March 19, 2014
In today's BrokeAndBroker Blog, a senior citizen public customer asserts that he was taken advantage of by a now deceased stockbroker, who was improperly supervised by the respondent brokerage firm. Slices of life ain't always pretty, and this piece of cake from Wall Street is certainly a particularly unsavory bite.
In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in November 2012, public customer Claimant Edmonson asserted causes of action including breaches of contract and fiduciary duty, suitability, failure to supervise, and fraud. Essentially, Claimant alleged that Respondent First Midwest had failed to monitor his account between November/December 2008 and January 2009 in order to ensure the suitability of the transactions at issue, which were purportedly contrary to Claimant's conservative objectives. Claimant Edmonson ultimately sought damages of $106,000 or, in the alternative, $53,954. In the Matter of the FINRA Arbitration Between Harold Edmonson, Claimant, vs. First Midwest Securities, Inc. and Kyle Matthew Nonnenmann, Respondent (FINRA Arbitration 12-03899, March 10, 2014).
Respondent First Midwest generally denied the allegations and asserted affirmative defenses.
In light of the death of Respondent Nonnenmann, Claimant Edmonson dismissed with prejudice the claims against the stockbroker.
SIDE BAR: The FINRA Arbitration Decision asserts that:
On or about March 6, 2013, a Certificate of Death for Respondent, Kyle Matthew Nonnenmann, was sent to Claimant's counsel. On or about November 23, 2014, Claimant notified FINRA of the dismissal of claims against, Respondent Kyle Matthew Nonnenmann,with prejudice.
Based upon online records, it appears that Respondent Nonnenmann died around December 2012 but the circumstances are not noted. Claimant could not have dismissed the claims around "November 23, 2014" as the Decision was published in March 2014. Presumably the dismissal was around November 23, 2013.
As set forth in the FINRA Arbitration Decision, Claimant Edmonson was a:
70 to 71 year old man who had never been married, and who had no support obligations other than himself at that time. His residence, which he had inherited from his parents was owned free and clear. He had been employed most of his adult life, and had been investing in the stock market since 1974. He lived primarily on the dividends from Kalmbach Publishing Co. employee stock purchases and other investments. His annual income appeared to be approximately $55,000, and his net worth was estimated at between 1 and 1.5 million dollars.
A day trading account was established at First Midwest for Claimant Edmonson and funded with about $100,000. After some initial success trading in November 2008, Claimant Edmonson increased his account's desired risk from "Moderate" to "Speculative."
December's trading didn't go well, and the FINRA Arbitration Decision asserts that the account lost about $50,000 in that month. Notwithstanding that sizable hickey, on December 28, 2008, Claimant Edmonson gave Respondent Nonnenmann discretionary authority in his account with the expectation that the broker would continue the same pattern of trading that had transpired for the first two months. The grant of discretion seems to have been prompted by a trip that Claimant planned to take from December 29, 2008, through January 16, 2009.
New Year's Resolutions
It was apparently Claimant's understanding that Nonnenmann's discretionary authority expired upon the customer's return on January 16, 2009. Notwithstanding the customer's belief, Claimant received a confirmation slip showing $14,628.72 in losses for buys and sells entered by Nonnenmann on January 20th. Claimant Edmonson asserted that he attempted to contact Nonnenmann several times on January 20, 2009, which was the first business day after his return from his trip on January 16th; however, those attempts to reach his stockbroker were unsuccessful and Edmonson allegedly never got back.
The Letter Said "Yes You Did"
Upon receiving Claimant's complaints about the trading by Nonnenmann, Respondent First Midwest's asked Respondent Nonnenmann to respond, which he apparently did via letter asserting that he had spoken to Claimant Edmonson on January 20th, at which time the customer authorized the disputed day trades. Respondent First Midwest submitted that letter to the FINRA Arbitration Panel.
In advancing his claims, Claimant Edmonson presented himself as a senior citizen lacking extensive investing experience, all of which made him susceptible to improper sales pressure. Claimant asserted that, in fact, Respondent Nonnenmann took advantage of him and wrongly invested him in risky investments that he did not understand.
In considering the professed vulnerability of Claimant, the arbitrators did not fully buy into the depiction. The Decision noted that Claimant had some knowledge of margin trading, as was made manifest by the disclosure that he had been embroiled in a dispute with another brokerage firm over margin trading in his account. All of which diminished the presentation of a potential babe-in-the-woods public investor. Similarly, given the existence of a prior brokerage dispute involving trading, it was likely that the arbitrators may well have wondered whether a customer who was once burnt at a brokerage firm should now be twice as wise.
Additionally, Claimant Edmonson had current and past accounts with numerous investment firms and broker dealers, but he had failed to produce some of the accounts' documentation during Discovery, and, then again, failed to produce even after an Order by the Chairperson. As a result of what the Panel seems to have viewed as improper efforts to hide disclosable information, the arbitrators drew an adverse inference finding that those documents would tend to show that Claimant was a more experienced investor than he claimed to be.
In January 2014, Respondent First Midwest filed a Motion for Sanctions. Therafter, in February 2014, Claimant filed a Motion to Compel and for Sanctions. The FINRA Hearing Panel deferred consideration of the motions until the hearing on the merits.
At the hearing. First Midwest made a Motion to Recuse the Chairperson, which Claimant opposed. The Motion was denied.
At the hearing. First Midwest made a Motion to Dismiss after Claimants' case-in-chief. The Panel denied the Motion, based upon a finding that Claimant had made out one or more potentially sustainable claims.
The FINRA Arbitration Panel found Respondent First Midwest liable and ordered it to pay to Claimant Edmonson $14,628.72 in compensatory damages. In explaining its findings, the Panel offered this telling observation:
The Panel finds that the investments made in Claimant's account, although risky, were not actionably unsuitable given Claimant's financial condition and the amount of his net worth put at risk. The Panel finds that Claimant made a conscious decision to pursue the risky investments. The Panel further finds that based on Claimant's demeanor and testimony at Hearing, he did not suffer from any degree of diminished capacity; so claims that he was unduly influenced into making investment decisions by Nonnenmann's sales techniques are not sustained. The Panel finds that the January 20, 2009 trade was outside of the limited discretionary authority Nonnenmann had been granted and was unauthorized. The Panel further finds that under the circumstances, Respondent's supervision was inadequate.
Bill Singer's Comment
A log of the telephone calls purportedly made by the public customer to the now deceased stockbroker (and vice versa) would have been very helpful in terms of resolving the issue of whether such calls occurred and how long they lasted. The arbitrators noted that Respondent First Midwest failed to produce any corroborating telephone logs; similarly, Claimant Edmonson asserted that he was unable to get his own corroborating telephone logs because he had used a prepaid telephone card for the subject calls. Faced with the lack of proof, the Decision offers this observation:
It is undisputed that no communication between Claimant and Nonnenmann took place after January 20, 2009, and the Panel finds that none took place on January 20. The Panel finds Claimant's testimony on this point to be
Respondent Nonnenmann, the deceased stockbroker, was characterized in the Decision as "an inexperienced 23 year old registered representative," who had been licensed for less than a year at the time of the contested trading. Apparently, during his tenure an incident arose in which he was ordered to cease using a title for which hew was not qualified. The Panel seemed disturbed that Respondent Midwest had not offered any evidence during the hearing to demonstrate that it had applied heightened supervision and review of Nonnenmann.
The Panel also seemed perplexed by the testimony of a compliance officer of Respondent First Midwest that the firm had discouraged discretionary accounts, and would permit them only on a limited basis and for short duration. That same compliance officer also conceded, however, that a young, inexperienced representative such as Nonnenmann would typically be supervised more closely that a veteran broker. It does not appear that the Panel was convinced that the brokerage firm practiced what it preached.