FINRA Arbitration Claimant's "Short" Dog Won't Hunt

November 24, 2011

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in December 2010, Claimant Feldberg Property Trust alleged that Respondent GS failed to honor Claimant's request for the transfer of its assets to its Charles Schwab account.  The referenced assets related to margin transactions in securities, among which were

  • HLS Worldwide;
  • Annaly Capital Management (NLY);
  • Cadus Corp (KDUS);
  • Immunogen inc. (IMGN);
  • Renaissance Holdings (RNR);
  • TJX Companies Inc. New (TJX); and
  • White Mountains Insurance Group Ltd. (WTM).

Claimant sought $2,438.88 in compensatory damages; $20,000 in punitive damages; $17.60 interest; and demanded the immediate release/transfer of all funds. At the close of the arbitration, Claimant sought an addition $20,000 for fees, expenses, and a percentage of money "tied up."  In the Matter of the FINRA Arbitration Between Mark Feldberg Separate Property Trust, Claimant, vs. GBS Financial Corp.,Respondent (FINRA Arbitration 10-05661, November 14, 2011).

Respondent GBS generally denied the allegations citing impossibility of perfonnance.

Going Through the Motions

On April 5, 2011, Respondent filed a Motion to Compel Joinder of J.P. Morgan and FINRA as Respondents, which Claimant opposed.

On June 1, 2011, the sole FINRA Arbitrator denied the Motion to Compel Joinder of Parties. Citing FINRA Rule 12404(b), the Arbitrator noted that motions to add (join) a party must be served on all parties including the party to be added, and the party to be added may respond to the motion in accordance with Rule 12503:Motions without waiving any rights or objections under the Code.  Apparently the joinder procedure was not followed. 

SIDE BAR: FINRA Code of Arbitration Procedure for Public Customer Disputes

Rule 12404: Additional Parties

[(b)] Once the ranked lists are due to the Director under Rules 12402(d)(3), 12403(c)(3)(C), or 12403(d)(3)(C), no party may amend a pleading to add a new party to the arbitration until a panel is appointed and grants a motion to add the party. Motions to add a party must be served on all parties, including the party to be added, and the party to be added may respond to the motion in accordance with Rule 12503 without waiving any rights or objections under the Code. If the panel grants the motion to add the party, the newly added party may not strike and rank the arbitrators, but may challenge an arbitrator for cause in accordance with Rule 12407.

On June 6, 2011, Respondent filed a second Motion to Compel Joinder of only J.P. Morgan as a Respondent, which Claimant again opposed. On July 15, 2011, the Arbitrator denied the Motion without prejudice and re-cited FINRA's Rule 12404(b) - apparently the requisite procedure was still not followed.  

On October 3, 2011, Respondent filed a Request to Suspend FINRA Rule 4210(c)(5)/(02)  (the "Margin Maintenance Rule") requiring a certain amount of money be withheld in the case of an uncovered short position, which Claimant opposed.

SIDE BARFINRA Financial and Operational Rules

Rule 4210. Margin Requirements

[(c)] Maintenance Margin
The margin which must be maintained in all accounts of customers, except for cash accounts subject to other provisions of this Rule, shall be as follows:
(1) 25 percent of the current market value of all securities, except for security futures contracts, "long" in the account; plus
(2) $2.50 per share or 100 percent of the current market value, whichever amount is greater, of each stock "short" in the account selling at less than $5.00 per share; plus
(3) $5.00 per share or 30 percent of the current market value, whichever amount is greater, of each stock "short" in the account selling at $5.00 per share or above; plus
(4) 5 percent of the principal amount or 30 percent of the current market value, whichever amount is greater, of each bond "short" in the account.
(5) The minimum maintenance margin levels for security futures contracts, long and short, shall be 20 percent of the current market value of such contract. (See paragraph (f)(10) of this Rule for other provisions pertaining to security futures contracts.)

On October 27, 2011, the Arbitrator denied the request to suspend FINRA's Margin Maintenance Rule.

 SIDE BAR: As best I can tell (and this is wholly conjecture), Respondent's Motion to suspend FINRA's Margin Maintenance Rule was filed somewhat tongue-in-cheek and with a tinge of sarcasm and a flair for the dramatic.  I cannot even begin to fathom how a lone FINRA Arbitrator would be empowered to unilaterally and arbitrarily suspend the self-regulatory organization's regulatory rules - and, I suspect, that was the whole point of the motion.

I now stand back, make way for the FINRA Arbitrator, and give him the lone spotlight and center stage from which I allow him to have the last word:

Claimants claim is wholly denied. The Claimant, as the Respondent so aptly put it, was "barking up the wrong tree." The Respondent is unable to override FINRA/SEC rules to free up the Claimants funds being held per such rules by the clearing agent.  Advice was provided to the Claimant by the Respondent as to how he might cover the disputed position and at least partially remove his funds. The initial claim and added costs are denied.