FINRA Lawyer Blog
Decades of Securities Industry Legal Experience
Certified Arbitrator for FINRA, AAA, and the NFA
Exceptional Track Record From 100’S of Finra Arbitrations
New Rule
Virginia recently added Section F to 21 VAC5-80-200 (Dishonest or Unethical Practices), which provides: “For purposes of this section, any mandatory arbitration provision in an advisory contract shall be prohibited.”
Background
FINRA BARS A SUPERVISOR FOR THE MISDEEDS OF ANOTHER
Courts call a lifetime bar “the securities industry equivalent of capital punishment.” PAZ Sec. Inc. v. SEC, 494 F.3d 1059, 1065 (D.C. Cir. 2007). It is a draconian measure which not only permanently removes you from the securities industry but also subjects you to “statutory disqualification” under Section 3(a)(39)(A) of the Securities Exchange Act of 1934 and all the collateral consequences that come with it.
Given the seriousness of a lifetime bar, a recently released AWC presents an alarming fact pattern in which a supervisor was barred due to the transgressions of an FA he failed to properly supervise. Let’s consider the case of Michael Leahy, FINRA Case No. 2019063631802. The question is, why did FINRA go after the supervisor with guns blazing?
The Applicable Rule: FINRA Rule 3110
UBS DEFAMES AN FA BUT STILL WINS BIG
This blog post looks at an interesting FINRA arbitration award issued on January 7, 2020: Daniel Paul Motherway v. UBS Financial Services, Inc., FINRA Arbitration No. 17-02799. This case seems to prove the old adage: a man who is his own lawyer has a fool for a client. Here we have an FA who proved, quite literally, that UBS defamed him, but was nonetheless ordered to stroke a check to UBS for more than $1 million.
Background Facts
On June 28, 2017, UBS fired Motherway and offered the following termination explanation on BrokerCheck: “Financial Advisor’s employment was terminated after review concluded that he made false claims of merchant fraud on his personal credit and debit cards to an affiliate of the firm and made conflicting statement during the review.”
FINRA Attacks Suitability By Challenging FAs Product Knowledge
On January 3, 2020, FINRA released an AWC for Robert James D’Andria, Case No. 2017056579502. At first blush the AWC seems rather plain vanilla. The FA recommended high-risk products, in this case leveraged and inverse exchange-traded notes and funds, to retail investors and FINRA deemed those recommendations to be unsuitable. FINRA suspended the FA for 2 months and fined him $5,000.
In a typical suitability case, FINRA would claim that the account was over-concentrated in a given sector, or the position was too large relative to the portfolio as a whole, or the account was over-traded, or the investment was inconsistent with the investor’s stated investment objectives. And, in a typical case, FINRA would claim that the customer suffered meaningful losses.
In this AWC, however, FINRA does not claim that the investments were inconsistent with the customers’ investment objectives. Nor does FINRA claim that the investors were unsophisticated or otherwise lacked the ability to assess the merits of these investments. So, this begs the question: where’s the violation?
FINRA ARBITRATORS REFUSE TO PERMIT FAs TESTIMONY: BUT THEY DID HEAR FROM THE SUBSTITUTE TEACHER
FINRA published an interesting arbitration award on December 27, 2019. In Raymond James & Associates, Inc. v. Gregory D. Clark (FINRA Case Number 18-04011), Raymond James claimed that Mr. Clark breached a settlement agreement related to the repayment of a promissory note. Raymond James requested, and was awarded, compensatory damages of $206,000 plus interest pursuant to Florida Statutes § 55.03. You can access the Award by clicking here.
Things get interesting when analyzing the procedural rulings of this case.
Motion to Bar Presentation of Defenses and Facts
FINRA HITS AN FA FOR FAILING TO DISCLOSE BENEFICIAL OWNERSHIP OF AN ACCOUNT
On December 20, 2019, FINRA announced a settlement with John Carneglia. According to the AWC, Carneglia violated FINRA Rule 3210 for failing to notify his member firm of a brokerage account and violated FINRA Rule 3270 for failing to timely disclose an outside business activity.
Underlying Facts
Carenglia was registered with BNP Paribas from June 2006 through July 2017. According to FINRA, Carneglia didn’t inform BNP of his wife’s brokerage account and likewise failed to inform the firm that maintained his wife’s account of his association with BNP. Further, FINRA alleges that Carneglia was a member of an LLC that owned an income-generating rental property (ski-resort condominium), yet failed to timely notify BNP of that outside business activity.
FINRA DROPS THE STATUTORY DISQUALIFICATION HAMMER
On December 16, 2019, FINRA released the AWC in Matter No. 2018060843801 (In re Molteni) [click here to read the AWC]. At first blush, the AWC seems to concern a garden variety violation in which the FA failed to amend his Form U4 to disclose two federal tax liens. This doesn’t seem to be the violation of the century, right? Even FINRA’s Sanction Guidelines suggest a regulatory slap on the wrist of a modest fine and 10 day suspension.
So here is where things get interesting. FINRA more or less sanctioned Molteni in accordance with the Sanction Guidelines. They hit him with a $5,000 fine and a 3 month suspension. However, FINRA also found that he “willfully” failed to disclose the federal tax liens. In the world of FINRA regulation, the word “willful” carries an awful lot of weight.
What does it mean to act “willfully”?
UBS IS SLAMMED FOR FORM U5 DEFAMATION: QUALIFIED IMMUNITY PREVAILS
On December 11, 2019, a Chicago-based FINRA arbitration panel body-slammed UBS in a Form U5 defamation case (FINRA Case No. 18-02179 – Munizzi vs. UBS Financial Services Inc.). UBS will need to cough up compensatory damages of $3,149,656, punitive damages of $7.5 million, and almost $500,000 in attorneys’ fees. The bean counters in Zurich can’t be happy. This case should serve as a warning to brokerage firms who play games with Form U5 disclosures.
The issues surrounding Form U5 disclosures are well known. Firms are required to state a reason for an individual’s termination as either “discharged,” “other,’ permitted to resign,” “deceased,” or voluntary.” If the reason for termination is designated as discharged, permitted to resign or other, the firm is required to provide a written explanation. This is where things get funky, particularly where the individual contests the explanation offered-up by the firm.
Lawyers tend to squabble over whether a firm can be successfully sued for defamatory statements on a registration termination form (Form U5). Brokerage firm’s argue that FINRA requires them to provide timely, complete and accurate information on Form U5 concerning the individual’s termination. Firm’s will often cite to FINRA Regulatory Notice 10-39 [a copy can be viewed here] to support this proposition. Thus, many firms will claim to enjoy “absolute immunity” for statements made on a Form U5 and rely upon Rosenberg v. Metlife, 8 N.Y.3d 359 (2007) (where New York’s highest court ruled that defamatory statements on a Form U5 are subject to an absolute privilege). However, as set forth in the tables below, New York’s position on Form U5 immunity is clearly the minority view, since most states that have considered this issue provide brokerage firm’s with only qualified immunity (meaning, immunity for statements made in “good faith”):
| MAJORITY POSITION: QUALIFIED IMMUNITY | |
| State | Case |
| Arizona | Wietecha v. Ameritas Life Ins. Corp., No. CIV 05-0324-PHX-SMM, 2006 WL 2772838 (D. Ariz. Sep. 27, 2006) |
| Connecticut | Dickinson v. Merrill Lynch, 431 F. Supp. 2d 247 (D. Conn. 2006) |
| Florida | Smith-Johnson v. Thrivent, No. 803CV2551T30EAJ, 2005 WL 1705471 (M.D. Fla. July 20, 2005) |
| Illinois | Bavarati v. Josephthal, Lyon & Ross, 28 F.3d 704 (7th Cir. 1994) |
| Michigan | Andrews v. Prudential, 160 F. 3d 304 (6th Cir. 1998) |
| Oklahoma | Prudential Sec. Inc. v. Dalton, 929 F. Supp. 1411 (1996) |
| Tennessee | Glennon v. Dean Witter, 83 F.3d 132 (6th Cir. 1996) |
| Texas | In re Wakefield, 293 B.R. 372 (N.D. Tex. 2003) |
In addition, a number of states have enacted Section 507 of the Uniform Securities Act, which specifically provides for qualified immunity (the firm can be liable for defamation if the firm knew or should have known that the statement was false, or acted in reckless disregard of the statement’s truth or falsity.
| MAJORITY POSITION: QUALIFIED IMMUNITY | |
| State | Statute |
| Hawaii | HAW. REV. STAT. ANN. § 485A-507 (2006) |
| Idaho | IDAHO CODE ANN. § 30-14-507 (2004) |
| Kansas | KAN. STAT. ANN. § 17-21a507 (2005) |
| Maine | ME. REV. STAT. ANN. 32, § 16507 (2005) |
| Minnesota | MINN. STAT. ANN. § 80A.74 (2007) |
| Missouri | MO. REV. STAT. § 409.5-507 (2003) |
| Oklahoma | OKLA. STAT. ANN. 71, § 1-507 (2004) |
| South Carolina | S.C. CODE ANN. § 35-1-507 (2006) |
| South Dakota | S.D. CODIFIED LAWS § 47-31B-507 (2002) |
| U.S. Virgin Islands | V.I. CODE ANN. 9, § 657 (2004) |
| Vermont | VT. STAT. ANN. 9, § 5507 (2006) |
In addition, the regulatory community has historically supported the proposition of qualified immunity instead of absolute immunity. In 1997, FINRA (then NASD) even proposed a rule specifically provided only qualified immunity for Form U5 disclosure [click here to read the Notice to Members]. Additionally, in 1996, then SEC Commissioner, Isaac C. Hunt, Jr., forcefully advocated for qualified immunity [click here to read his remarks].
Herskovits PLLC has a nationwide practice representing individuals in the securities industry in employment and compensation disputes, including Form U5 defamation cases and Form U5 reformation cases. Feel free to view our practice area page or call us at 212-897-5410.
FINRA ACCUSES NY LIFE OF FALSIFYING CUSTOMERS’ INVESTMENT OBJECTIVES: OUCH
FINRA wants a member firm to enforce its written supervisory procedures. And FINRA wants a member firm to recommend securities that fit within the customer’s investment objectives. And certainly FINRA wants a member firm to avoid falsification of business records. So what happens when a member firm doesn’t quite live up to FINRA’s expectations? Let’s play the over / under game and try to guess the size of the FINRA sanction when a member engages in the following misconduct:
- Failure to enforce WSPs governing the sale of high-risk mutual funds subject to significant volatility
- Failure to reallocate portfolios to reduce risk or otherwise update investment objectives to correspond with the assumption of additional risk
FINRA DINGS ANOTHER FA FOR A PRIVATE SECURITIES TRANSACTION VIOLATION
FINRA is on the look-out for violations of Rule 3280, which prohibits an FA from participating in a private securities transactions without giving written notice to the broker-dealer and receiving written approval. A “private securities transaction” is any securities transaction outside the scope of the FA’s employment with the broker-dealer. Private securities transactions remain a regulatory focus for FINRA. As noted by FINRAs CEO, Robert Cook, in the 2019 Risk Monitoring and Examination Priorities Letter: “we are particularly concerned about fundraising activities for entities that the associated persons control or in which they have an interest…”
Case In Point
In the Matter of Michael Jason Collins, FINRA Matter No. 2017056104801 (see the AWC itself)