HNW Customer Complains, Firm Settles, Stockbroker Doesn't . . . Now What?

July 16, 2014

This stockbroker wasn't named in the public customer's FINRA Arbitration Statement of Claim caption.  The brokerage firm settled for less than 3% of the damages sought. The stockbroker didn't pay one cent. After the case settled, however, the unnamed party still had a regulatory disclosure. All of which places us on the path to a FINRA expungement recommendation.

Customer Complaint

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in September 2013, public customer Claimant Madris asserted causes of action including negligence and breaches of fiduciary duty and contract in connection with purchases of Lehman Brothers preferred stock. Claimant sought $500,000 in compensatory damages plus commissions, fees, loss of income, costs, interest, rescission, and attorneys' fees. In the Matter of the FINRA Arbitration Between Russell L. Madris, Claimant, vs. Merrill Lynch, Pierce, Fenner & Smith Inc., Respondent (FINRA Arbitration 13-02907, July 8, 2014).

Respondent Merrill Lynch generally denied the allegations and asserted various affirmative defenses.

In April 2014, Claimant Madris notified FINRA that the parties had settled the matter. 

Expungement

In May 2014, Respondent Merrill Lynch filed a Motion for Expungement on behalf of unnamed, non-party stockbroker Philip Caso,.  Thereafter, the FINRA Arbitration Panel conducted a telephonic expungement hearing. Public customer Claimant Madris did did not oppose the motion and did not attend the hearing.

The FINRA Arbitration Panel recommended the expungment of the customer arbitration from Caso's Central Registration Depository records ("CRD"). The Panel offered a concise rationale for its recommendation, and I offer you this verbatim extract: 

a. All of the allegations in the claim related to the unsuitable recommendation to purchase shares of preferred stock of Lehman Brothers in February 2008. 
b. Non-party Caso was not named in the Statement of Claim.
c. Claimant and Respondent have entered into a General Release providing that Respondent will pay Claimant a certain amount. Respondent does not admit to any wrongdoing. In the Motion for Expungement Respondent made the uncontroverted statement that "this settlement was entered into solely as a business decision because the settlement payment is less than Respondent would have paid in legal costs in defense of this lawsuit, even if Respondent had prevailed on the merits."
d. Non-party Caso is not a party to the settlement and did not contribute to the settlement.
e. The amount paid is in no way inconsistent with Respondents conviction that the case was without merit and was not indicative of any admission of wrongdoing by non-party Caso,
f. At the expungement hearing Respondents counsel made the uncontroverted statement that the settlement did not require Claimant to consent to the Motion for Expungement.
g. Non-party Caso testified at the expungement hearing. His uncontroverted testimony is that:
Claimant is still a client and continues to refer friends to non-party Caso;
Claimant has a very high net worth and this investment represented a very small fraction of his overall portfolio;
Lehman Brothers was investment rated A preferred stock. Nonparty Caso explained to Claimant how preferred stocks worked, apprised Claimant of the associated risks and provided a prospectus to Claimant
Claimant conducted independent research and sought advice from his contacts at Lehman Brothers;
Claimant had regular conversations with non-party Caso and rejected a proposed recommendation to sell the Lehman Brothers stock; and
The account was a non-discretionary account.

Bill Singer's Comments

According to online FINRA records as of July 16, 2014, Claimant Madris had alleged:

THE CUSTOMER ALLEGES AN UNSUITABLE INVESTMENT RECOMMENDATION AND MISREPRESENTATION AND OMISSION OF MATERIAL FACTS IN FEBRUARY 2008

In response, there is this "Broker Statement":

MR. CASO DENIES THE ALLEGATIONS IN THE STATEMENT OF CLAIM. THIS MATTER WAS SETTLED FOR BUSINESS REASONS TO AVOID THE EXPENSE AND UNCERTAINTY OF LITIGATION. MR. CASO DID NOT CONTRIBUTE TO THE SETTLEMENT.

Online FINRA records disclose a May 16, 2014, settlement in the amount of $14,900.

A number of takeaways for industry participants who may find themselves in the position of a non-party in a public customer arbitration but, notwithstanding that unnamed status, are still deemed to have been "involved" in the underlying matter to the extent that a regulatory disclosure is filed disclosing that status. 

For starters, do not despair merely because your employer/firm entered into a settlement with the public customer. If you did not contribute and the amount of the settlement is consistent with what is commonly called a "nuisance" amount, those factors may weigh in your favor.  What constitutes a so-called nuisance settlement will vary with the amount of damages sought and the likely attorneys' fees and attendant litigation costs. 

Another interesting aspect of Caso's expungement is his assertion that Claimant Madris "is still a client and continues to refer friends." All of which strongly suggests that a registered person should be careful about burning bridges if and when a customer sues your brokerage firm. If you're not named in the caption of that lawsuit, you might want to bite your tongue and keep the customer as a "friendly."

In Caso's expungement recommendation, the FINRA Arbitration Panel seems to have based much of their decision on the non-discretionary nature of the account -- and the arbitrators did not merely look up the paperwork and note the account was marked as "Non-Discretionary," but they also considered the realities of the relationship between the customer and the stockbroker. Here, the the disputed Lehman Brothers investment was made by high net worth customer ( the "HNW" of industry lore), who evidenced investment sophistication. Further, the Panel considered  it noteworthy that public customer Claimant Madris  had "conducted independent research and sought advice from his contacts at Lehman Brothers."  Similarly, the Panel factored in the purported rejection by the customer of Caso's "proposed recommendation to sell the Lehman Brothers stock."

Take note of the checklist presented by the Panel. Ask yourself if you are maintaining records that would buttress a request for expungement for you under similar circumstances. If you're not, start keeping those notes and documents.

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