January 23, 2018
Some public customers approach a FINRA arbitration against their former brokerage firm and stockbroker as if it's a fairly informal event -- not like going to court and maybe you could even show up in shorts and flip-flops. Other public customers come to FINRA arbitration deadly serious. They ain't takin' no prisoners. They ain't playin' no games. They enter the hearing room with a wheelbarrow filled with documents and intent to answer the bell for the 13th round of a 12 round fight. In today's featured FINRA arbitration we got the deadly-serious version of unhappy Claimants. The Claimants filed a Statement of Claim that is breath-taking in terms of its breadth and depth of charges. As combatants, the Claimants seemed ready to go toe-to-toe in furtherance of their claims. They sort of entered the ring and met in the middle of the mat where the ref told them not to hit below the belt and when to go to a neutral corner. And, okay, maybe the contestants even grudgingly banged gloves as a token of respect. Unfortunately, the Claimants never got to that point in the match where the bell rings for the first round. To the surprise of all in attendance, the judges refused to allow the contest to go forward and disqualified the Claimants.
Case In Point
In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in September 2016, Claimants Marcus and Matthew Nagel asserted breaches of contract, trust, and fiduciary duty; negligence; fraud; deceit; manipulations; misrepresentations; omissions of facts; unauthorized trading; defamation; conversion/larceny of customer funds; conversion/conspiracy/burglary of trust deeds and trust correspondence of customer premises; conversion/robbery of customer trust deeds and trust documentation; intimidation of customer witness; obstruction of justice in customer-party proceedings; trespass to customer chattel/tampering with customer evidence; trespass to customer chattel/trespass of customer computer; conversion/destruction of customer computer materials; knowing violation of customer attorney client privilege and conversion/destruction of privileged materials; knowing violation of attorney work product doctrine and conversion/destruction of privileged materials; conspiracy; violations of FINRA Rules:
- 2010 Standards of Commercial Honor and Principles of Trade,
- 2020 Use of Manipulative, Deceptive or other Fraudulent Devices,
- 2150 Improper Use of Customers' Securities or Funds, Prohibition against Guarantees and Sharing in Accounts, and
- 2232 Customer Confirmations.
SIDE BAR: Gimme a minute here . . . wow, I'm out of breath. Okay, that's better. You know, ifI had an award to give out, I would likely bestow it upon the Nagels for what may well be the most extensive list of causes of action in a FINRA customer arbitration that I have come upon in some 38 years on Wall Street. Frankly, there are claims raised that I've never seen before and am not even sure what they are. The FINRA Arbitration Decision discloses that Claimants Marcus and Matthew Nagel were represented by Marcus Nagel, Esq.
As explained in the FINRA Arbitration Decision, the claims were allegedly made in connection with allegations that Respondent Warren's "misconduct interfered with Claimants' Interest in multiple trusts and wills, including the Nagel Family Trust, Matthew Nagel Trust, Frederick Nagel Trust, and Frederick Nagel Will (collectively "Nagel Trusts").
Claimants sought $387,000 in compensatory damages plus $215,000 in punitive damages. Additionally . . . yes, of course there's an "additionally" here . . . Claimants sought injunctions:
- mandating Warren to return all Nagel Trusts deeds, financial reports, emails, and email attachments illegally removed from Claimants' residence or deleted from Claimants' email accounts;
- mandating the furnishing to all confirmations, statements, performance, reports and correspondence, whether relating to any brokerage account relevant to this arbitration, or otherwise relating to the Nagel Trusts and related entities, from the date of inception through the present, and to continue such furnishing until further notice is provided to Claimants;
- prohibiting Warren from further violations of law, and FINRA rules and guidelines in respect to Claimants;
- restraining Warren from further non-essential communication relation to harassment, defamation, false light, and tortious acts relating to the funds or property of Claimants;
- restraining Warren from further conspiracy, assault, battery, other injuries to the person, and any acts or omissions that endanger the health safety, or life of the Claimants.
In the Matter of the Arbitration Between Marcus Nagel and Matthew Nagel, Claimants, vs. UBS Financial Services, Inc.; David Louis Danby Warren; Citgroup Global Markets Inc., and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Respondents (FINRA Arbitration Decision 16-02710 / January 19, 2017).
Respondents' Requests for Dismissal
Respondents UBS and Warren requested that the claims be dismissed with prejudice and expunged from the CRD records of any registered representative for which a report was made. Respondents Citigroup and Merrill Lynch requested the dismissal of the claims.
In February 2017, Respondents filed a Joint Motion to Dismiss arguing that Claimants were never (and were not presently) customers of any respondent. Although Claimants did not respond to that motion, the FINRA Arbitration Panel denied it.
SIDE BAR: FINRA Code of Arbitration Rule 12200: Arbitration Under an Arbitration Agreement or the Rules of FINRA
Parties must arbitrate a dispute under the Code if:
- Arbitration under the Code is either:
(1) Required by a written agreement, or
(2) Requested by the customer;
- The dispute is between a customer and a member or associated person of a member; and
- The dispute arises in connection with the business activities of the member or the associated person, except disputes involving the insurance business activities of a member that is also an insurance company.
In July and August 2017, Respondents submitted various motions requesting that the FINRA Panel of Arbitrators order Claimants to submit to discovery or, in the alternative, to dismiss their claims with prejudice. Claimants did not respond and did not attend the pre-hearing conference entertaining oral argument on the discovery motions.
By Order dated September 6, 2017, the Panel ordered Claimants to produce documents to UBS and Warren or else all claims against UBS and Warren would be dismissed with prejudice.
On September 19, 2017, UBS and Warren moved for dismissal citing Claimants' alleged failure to comply with the Panel's September 6th Order. Claimants responded to the motion but did not attend the pre-hearing conference entertaining oral argument on the pending motion. The Panel deferred a decision until it had considered the "fundamental question" of FINRA's jurisdiction over the matter.
On November 30, 2017, the Panel dismissed Claimants' claim and the FINRA Arbitration Decision. citing FINRA Arbitration Code Rule 12200, the arbitrators offer this rationale:
In keeping with the odd nature of this case, the FINRA Arbitration Decision states that Claimants . . . yes, Claimants! . . . requested an expungement hearing and a reasoned decision on the application. In response, UBS and Warren opposed and advised the arbitrators that they had withdrawn their expungement request. The Panel denied Claimants' request for the expungement hearing and reasoned decision.
Respondents have consistently maintained that Claimants were never customers, had accounts, or transacted business with any of them. UBS, Merrill Lynch, and Citigroup furnished affidavits to that effect in support of their Joint Motion to Dismiss, which was heard by the Panel in a recorded telephonic pre-hearing conference on April 4, 2017. During that pre-hearing conference, Claimant Marcus Nagel stated that he believed he had documents at his home that proved he had an account with at least one of the Respondents. Notwithstanding Respondents several discovery requests, and the Panel's Order of September 6, 2017, Claimants have not produced any document evidencing a customer relationship with any of the Respondents. In Claimants' Response moreover, Claimant Marcus Nagel states at page 21 that: "Claimants have responded repeatedly that they had / have no accounts with Respondents. . . .'
Bill Singer's Comment
Compliments to the Panel for presenting a painstaking rendition of the pre-hearing comings and goings of this arbitration. I can only infer how testy things must have been between the parties and how frustrating this case must have been for the arbitrators to manage. Although it is preferred that public customers be given their day in court -- particularly when arbitration is mandated by the industry before FINRA -- there are times when the interests of justice demand that an opponent not be put through the time and expense of a defense. Whether or not the facts in a given case rise to the level that compels dismissal for lack of jurisdiction is always a point of intense debate. In today's FINRA arbitration, however, the arbitrators heard the arguments and believed that they had no recourse but to dismiss. As extreme a measure as such a dismissal is, the arbitrators published a compelling rationale replete with sufficient content and context as to justify their findings. Nice job!
Allow me just a bit of rain on this parade. The Arbitrators assessed $3,412.50 of the $6,500 in hearing session fees among the four respondents on the basis of $325 against Warren and $920.83 each against the three firms. Ummm . . . what? Really?? Respondents were required to pay $3,412.50 in fees for a case that was dismissed on the basis that the Claimants failed to present proof that FINRA had jurisdiction over their claims . . . and in a case where those same Claimants did not appear to have participated in good faith in Discovery? I mean, you know, like, just what facts and findings does it take to shift the cost of an arbitration from any respondents (industry or public customers) to any claimants?