In a Financial Industry Regulatory Authority ("FINRA") Arbitraiton Statement of Claim filed in September 2011, Claimants Vishin and Vinita Wadhwani asserted against Respondent Morgan Stanley & Co. LLC causes of action involving for:
- responsibility to supervise associated persons selling away;
- control person liability;
- respondeat superior;
- state law control person;
- breach of fiduciary duty;
- fraud; and
As a result of the above conduct involving an "unspecified unregistered security," Claimants sought a rescission of their investment, or, in the alternative at least $150,000 in compensatory damages, punitive damages, interest, costs, expenses, and fees. In the Matter of the FINRA Arbitration Between Vishin Wadhwani and Vinita Wadhwani, Claimants, vs. Morgan Stanley & Co. LLC, Respondent (FINRA Arbitration 11-03699, April 4, 2012).
FINRA Eligibility Rule
On November 22, 2011, Respondent submitted aMotion to Dismiss based upon FINRA's Rule 12206, which provides that no claim shall be eligible for submission to arbitration under the Code where six years have elapsed from the occurrence or event giving rise to the claim. The determination of whether FINRA's Eligibility Rule applies is left for the FINRA Arbitration Panel.
In analyzing the facts applicable to the issue of eligibility, the FINRA Arbitration Panel explained that:
[T]he "investment" in this case (actually the fraudulent taking of Claimants' funds by Kevin Cronic, Respondent's former registered representative, and converting them to Kevin Cronic's personal use) occurred in 2001. The Statement of Claim was filed in September 2011. Claimants were in their sixties in 2001 and assert that because they did not know about the conversion until May of 2005, there should be "equitable tolling" of the rule so they may pursue claims in arbitration that might be barred by applicable statutes of limitation in court.. .
Horizon of Inaction
Given those facts and the Panel's apparent sympathy for the Claimants, there may well be a disposition to bending the rules - a tad - or, perhaps, granting a favorable interpretation of events and dates. On the other hand, this Panel looked at the four years that transpired from the 2001 misconduct and the Claimants' alleged discovery in 2005; and, then, the arbitrators stood at that point in time and looked forward. What they saw was a horizon of inaction that spread some six years and four months into the future - to the September 2011 filing of the Statement of Claim.
The Panel was faced with two gaps in time: the four years until the Claimants' alleged discovery of the fraud and the further six-plus years from discovery to filing of the claims. As the Panel summed it up:
So we are asked to ignore both the time from "investment" until the alleged discovery of the fraud, and the time from discovery until the filing for arbitration, a period of 10 years. . .
[C]laimants alleged fraudulent concealment and negligent supervision by Respondent, but these ultimate conclusions are not supported by any facts.
On the contrary. Respondent answers that Kevin Cronic committed a criminal act (for which he eventually went to prison) that was not within the scope of his employment and could not have been foreseen. He reported nothing of the transaction to his employer, it did not show on their records and he kept the money. At the same time. Respondent routinely provided account opening documents and monthly statements to Claimants (exhibits that were shown to the Panel) which did not contain the questionable investment among other legitimate ones, putting Claimants on notice of irregularities. Claimants had to be aware that Kevin Cronic was working for Morgan Stanley & Co. LLC; he brought them to the firm, they received statements of their other Morgan Stanley & Co. LLC accounts and they were aware when he left.
Moreover, Respondent can hardly defend itself against a stale claim it knew nothing about until it was filed 10 years later - the very reason for a rule of limitation. . .
Although admittedly "sympathetic to Claimants' advanced ages and alleged lack of investor sophistication," the FINRA Arbitration Panel could not find that the Claimants' were clueless until 2011; moreover, the arbitrators rejected any implication that the Claimants' were ignorant of Cronic's fraud for that same period. The Panel noted that in a letter written by Claimants to the San Francisco District Attorney in May 2005, they stated that they had become "suspicious in 2003 and 2004 when "dividends" and annual IRS statements from Kevin Cronic ceased, and their money was not returned on demand. Their last account statement from Kevin Cronic was in November 2003. So they hired an investigator and complained to the authorities."
Under the totality of the above facts and findings, the Panel found that Claimants did not act timely upon notice of the cited misconduct and their claims are barred under Rule 12206 and the case was dismissed.
Bill Singer's Comment
Starting with the Tech Wreck of 2000, through 9/11, and culminating with the Great Recession, it's been one body blow after another over the past 12 years for many stock market investors. Not only have brokerage firms disappeared but some of the survivors have merged into larger holding companies and have remained in name only - and sometimes even the old household names have disappeared. Not that the likes of Morgan Stanley, Smith Barney, Wachovia, Merrill Lynch, JP Morgan, UBS, or the rest will get much sympathy when they grouse to arbitrators that it's now unfair to expect them to defend against claims that arose from alleged misconduct more than six years ago, but, in fact, rulings on issues of eligibility or the separate consideration of statutes of limitations are not supposed to be emotional.
As demonstrated here, arbitration rules only provide for so much time after a wrong has been committed for customers to file. Although there's often a bit of stretch in determining just exactly when public investors knew or should have known that they had been victimized, if you don't get the Statement of Claim filed within six years of the latest date that you are citing, you may be dead in the water, out of gas, and otherwise left to stew in your own juices.