage firm has a legal and regulatory obligation to supervise the Financial Advisors’ sales practices and dealings with clients. To the extent any of these duties are breached, the customer may be entitled to a recovery of his or her investment losses.

Reasonable basis suitability requires that a recommended investment or investment strategy be suitable or appropriate for at least some investors. Reasonable basis suitability requires an advisor to conduct adequate due diligence so that he or she can determine the risks and rewards of the investment or investment strategy.

Quantitative suitability requires a brokerage firm or financial advisor with actual or de facto control over a customer’s account to have a reasonable basis for believing that a series of recommended transactions – even if suitable when viewed in isolation – is not excessive and unsuitable for the customer when taken together in light of the customer’s investment profile. No single test defines excessive activity, but factors such as the turnover rate, the cost-equity ratio, and the use of in-and-out trading in a customer’s account may provide a basis for a finding that a member or associated person has violated the quantitative suitability obligation.

Customer-specific suitability requires that a member or associated person have a reasonable basis to believe that the recommendation is suitable for a particular customer based on that customer’s investment profile. Among the criteria that a financial advisor must evaluate to satisfy his or her customer-specific suitability obligations include the investor’s age, tax status, time horizon, liquidity needs, and risk tolerance; a client’s other investments, financial situation and needs, investment objectives, and any other information disclosed by the customer should also be considered.

The Wolper Law Firm represents investors nationwide in securities litigation and arbitration on a contingency fee basis. Matt Wolper, the Managing Principal of the Wolper Law Firm, is a trial lawyer who has handled hundreds of securities cases during his career involving a wide range of products, strategies and securities. Prior to representing investors, he was a partner with a national law firm, where he represented some of the largest banks and brokerage firms in the world in securities matters. We can be reached at (800) 931-8452 or by email at mwolper@wolperlawfirm.com.