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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.

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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”?

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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 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

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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)

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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.

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If you are the target of an investigation by the Securities and Exchange Commission, do not assume it will go away on its own. Instead, it may linger for months or years, all the while you face the possibility of fines, loss of license and your job or business, and the possibility of criminal charges if the SEC refers your matter to the Department of Justice. When this happens, the smart thing to do is to become aware of the investigation as soon as possible and hire legal representation. If you need to know more about SEC investigations, here are some important details to keep in mind, as well as how New York securities attorneys at Herskovits PLLC can help you navigate this complex process.

Tips and Referrals

For an SEC investigation to begin, the agency usually relies on tips and referrals from various sources, such as:

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When a registered representative leaves a broker-dealer, there are many different service and compliance issues that emerge. There are also competing interests between the firm and the representative, each of whom want to keep the customer’s business. At the same time, the customer wants to maintain steady and uninterrupted service. FINRA Regulatory Notice 19-10 sets forth obligations that members must follow when a registered representative departs a firm. Herskovits PLLC can assist firms and registered representatives that need assistance in understanding or implementing FINRA’s directives.

It is common in the industry for registered representatives to move between firms. FINRA expects that the firms and representatives continue to prioritize the customers’ interests when a registered representative leaves the firm. First and foremost, the firm must inform the customer how their account will continue to be serviced after the representatives moves from the firm. Then, the firm must provide its customers with full and complete answers when the firm is asked about the representative who is leaving.

Firms must ensure that the customers know that they have the option to keep their account at the firm and have the account serviced by a new representative. They must also provide the contact of the departing representative to the customer if the representative has given their consent to their contact information being distributed. In other words, customers must be able to make their own choice about what to do with their account.

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