Lex testified that his clients received their interest payments on time and were able to redeem their private placement investments from 2003 through 2007. Tr. 4890-91. Lex sold MS & Co. private offerings into July 2009. Tr. 1583; Div. Ex. 2, Ex. 4k (as attached to Div. Ex. 2). In 2010, FINRA suspended Lex's right to associate with a FINRA member firm; he was suspended for failing to pay an arbitration award owed to his former client Duckkyu Chang (Chang). Tr. 1538-39; Div. Ex. 482 at 10. In December 2009, a FINRA arbitration panel found Lex, along with MS & Co. and Smith, jointly and severally liable for $805,110 in compensatory damages following Chang's customer complaint. Div. Ex. 514; see also Div. Ex. 444. The arbitration panel concluded that there was "some definitive fault by . . . Chang and some fault by . . . Mr. Lex, Mr. David Smith, and [MS & Co.]," and derided Lex for failing to diversify Chang's holdings. Div. Ex. 514 at 3-4.
Dr. Chang and his wife as individuals and Dr. Chang in his role as trustee of Cumberland Pathology pension accounts appear to be intelligent, accomplished people.However, the Arbitration Panel finds no logical carryover from being very experienced at the practice of medicine or music theory or the use of Quicken software programs to account for small-business accounts receivable and accounts payable to any understanding of private placement prospectus.Pages 3 - 4 of the FINRA Arbitration Decision,Furthermore, Mr. Lex seems to be a conscientious broker and insurance salesman who McGinn, Smith & Company as the supervisor of Mr. Lex had necessary procedures and policies in place to carry out its duties to potential customers as they had standard education programs for brokers and Industry-standard supervision procedures for individual broker accounts.. . .Dr. Chang and Kee Mann Chang are found to be responsible for the consequences of their own investment decisions after their stating repeatedly verbally and in writing that they had the opportunity to read investment literature and query resources such as Mr. Lex about the risks and rewards of the subject private placement notes.The fault of Mr. Lex. Mr. Smith, and McGinn. Smith & Company is derived from the over concentration of the Claimants' investments In these private placement notes.While Mr. Lex is certainly not responsible for preventing the Claimants from investing all of their funds into a single instrument, Mr. Lex and McGinn. Smith & Co. through Mr. David Smith [because Mr. David Smith oversaw Mr. Lex as the compliance officer for a large majority of the time period in question] could have just told Dr. Chang and Kee Mann Chang that McGinn. Smith & Co. would not play a part in these disproportionate investment actions as they developed. Mr. Lex and/or McGinn, Smith & Co. could have declined to conduct the sale of any more of these notes once the over-concentration reached a critical mass.As to some counter-arguments presented to the arbitration Panel, the Panel finds the line of reasoning that these private placement notes were both diversified within each and the five or more notes were separately varied so there was not concentration,to be disingenuous.There are about a dozen or maybe two dozen small to moderately capitalized LLCs within these notes that are all either consumer service companies like residential alarm companies or discretionary-consumer goods companies like swimming pool supply firms or golf club accessory supply firms. A truly diversified portfolio would have some selections of small, mid and large capitalized businesses among the number of business areas such as some greater number of the 98 categories of businesses that Value Line created. Another counterpoint raised in the arbitration hearing with colored "pie-charts" depicting the percentage of the Chang's assets that were invested in these private placements, was that the Respondents concluded that the subject private placement notes were only 40 to 60% of the Claimants' total assets; this statement by the Respondents rings hollow. Of the liquid or near liquid assets Dr. Chang and Kee Mann Chang had, these subject notes were close to 90% of their net worth, and this aspect of the over-concentration is exacerbated by Mr. Lex only knowing a fraction of Dr. Chang's and Kee Mann Chang's total liquid/near liquid assets. . . .
In finding some of Respondents' over-concentration arguments to be "disingenuous" and to "ring hollow," the FINRA arbitrators found, for example, that Lex had "exacerbated" the over-concentration in the Changs' account because of his "only knowing a fraction" of their total liquid/near liquid assets.