Public Customer Gets Legg Mason Fund Settlement From Ameriprise But Broker-Of-The-Day Exonerated

September 19, 2011

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in June 2010, public customers Russo and Cammarano sought at least $160,000 in compensatory damages as a result of alleged losses they sustained in the Legg Mason New York Municipal Bond Fund ("SBNYX") through Respondent Ameriprise Financial Services, Inc. Among their allegations, the Claimants alleged fraud, negligence, and breach of fiduciary duty. In the Matter of the FINRA Arbitration Between Eugene Russo and Mary Cammarano, Claimants, v. Ameriprise Financial Services, Inc., Respondent (FINRA Arbitration 10-02949, September 13, 2011).

Respondent Ameriprise generally denied the allegations, asserted various affirmative defenses, and sought an expungement of the Central Registration Depository records ("CRD") of non-party Associated Person Frank Gambino (an Ameriprise employee).

Settlement

On April 27, 2011, Claimants notified FINRA that the matter had settled but the case would remain open for the limited purpose of permitting the FINRA Arbitration Panel to consider Respondent Ameriprise's expungement request. Claimants did not oppose that request and did not participate at the August 2011 expungement hearing.

Expungement

The FINRA Arbitration Panel recommended the expungement of the arbitration from Gambino's CRD.

House Sale Proceeds

As the Panel explained the circumstances, Claimant Russo had called Respondent asking to speak to a sales representative - as the designated broker-of-the-day, Gambino was given the call.  The FINRA Arbitration Panel determined that Claimant Russo had owned a house in Queens, New York that he had recently sold for approximately $1.5 million dollars (post-capital gains tax), and he wanted to re-invest those net proceeds. However, Russo expressed extreme concern about reducing his tax exposure and indicated his interest in investing in a tax-free muni bond fund. Apparently, Russo concluded that his best investment option was SBNYX.

Following Russo's initial call, Gambino said that he spoke to Claimants Russo and Cammarano several times over a period of approximately six months before the first purchase, and Russo indicated in the first telephone call that he was familiar with several muni bond funds.  Additionally, Russo already knew about several different municipal bond funds from information he had obtained from JP Morgan Chase.

Quick Pull of the Trigger

Apparently, Russo wanted to quickly invest his $1.5 million within the relatively short time of a month rather than phase-in purchases over a more extended period. Gambino testified that he harbored reservations about Russo's gameplan and corroborated his recollection through the introduction to the FINRA Panel of six pages of notes memorializing his unsuccessful efforts to persuade Russo to consider 'Dollar Cost Averaging' and more diversification.

Gambino claimed that notwithstanding his advice to the contrary, Russo insisted upon investing in SBNYX and placed his first trade on July 23, 2008, in the amount of $499,999, at a time when SBNYX was trading at $13 per share. On August 7, 2008, Russo invested an additional $1 million in SBNYX at a per share price of $13.05.

2008 Market Crash

The FINRA Arbitration Panel noted that the summer of 2008 was the beginning of a period marked by "tremendous declines in the entire securities and bond market, including of course, Legg Mason." In response to frequent calls from Russo, Gambino and the customer discussed the overall negative stock market and economy, particularly after Lehman's September 2008 bankruptcy.

After owning SBNYX for less than three months during a period of precipitous market declines, Russo decided to sell his position on October 15, 2008, at $11.78 per share for net proceeds of $1,364,588. The order was marked "unsolicited."

The FINRA Arbitration Panel characterized Claimant Russo as a:

very, very nervous person, nervous about investing in anything. It appears on the profile information, that Mr. Russo had listed his risk tolerance as 'moderate'. The Panel seriously questions whether in fact Mr. Russo knew or understood what the word 'moderate risk tolerance' meant.

In its deliberations, the Panel concluded that Russo was determined to purchase SBNYX and to invest his $1.5 million into this one security - and that he made his decision based upon his prior investigation of various opportunities and on research he obtained from JP Morgan Chase, others, and Gambino. As to what prompted his somewhat panicky liquidation, the Panel determined that Russo "was just too nervous, and was not able to continue with holding the investment."

Gambino demonstrated to the FINRA Arbitration Panel that if Russo had not dumped his position that, over time, SBNYX had increased in value and the customer would have sustained a capital increase rather than a loss.

Boilerplate

An interesting comment from the FINRA Arbitration Panel was that it seemed troubled by the Statement of Claim's use of:

'buzz' words and phrases, such [as] 'recommended unsuitable investments', 'violated securities industry practices', 'breached fiduciary duties', 'violated federal and state laws', 'was negligent', 'failed to properly supervise its registered representatives', 'engaged in security fraud' and otherwise 'defrauded the claimants'. The Panel from all information provided, did not see how any of these claims could possibly have been true, and could not see if there were any basis to any claims and do not believe Claimants could have been successful on any of these claims.

Settlement Agreement

Finally, the Arbitration Panel noted that the Settlement Agreement between Claimants and Respondent Ameriprise was based upon Ameriprise's payment of $37,500, and that Ameriprise stated that its motivation in entering into that resolution was to "avoid the ongoing expense and inconvenience of litigation." Although that is the frequently cited reason for most settlements (and, frankly, not always an honest statement), in this case, the Panel calculated the payment as a little over 20% of Claimants compensatory damages - which the Panel characterized as a "small amount relating to the alleged claim of $160,000."