Articles Posted in FINRA Arbitration

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In Next Financial Group, Inc. v. GMS Mine Repair and Maintenance, Inc., Case No. 3:19-cv-168 (USDC W.D. Pa.), the federal court was asked to define the term “customer” as it relates to FINRA’s Code of Arbitration Procedure.  The definition of that term carries significance because “customers” can compel a member firm to participate in FINRA arbitration whereas non-customers cannot.  In the case at hand, GMS Mine Repair had no account with Next Financial and received no goods or services from Next Financial itself.  This case bears some significance because the court compelled arbitration even though GMS Mine Repair was nothing more than an investor in the FAs outside business activity.

Background

The case arose from a supposedly fraudulent investment scheme perpetrated by Douglas P. Simanski, a former registered representative of Next Financial Group.  According to BrokerCheck, Next Financial terminated Douglas Simanski in May 2016 because “RR sold fictitious investment and converted funds for his own personal use and benefit.”  Mr. Simanksi currently has 30 disclosures on his BrokerCheck report, reflecting numerous settled customer claims.  On November 2, 2018, the SEC filed a complaint against Mr. Simanski alleging that Simanksi “raised over $3.9 million from approximately 27 investors by falsely representing he would invest their money in one of three ventures:  (1) a ‘tax free investment’ providing a fixed return for a specific number of years; (2) one of two coal mining companies in which Simanski claimed to have an ownership interest; or (3) a rental car company.”  According to BrokerCheck, the SEC ultimately barred Simanski and Simanski plead guilty to criminal charges filed by the U.S. Department of Justice.

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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.”

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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

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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.

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FINRA operates the largest securities dispute resolution forum in the United States.  Virtually all disputes between customers and brokerage firms are resolved by arbitration before FINRA.  Similarly, virtually all disputes between employees and brokerage firms are likewise resolved by arbitration before FINRA.

It is common in any arbitration that a party may seek documents or testimony from a non-party.  If the non-party is a FINRA member or an employee of a FINRA member, the arbitrators are free simply to “order” that person or company to testify or supply documents (FINRA Rule 12513).  However, does the jurisdiction of FINRA arbitrator extend to companies or persons that are not FINRA members or employees of FINRA members? The answer is, kind of sort of yes, but with some wrinkles.

Let me explain and take it from the top.  First, the laws in the United States favor arbitration.  The Federal Arbitration Act (ʺFAAʺ), 9 U.S.C. § 1 et seq., ʺreflects a legislative recognition of ʹthe desirability of arbitration as an alternative to the complications of litigation.ʹʺ  Genesco, Inc. v. T. Kakiuchi & Co., 815 F.2d 840, 844 (2d Cir. 1987).  Thus, one question is:  does FINRA even have a rule which permits an arbitrator to issue a subpoena to a non-member or an individual not employed by a member?  The answer is, yes:  FINRA Rule 12512 states, “Arbitrators shall have the authority to issue subpoenas for the production of documents or the appearance of witnesses.”

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Did you recently lose a serious amount of money because you took the bad advice given to you by your broker? If so, don’t despair. There may be a way for you to recoup the money that you invested. You may even be able to sue for punitive damages on top of the amount that you recently lost. To do so, you will need to contact a firm of experienced NYC investment fraud attorneys.

Don’t Let a Faulty Adviser Drain Your Investment Account


If you were misled by a negligent or incompetent financial adviser, you may have recourse to the law. If you can prove that they intentionally misled you, mismanaged your funds, or otherwise behaved in an unlawful manner, you may be able to file a claim against them in arbitration.

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When you have a FINRA arbitration case, it can be confusing if you are not familiar with the process. Since arbitration differs from a traditional court hearing, you need an attorney on your side who not only understands the FINRA arbitration process, but who has also helped clients obtain favorable outcomes. If you have an upcoming FINRA case, here are some ways arbitration can help turn the tide in your favor.

Non-Public and Confidential Hearings

If you find yourself involved in a court hearing, it will almost certainly be a matter of public record. However, an arbitration hearing is far more confidential, with the only information available publicly being that which is posted on the FINRA Arbitration Awards online database.

Ever since it was implemented, brokers have relied on the Protocol for Broker Recruiting to be able to take some of their clients with them when they leave a firm, but a recent ruling by a state court in Georgia might jeopardize the Protocol’s protections.

The Appeals court’s ruling concluded the case against four former Aprio brokers, who failed to give 60 or 90 days’ notice before moving to Morgan Stanley, as it was established in their employment agreements.

Instead of giving Avrio a heads up, they announced they were leaving and quit on the same day. As soon as they had a foot out the door, they reached out to all their clients, in an attempt to bring them over to Morgan Stanley. Naturally, many followed, and Aprio lost a significant amount of business.

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A FINRA arbitration panel has just awarded James L. Springer Jr.; a Sarasota investment adviser, $3 million in damages, to be paid by his former employer, UBS. Springer, who managed  $350 million in client assets during his 12 years with the company, claims UBS defamed him in a desperate attempt to keep his clients after he decided to leave.

In 2014, the broker prepared to leave UBS for a lucrative position at Merrill Lynch. Two days before he was supposed to resign, UBS fired him and proceeded to make allegedly false statements to his former clients.

UBS claimed Springer was being fired because he had used a corporate credit card to make personal purchases. The dollar amount of the purchases was, however, insignificant, especially when considering that the broker’s work yielded multi-million dollar profits for the company.

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