FINRA Arbitrators Hit Kovack Securities With Punitive Damages for A Broker's Egregious Behavior

February 22, 2012

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claimfiled in August 2010, public customer Claimant Tarrant sought $500,000 in compensatory damages plus interest and cost, and punitive damages, as a result of damages allegedly sustained from his being solicited to invest in a real estate project and the subsequent sale of various securities (among which was a SunLife annuity) in his account to fund a loan made to Claimant's broker.  Claimant Tarrant asserted causes of action for

  • breach of fiduciary duty;
  • negligence;
  • negligent supervision;
  • fraud; and
  • breach of contract.
Respondent Kovack Securities generally denied the allegations and asserted various affirmative defenses. In the Matter of the FINRA Arbitration Between Russell Stephen Tarrant, Claimant, v. Kovack Securities, Inc., Respondent (FINRA Arbitration 10-03532, February 13, 2012).

SIDE BAR:  Permit me a short rant at this point.

Those of you familiar with my reporting about FINRA arbitrations know that I detest the hide-and-seek nature of far too many of the organization's Decisions.  Believing that a cogent presentation of the factual background of a dispute provides meaningful context to the ultimate ruling, I am puzzled as to why there appears no effort to enforce such a presentation.

In this case, for example, what I've written above is pretty much all that the Decision sets forth up to and until the Arbitration Panel announces its findings and sanctions.  I mean, really?  You're going to rule on liability in a case demanding at least $500,000 plus punitive damages and all that you're going to explain to us is that there was a dispute about how the customer was solicited and there were some further issues pertaining to the sales of securities to fund a loan to the broker?  Wow . . . thanks for nothing.

DECISION

The FINRA Arbitration Panel found Respondent Kovack Securities liable and and ordered the firm to pay to Claimant Tarrant:
  • $100,000.00 (pre-judgment interest specifically denied);
  • $200,000 in punitive damages;
  • $14,017.00 in costs; and
  • $300 reimbursement of FINRA filing fee.
Bill Singer's Comment

You know, it would help - really help - if FINRA required that its Arbitration Decisions followed a somewhat uniform format of setting forth a minimal recitation of the underlying facts so that the rulings are comprehensible and meaningful.  In Tarrant, for example, we have a fairly unusual situation where a FINRA Arbitration Panel awarded punitive damages equaling double the award of compensatory damages.  In and of itself, that's a notable event - it implies that the misconduct at issue was far more than a routine mishap and that the Respondent's future conduct needed to be influenced by this more severe sanction.  Unfortunately, when sending such a message, the missive tends to get lost in the mail, so to speak, because it's virtually impossible to understand who did what here.

In its own words, this is what the Panel explained - not before rendering  the financial awards but as part of that statement:

The panel determined that punitive damages should be awarded due to the egregious behavior on the part of the broker and the apparent lack of any system of supervision by the Respondent. The broker was employed for over two and one-half years by Respondent and there was no evidence of any compliance reports. The situation is more egregious given the Respondent was aware the broker had been terminated from another firm due to unreported and unapproved outside activities. Even though the broker disclosed an outside activity shortly after being employed by Respondent, there was no evidence of any type of supervision or monitoring system to ensure the outside activity was conducted properly. Additionally, the Claimant was never notified that the broker was terminated and continued to receive financial statements from Respondent listing the broker as the financial adviser. . .

Some Snotty Questions

So tell me, pray do, members of this FINRA Arbitration Panel:

  • What was the name of the stockbroker who seems to have inflamed your ire?  (You know, in case a public investor would like to look him or her up.)
  • What constituted the "egregious behavior" that you cited? (Don't you think it might have been helpful if you set forth the acts and conduct?)
  • What was the nature of the prior "unreported and unapproved outside activities?" (Why reference it if you don't explain it to us?)
  • Did you vote to refer this matter to FINRA for a regulatory investigation?
Why do I rant about these bits of missing information?  Because there is an obligation by FINRA to inform the public and the industry about these matters - otherwise, what's the point of issuing these Decisions? And while Kovack Securities isn't exactly a household name, that doesn't justify the lack of explanation.

Arbitrations are not supposed to be about punishing individual brokers and brokerage firms but about awarding restitution to harmed public customers or industry participants. In those rare cases where a Panel decides that it needs to do more than award compensatory damages, I think it is critical that such a sanction be justified and placed within its proper context by the arbitrators. It doesn't matter if it's a small indie/regional firm or some behemoth like Wells Fargo, Merrill Lynch, JP Morgan, or Morgan Stanley: The public and the industry are entitled to know sufficient background so as to explain a given Decision and to ensure that the desired message (if any) is properly transmitted.  In the case of a relatively smaller firm such as Respondent Kovack Securities, the lack of detail about the individual broker and the underlying misconduct not only deprives us, the readers, of the ability to judge whether the punitive damages were warranted but also prevents the Respondent from defending itself to the public and the industry.

Some Additional Punitive Damages Reading from "Street Sweeper":
  • Wells Fargo Hit With Punitive Damages in FINRA U5 Defamation Case
  • Defamed Broker Hits the Jackpot with $575,000 Punitive Damages in FINRA Arbitration
  • FINRA Arbitration Respondent Hit With Punitive Damages and Discovery Sanctions
  • Morgan Keegan Hit With Punitive Damages in Madoff Feeder Case
  • Arbitrators Say Deutsche Bank Securities Managing Director's Conduct Was Reprehensible