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FINRA Expels Broker-Dealer for Reg BI Violations

The Financial Industry Regulatory Authority announced that it has expelled SW Financial, a Melville, N.Y.-based broker-dealer, for multiple violations of Reg BI and suitability standards, including making misrepresentations to clients in its sales of private placements offerings, churning customer accounts and failing to supervise its registered representatives.

“The serious misconduct in this case exposed customers to significant risk of harm and necessitated expulsion of SW Financial from FINRA membership,” said Christopher J. Kelly, senior vice president and acting head of FINRA’s Department of Enforcement. “Firms cannot make material misstatements or omissions when they sell securities to customers. Firms also must reasonably surveil for, and respond to, red flags of excessive trading and churning. When firms, particularly those with significant disciplinary histories, commit egregious sales practice and supervisory violations, expulsion from FINRA membership may be warranted.”

Between January 2018 and December 2021, FINRA says SW Financial’s chief executive officer and co-owner, Thomas Diamante, engaged in a practice and course of business that deceived investors in connection with the sale of private placement offerings of pre-initial public offering funds. In the offering documents, SW Financial stated it would receive a 10% sales commission from its sale of the offerings. Diamante, however, had entered into an agreement with the issuer whereby SW Financial would receive an additional 5% in selling compensation, as well as half of any carried interest. Diamante then failed to disclose to others at SW Financial that the firm would earn additional compensation.

From March 2018 to December 2021, SW Financial sold the offerings to 171 investors. According to FINRA, the total principal amount of the investments was approximately $21.3 million. SW Financial received approximately $3.06 million in total selling compensation, of which $936,000 was attributable to the undisclosed five percent in selling compensation.

Although Diamante used some of the disclosed sales commission to compensate selling representatives, FINRA says he directed the undisclosed compensation to the firm’s general fund, from which he drew his own compensation. In addition, the issuer transferred shares valued at over $1.07 million to SW Financial and its owners, including Diamante, to cover SW Financial’s share of the carried interest. Therefore, the firm received approximately $2 million in additional compensation, some of which Diamante personally retained.

As a result, FINRA says SW Financial negligently misrepresented and omitted material facts to investors about the amount of compensation the firm would receive in connection with the offerings. Through this conduct, including negligent omissions, Diamante violated FINRA rules.

FINRA says Diamante failed to perform reasonable due diligence for the offerings, failed to complete due diligence checklists and failed to ensure that the offering documents contained accurate information. As a result, Diamante violated FINRA rules.

Diamante consented to a nine-month suspension from associating with any FINRA member in all capacities, a three-month suspension in all principal capacities and a $50,000 fine. FINRA also required that he requalify as a general securities principal or investment banking representative by passing the requisite examinations.

SW Financial consented to an expulsion from FINRA membership.

Diamante founded SW Financial in 2007. Prior to that, according to BrokerCheck, he worked for 10 firms from 1987 to 2006.

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