by Bill Singer
In a Financial Industry Regulatory Authority (“FINRA”) Arbitration Statement of Claim filed in February 2011 and as thereafter amended, public customer Couturier asserted causes of action including breaches of fiduciary duty and contract, suitability, and negligence in support of her claim for $2,500,000 in compensatory damages plus interest, costs, attorneys’ fees, rescission, and treble damages. In the Matter of the FINRA Arbitration Between Clair R. Couturier, Jr.,Claimant, vs. Merrill Lynch, Pierce, Fenner & Smith Incorporated, Walter Schlaepfer, and The Phil Scott Group,Respondents (FINRA Arbitration 11-00867, December 10, 2012).
Respondents generally denied the allegations , asserted various affirmative defenses, and sought the expungement of the matter from Respondent Schlaepfer’s records.
Bill Singer
Respondent Phil Scott Group is not a member or associated person of FINRA, did not voluntarily submit to arbitration; and, accordingly no determination was made pertaining to that entity.
Decision
The FINRA Arbitration Panel denied the requested expungement , found Respondents jointly and severally liable, and ordered them to pay to Claimant Courterier:
Bill Singer’s Comment
Alas, this case truly set up as an intriguing one but in keeping with far too many FINRA arbitrations, we find ourselves begging for more facts and left with the nagging feeling that we have been left out in the dark. What securities were in dispute? Dunno. What were the relevant dates or transactions? Dunno.
SIDE BAR: An online FINRA document as of December 13, 2012, characterizes the customer’s allegations in this arbitration as follows:
THE CUSTOMER ALLEGES UNSUITABLE INVESTMENT RECOMMENDATION AND MISREPRESENTATION AND OMISSION OF MATERIAL FACTS FROM MARCH 2008 TO OCTOBER 2009
Why then did I publish this “Street Sweeper” commentary? Frankly, it was to note the intriguing “Findings” section of this Decision, which I set forth in full text for your . . . well, okay, not exactly your “edification” but how about we agree to call it your “consideration?”
FINDINGS
In finding for the Claimant, the Panel was particularly concerned by the following actions of Respondents:
1. Misrepresentations and omissions were contained in the unrestricted marketing materials supplied by Respondents to Greg Porter, who in turn, having been cloaked with apparent authority by Respondents, presented the misleading materials to Claimant. This wrongdoing was caused by Respondent Merrill Lynch, Pierce, Fenner & Smith Incorporated’s inadequate supervision before the fact and aggravated by its failure to take corrective action after it received notice of the communications.
2. Respondents’ manner of using the Personal Investment Advisory Questionnaire as a disclosure device was misleading and had the capacity to deceive. Respondent Merrill Lynch, Pierce, Fenner & Smith Incorporated’s continuing approval of this use constitutes inadequate supervision.
3. Respondent Merrill Lynch, Pierce, Fenner & Smith Incorporated’s failure to comply with its own ARMOR report procedures constitutes a breach of its duties toward Claimant and another example of inadequate supervision.
This list is not all-inclusive but is intended to give Respondents the benefit of some of the Panel’s conclusions so Respondents can modify their conduct accordingly.
In Galarneau v. Merrill Lynch Pierce, Fenner & Smith Inc. (1st Circuit Court of Appeals, 06-2410, October 12, 2007), the federal appeals court offers the following explanation of the ARMOR system on pages 5-6 of its Opinion:
[T]he firm uses a computer-generated monitoring system called Armor review, which automatically notifies the Merrill Lynch compliance officers of accounts with unusually active trading. The Armor alert may be accessed from either a financial advisor’s computer or a compliance officer’s computer. It provides background information about the targeted account, including a summary of the frequency and dollar value of trades (with links to data for individual trades), a comparison of the value of trades versus the commissions earned on the account (the “velocity” of trading), and the commissions for the trading.
The arbitrators certainly called out Merrill Lynch for failing to properly utilize its trade-monitoring software — and that’s a warning that should be heeded by all Wall Street compliance departments. Certainly the folks in supervision at Wells Fargo, JP Morgan, Morgan Stanley, UBS, Schwab, and elsewhere are on notice. Of course, an odd aspect of this case is that given the arbitrators obvious dissatisfaction with Merrill Lynch’s supervision, why wasn’t a formal referral made to FINRA’s regulatory side?