Securities Regulation Daily Wrap Up, ENFORCEMENT—E.D.N.Y.: Reg BI claim was not subject to 9(b) heightened pleading requirements, (Jul 14, 2026)

By Lene Powell, J.D.

The SEC adequately pleaded that a representative’s alleged excessive trading was fraudulent and not in customers’ best interests.

A federal district court allowed SEC claims to proceed against a registered representative at a broker-dealer for allegedly pushing frequent high-fee trades that racked up profits for the firm but losses for customers. The court denied dismissal, finding that a Regulation Best Interest (Reg BI) claim was not required to meet heightened pleading requirements for fraud, and the defendant’s statements regarding high profit potential were so “facially implausible” as to satisfy scienter (SEC v. Cabalar, No. 2:24-cv-07274-GRB-LGD (E.D.N.Y. July 10, 2026)).

Alleged excessive trading. The SEC complaint alleged both Reg BI and fraud claims based on the same factual allegations against Baris Cabalar, a registered representative at PHX Financial, a broker-dealer based in New York. The SEC alleged that Cabalar recommended a short-term, high-volume investment strategy to eight retail customers without a reasonable basis to believe that the strategy would be profitable given the costs imposed. The SEC also alleged in a separate complaint that PHX violated Reg BI through Cabalar’s conduct.

According to the SEC, Cabalar recommended frequent purchases and sales of securities to his customers—occasionally recommending the purchase and sale of the same security on the same day or within the same week. For each transaction, PHX charged a commission of up to 3.5 percent of the value of the trade and a $49 fee.

The frequent trades and resulting fees and commissions allegedly ate into customer profits but benefited PHX. Following Cabalar’s recommendations, the eight customers allegedly lost over $1 million combined during the relevant period, while PHX Financial and Cabalar made over $400,000.

Putting some numbers to it, the SEC said the annualized cost-to-equity ratios for the customers’ accounts during the relevant period ranged from 40.41 to 61.22 percent, and the annualized turnover rates ranged from 7.62 to 47.07. According to the SEC, cost-to-equity ratios exceeding 20 percent and turnover rates of 6.0 or more are generally indicative of excessive trading.

Regulation Best Interest. The court found that the SEC adequately alleged that Cabalar violated the “Care Obligation” under Reg BI.

The court rejected Cabalar’s argument that the heightened pleading standards of Rule 9(b) should also apply to the Reg BI claim. First, the court observed that the Second Circuit and many district courts have held that certain Securities Act claims that do not sound in fraud are not subject to heightened pleading requirements merely because they are asserted alongside fraud claims.

Next, the court found that the SEC’s claims under Reg BI and the antifraud provisions were “analytically distinct, even if overlapping conduct forms the basis for both,” and the SEC took care to distinguish the two sets of claims by describing different conduct for each.

For the Reg BI claim, the SEC alleged that Cabalar did not exercise the requisite diligence, care and skill to develop a “reasonable basis to believe” that the trades he solicited placed his customers’ interests before his and PHX’s interests. By contrast, the fraud claims included allegations that defendant knowingly made material misrepresentations to his customers to defraud them.

As a result, the Reg BI claim only needed to meet notice pleading requirements, not 9(b) heightened pleading requirements for fraud. Under that standard, the SEC adequately alleged that Cabalar failed to have a reasonable basis to believe that the transactions he solicited were in the best interests of his customers. The costs associated with the transactions made it virtually impossible that his customers could generate profits, the SEC said.

Fraud claims. The court also found adequate support for the SEC’s fraud claims, brought under Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act.

The court focused on an alleged statement that Cabalar could help a customer recoup a loss of $70,000 within one year. To earn that amount would have required a net profit of over 79 percent, exclusive of the commissions and fees charged by Cabalar and PHX. Noting that the customer allegedly lost $36,000. the court called this “so facially implausible as to satisfy the scienter element of plaintiff’s securities fraud claims.”

Dismissal denied. Because the court found that the SEC adequately alleged the claims, the motion to dismiss was denied.

This is case No. 2:24-cv-07274-GRB-LGD.

Judge: Brown, G.

Attorneys: Christopher John Dunnigan for the SEC. Matthew B. Baum (Fox Rothschild LLP) for Baris Cabalar.

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