FINRA Still Struggling to Make Sure Brokerages Pay Investors What They are Owed

The Financial Industry Regulatory Authority (FINRA) continues to struggle with enforcing brokerages to pay investors what they are owed. The broker-dealer industry continues to decline, with 3,901 broker-dealers open in August; a drop of 13% from 2011, when 4,456 firms were open, and a decrease of 20% from 2008, when 4,895 firms were open. Many of the broker-dealers struggle with rising legal costs and new technology and compliance costs. New regulations are also expected to be put in place, such as the Department of Labor’s fiduciary rule. Many times small firms go bankrupt and close without paying arbitration awards. Investors are then simply out of luck and receive nothing, despite winning arbitration awards.

For instance, Newport Coast Securities, closed its doors over the summer and its book of business and some of its biggest brokers went to another broker-dealer. 63% of Newport Coast’s brokers had at least one compliance mark, known as a disclosure event, which is a high percentage for brokers at a firm. According to Newport Coast’s profile on FINRA’s BrokerCheck, the firm “cannot meet the financial liabilities shown,” and its “total amount owed to customers, from pending and awarded arbitrations is $220,628.” FINRA must approve mergers, such as Newport Coast’s, and most broker-dealers carry insurance for investor claims, but limits on insurance can be low and doesn’t cover all types of claims. According to a report issued by a FINRA Dispute Resolution task force last year, in 2013, FINRA issued arbitration awards in 539 investor cases, of which 75 were not paid. In this case, the amount of unpaid damages equals $62.1 million. As far back as the year 2000, the U.S. Government Accountability Office issued a report that said that the industry needed to address the problem of unpaid arbitration awards. In 2013, a FINRA representative told the Wall Street Journal that it was considering requiring firms to carry insurance to cover the payment of arbitration awards to investors, but, a year later, a FINRA spokesperson stated that no such thing would happen, that insurance would be too costly. The idea of a fund for arbitration awards has been brought up, but no such fund has been initiated, yet.

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Vacated FINRA Arbitration Award Dismissal Affirmed by Third Circuit

Former Merrill Lynch clients Judith and Kenneth Goldman, followed their financial adviser, Barry Guariglia, when he left Merrill for Citigroup Global Markets. In a Financial Industry Regulatory Authority (FINRA) arbitration claim, the Goldmans alleged that when they transferred their account to Citigroup, they were subjected to a “devastating margin call” that wiped out their retirement savings. The FINRA arbitration panel dismissed the case, noting that, “while all the claims were quite stridently argued, not a single claim was proven to be true by evidence.” The Goldmans then filed a motion to vacate the arbitration award in Pennsylvania federal court, and Citigroup moved to dismiss for lack of subject matter jurisdiction, which was granted. The Pennsylvania federal court found that the Goldmans failed to raise a federal question and simply sought to “assert the same claims they unsuccessfully brought in their arbitration.” The Goldmans then appealed to the Third Circuit Court of Appeals. The Third Circuit rejected their argument, and affirmed the Pennsylvania federal court’s order dismissing the suit for lack of subject matter jurisdiction.

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FINRA Disciplines South Floridians

The Financial Industry Regulatory Authority (FINRA) disciplined eight south floridians for securities laws violations. Alexandre W. Artmann entered into an agreement with FINRA, with FINRA alleging that Artamnn should have known a form contained false statements. He was fined $15,000 and suspended for 45 days. Miami resident Alfredo Francisco Ayme agreed to a 10 day ban from acting as securities principal, COO and head trader at Martinez-Ayme Securities. Allegedly, between May and July 2014, the firm placed marker bids on a company’s shares. FINRA alleged that the firm should have had better supervisory systems, and that Ayme should have ensured those systems.

Gregory Edward Barr entered into an agreement with FINRA when it alleged that Barr did not get written authorization from his customers to sell positions at his discretion, when he was registered as a broker at Deutsche Bank Securities Inc. Barr was fined $5,000 and banned for 10 days from the securities industry. Gregory Mark Feldman was fined $10,000 and suspended for 10 days by FINRA and was ordered to pay a deferred disgorgement of more than $7,451 plus interest. Feldman was accused of purchasing shares in 15 initial public offerings (IPOs) in two personal brokerage accounts he held at different firms while he was registered at Lord Abbett Distributors. FINRA prohibits the purchase of shares in an IPO by a person associated with a member firm that has a beneficial interest in the offering. FINRA also suspended and fined Sonia Giannetti, a broker with Activa Capital Markets, for two years and $10,000.

FINRA alleged that Francisco Gabriel Hervella engaged in unapproved outside business activities as a 50 percent owner of a British Virgin Islands entity while working at Invex, Inc. He had also been acting as the director of a New Zealand-based LLP while at Invex. Hervella did not disclose his outside business activity, which is against securities rules and regulations. Talero and Hervella also allegedly acted outside the scope of their employment agreements in an advisory role in five private securities transactions. They both made more than $2 million because of them.

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Stifel, Nicolaus Latest Firm to Claw Back $440,000 from Ex-Broker

Stifel, Nicolaus is the latest brokerage firm to win back $440,000 from an adviser who was discharged from the firm almost two years ago. Christian Harkness will pay Stifel the balance owed on a promissory note he signed when he joined the firm in 2009, according to a FINRA resolution document released earlier this week. Promissory notes are typically given to brokers when they join a firm, intending to entice them to reach certain performance targets. Firms tend to win these promissory note cases because they are contractual in nature. An arbitration panel recently ordered Wells Fargo broker Robert Loftus to pay $1 million in compensatory damages tied to promissory notes, while Morgan Stanley clawed back $333,000 from a financial adviser.

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Ex-SEC Commissioner Hopeful Fiduciary Rule Brought to Vote by the SEC

In a recent OnWallStreet article by John Wasik, Luis Auilar, a former Securities and Exchange Commission (SEC) commissioner, helped launch the Campaign for Investors, sponsored by the Institute for the Fiduciary Standard, a group which promotes investor protection and advocates best practices for advisers. Aguilar agreed to comment on regulation in an exclusive conversation with Financial Planning. Aguilar recently joined Consequent Capital Management. Aguilar stated that he “wished a fiduciary rule had been brought to a commission vote and he is hopeful that the commission will adapt a fiduciary standard for all advisers who are providing personalized investment advice.” One hot topic of the commission’s is whether clients of broker-dealers should be forced into arbitration to resolve disputes. Aguilar weighed in on the side of individual investors. He stated: “I think investors should have the right to protect their interests in all available forums. I believe that forcing clients to agree to arbitration before a dispute arises can deny them important rights. My focus is not on arbitration per se. Arbitrations are neither inherently bad nor good. A lot can depend on the particular forum and how arbitrators are chosen, trained and the particular mechanisms employed in reaching decisions.”

Many advocates for investor protection would like to see the SEC have more oversight over the Financial Industry Regulatory Authority (FINRA). But Aguilar points out that the SEC is not a self-funded agency and that its budget and resources are limited. The limited nature of funding can cause the staff to make many judgments as to where best to focus limited resources. He would prefer that the SEC directly appoint FINRA board members the same way it does for the Public Company Accounting Board that oversees public company audits.

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FINRA Orders Morgan Stanley Advisor to Pay Firm $333,000

According to a recent InvestmentNews article, a Financial Industry Regulatory Authority (FINRA) arbitration panel ordered Louis D. Dworsky, a former advisor with Morgan Stanley, to pay back the firm $333,000 in damages for failing to pay them back when he left in 2013. Four promissory notes were issued to Dworsky in 2007, 2008 and 2009. Mr. Dworsky now works at Zermatt Wealth Partners in Raleigh, North Carolina, a wealth management business he started in 2013. At his hearing, Dworsky asked for $6.15 million in lost commissions in a counterclaim against Morgan Stanley. His counterclaims were dismissed, with the arbitration panel agreeing with the firm that Mr. Dworsky failed to comply with North Carolina’s statutes of limitations. The panel also ordered him to pay Morgan Stanley’s attorney’s fees of $232,000 as well as $13,248 of additional costs.

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FINRA Warns Brokerage Firms Not to Shirk Arbitration Forum

The Financial Industry Regulatory Authority (FINRA) recently sent out a warning to broker-dealers reminding them that they cannot force customers or brokers into dispute forums other than its own arbitration program. If they do, firms could be subject to enforcement action. Recently, court cases have undermined the regulatory body’s rules allowing customers and registered representatives to choose FINRA arbitrations to settle disputes, even when account aggreements and employment contracts specify an alternative forum. In the regulatory notice it stated: “FINRA rules requiring arbitration are not mere contracts that member firms and associated persons can modify.” The cases referred to used two appellate court decisions from the 1990s that “never actually decided whether a member firm may obtain and enforce a waiver of its obligation to arbitrate” at FINRA.

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FINRA Orders Morgan and Citi to Pay $625,000 in Broker-Wife Dispute

According to a recent OnWallStreet article, a Financial Industry Regulatory Authority (FINRA) arbitration panel ruled against Morgan Stanley and Citigroup Global Markets to the tune of $625,000. Morgan Stanley and Citigroup has been ordered to pay the fine to Laura Lyn Bell, soon-to-be-ex-wife of SEC-registered adviser and CFP, Kirk Bell. Laura Bell claims that funds were stolen from her, when, in 2001, she deposited more than $600,000 into a Smith Barney account. In October 2002, Kirk Bell, an employee of Citigroup Global Markets in Glendale, California, became the broker on her account. The two were married that same month. Laura Bell alleges that Kirk Bell transferred funds from her account to another account for his own use, without her knowledge or authorization, between March 2003 and May 2009. The FINRA arbitration panel sided with Laura Bell and ordered Citigroup and Morgan Stanley to pay $625,000.

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Study Shows Bad Brokers Tend to Stick Together

In an analysis done by Craig McCann, owner of Securities Litigation and Consulting Group (SLCG) Inc., bad brokers are likely to stick together when going from one brokerage firm to another. These bad brokers tend to concentrate in equally bad brokerage firms. This helps to predict future misconduct by co-workers not yet revealed to be bad. He stated: “Brokers at bad firms are more likely to engage in future investor harm-whether they had previously engaged in investor harm or not-than otherwise identical brokers at good firms.” In the study which used more than 100 brokers, small brokerages were found to have more bad actors than large firms. Of the 42 firms with the worst records, 32 had fewer than 400 brokers and only Oppenheimer & Co. had more than 1,000. Of the 10 worst firms, eight had fewer than 400 brokers.

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FINRA to Decide About Creation of Fund for Unpaid Arbitration Awards

The Financial Industry Regulatory Authority (FINRA) is considering creating a fund to be used for unpaid arbitration awards. This would solve the problem of investors not recovering arbitration awards that are due to them. In 2013, a total of $62 million in awards went unpaid, which amounted to one in three awards, according to a study done by the Public Investors Arbitration Bar Association (PIABA). Many times the awards go unpaid because the brokerage firm or broker that they have sued, declare bankruptcy. But FINRA firms and brokers are regulated, so it should be expected that they be held to a higher standard. It proposes that FINRA members pay dues annually into a designated pool, amounting to about $100 per broker, to help compensate the award winners. The report also lays out a blueprint that says the pool could be created and maintained based on the average sum of unpaid claims the past five years. The money would be paid out annually. The existence of the fund is likely to increase the number of arbitration cases brought against brokers and brokerage firms, because more securities attorneys will be willing to take the cases if they know there is a guarantee the award will be paid out.

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