Rules 2010 and 2111 of the Financial Industry Regulatory Authority (FINRA) seek to prevent excessive trading by brokers in customer accounts. John Sebastian Cangialosi, a broker last associated with Worden Capital Management LLC, has fallen foul of FINRA on account of violation of these rules and has been suspended for a period of 9 months. As a result, Haselkorn & Thibaut has started an investigation into Mr. John Cangialosi.
Cangialosi was accused of the transgressions that took place between October and December 2014 when he was a registered representative of Legend Securities Inc., and which continued thereafter even though he had switched allegiance to Worden. Cangialosi consented to the FINRA suspension. A $7,500 fine and an order to pay $271,622 in restitution to clients have also been levied on Cangialosi, but his ability to satisfy the financial penalty remains in question.
Please contact our office at 1-800-856-3352 if you or someone you know has invested with John Cangialosi. We have over 50 years of experience and a 95% win rate.
History of Worden Capital Management LLC
If an investor incurs losses on account of an infraction or fraud or inappropriate conduct of the advisor, the brokerage firm they are representing may also be liable to the investor. Brokerage firms have the responsibility of supervising advisors registered with them and monitoring their business activities. Failure to do so opens them up for investor claims and losses.
Worden Capital, in this case, can be held responsible for customer losses if it is demonstrated that they have failed to supervise the broker and adequately monitor his business activities.
Worden Capital Management has been highlighted in past reports as a firm that hires brokers with a suspect history. In a 2017 investigation and report authored by Reuters, only 23 other brokerage firms had hired more brokers with significant disclosures on their record, than Worden. The initial study of 2017 is currently being updated by Iorio Altamirano LLP.
54% of its brokers and supervisors having ‘red flag’ disclosures on their record that could be classified as significant, is also a revelation from the earlier study. The following are generally the ‘red flag’ disclosures that are considered significant:
- Employee termination based on misconduct
- Sanctions levied by a regulator
- Association with a firm since expelled by FINRA
- A settlement or award arising out of a customer filed a dispute
FINRA Letter of Acceptance, Waiver, and Consent No. 2017056432605
The Letter of Acceptance, Waiver, and Consent entered into on August 13, 2021, between FINRA and John Cangialosi, records the following allegations:
- Quantitatively unsuitable trading in three customer accounts indulged in by Cangialosi. This is for the period October 2014 through December 2018.
- Recommendation of high-frequency trading in the account made to the three customers by Cangialosi. The strategy also appears to have resulted in the customers holding concentrated positions in just one or two securities for short periods of time.
- While all transactions were solicited, it appears that these customers routinely followed the guidance of Cangialosi. This resulted in him exercising virtually sole authority over the operations in these accounts.
- The result of the strategies executed in these accounts by John Cangialosi was high cost-to-equity ratios as well as high turnover rates. And substantial losses incurred by the customers.
- Trading patterns in the three customers’ accounts reveal the following:
- For Customer A, between October 2014 and 2016, 90 trades were executed for an annual turnover rate of 13.7 and an annual cost-to-equity ratio of 53.38%. The total trading cost in the account was $173,337, which mainly comprised $169,342 in commissions. Realized losses – $279,803.
- For Customer B, the period of suspect transactions was January 2016 to December 2018. 83 trades were executed for an annual turnover rate of 20.23 and an annual cost-to-equity ratio of 95.74%. The total trading cost in the account was $116,442, which mainly comprised of $102,280 in commissions. Realized losses – $93,834.
- For Customer C, 15 trades were executed between March 2017 and October 2017 for a turnover rate of 5.62 (this equates to a turnover rate of 8.43 if annualized) and a cost-to-equity ratio of 26.14% (a cost-to-equity ratio of 39.21% if annualized). The total trading cost in the account was $21,450, which mainly comprised of $21,035 in commissions. Realized losses – $31,618.
With aggregated losses of $405,255, trading costs of $311,229 which included commissions of $292,657, and given the profiles of these customers, the trading was adjudged as excessive and unsuitable, leading to the violation of FINRA Rules 2111 and 2010.
What is excessive trading?
The primary benefit that a broker hopes to achieve by trading excessively in a customer’s account is the generation of trading commissions for himself/ his firm. It is not done with a view to meeting the investment objectives of the customer.
The two indicators used in the industry to establish the level of trading in an account, and whether it qualifies as excessive, are:
Turnover rate – How many times has the portfolio of the customer been replaced or overhauled? There are no fixed markers for what is excessive, but a ratio of 6 or more is generally assumed to be excessive for most customers. For some, even a factor of 4 may be excessive. In the cases traded by Cangialosi, the ratios were between 5.62 and 13.7.
Cost-to-equity ratio – How much, in percentage terms, should the value of an account appreciate in order to cover the cost of the trades? In other words, are the trades resulting in adding any value to the portfolio? Again, no defined benchmarks, but a ratio of 20% or more should generally cause alarm bells to ring. Cost-to-equity ratios of the accounts in question: between 26.14% and 95.74%.
A more virulent form of excessive trading is known as churning where the excessive trades are carried out with the intent to defraud or in complete disregard of the customer’s interest.
Non-discretionary accounts, where the customer retains the right to make decisions, are also often the victims of unauthorized trading, even though brokers need to obtain prior customer authorization.
Whether churning, or excessive trading, or unauthorized trading, these are all unethical and illegal practices carried out in disregard of the customer and his investment objectives and benefit.
John Cangialosi Advisor record
Financial Advisor John Sebastian Cangialosi (CRD No. 3273830) is a 19-year veteran of the industry. As per the BrokerCheck database of FINRA, he has worked for several firms:
- December 2001 to June 2004 – Joseph Stevens & Company, Inc.
- June 2004 to August 2006 – GunnAllen Financial, Inc.
- August 2006 to February 2009 – J.P. Turner & Company, L.L.C.,
- October 2009 to June 2012 – Brookstone Securities, Inc.(since expelled by FINRA)
- June 2012 to August 2013 – Joseph Gunnar & Co. LLC
- August 2013 to November 2016 – Legend Securities, Inc. (since expelled by FINRA)
- November 2016 to December 2019 – Worden Capital Management LLC
- Present – SW Financial
Cangialosi’s history of customer complaints, regulatory discipline, associations with disreputable brokerage firms, and an employment termination after allegations of misconduct, shows up on his record.
He was ‘allowed to resign’ from J.P. Turner & Company, L.L.C., in February 2009, when he was charged with allegations, denied by him, of unauthorized trading in a customer’s account.
Violation of NASD Conduct Rule 2110, IM-1000-I, and FINRA Rules 2010 and 1122 led to Cangialosi entering into a Letter of Acceptance, Waiver, and Consent with FINRA. This was in April 2013 and led to a 3-month suspension and a $5000 fine. This was on account of his failure to either disclose or disclose in good time, six unsatisfied judgments and/or liens on his Uniform Application for Securities Industry Registration, between December 2008 and January 2013.
Seven customer complaints show up on his record Between 2009 and 2018, several of them relating to allegations of excessive trading, churning, and unauthorized trading. Settlements have been reached in four of these cases.
If you, as an investor, have had dealings with either Cangialosi or Worden Capital Management LLC, and suspect that you could be at the receiving end of investment fraud, you are advised to consult with an investment fraud law firm, such as Haselkorn & Thibaut, P.A., with whom you can have a free and confidential consultation and get guidance on your legal rights. Consultation is advised even if you have already received a notification that you will be receiving restitution.
Haselkorn & Thibaut represents investors across the nation in their battle for the recovery of investment losses sustained on account of malpractices of brokerage firms and their advisors, such as Worden Capital Management LLC. Call us at 1-800-856-3352 for a free consultation.