July 16, 2018
Another day, another FINRA arbitration, and another complaint from BrokeAndBroker.com Blog's publisher Bill Singer, Esq about the lack of quality control over FINRA's arbitration decisions. Pointedly, Bill cites the lack of content and context sufficient to render a decision intelligible. On top of all of that, today's featured arbitration involves two interesting quirks: the Claimant is a FINRA funding portal member and the arbitration forum waived the firm's member surcharge and fees.
Case In Point
In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in February 2018, FINRA funding portal member Claimant StartEngine Capital LLC asserted the following (as set forth under "Case Summary" in the FINRA Arbitration Decision):
Claimant alleged Respondent was individually responsible for breach of the following agreements: the Issuer Engagement and Posting Agreement and the Addendum to Posting Agreement Advertising Advance each entered into on September 17, 2016; and the Addendum to Posting Agreement Advertising Advance entered into November 4, 2016 (collectively referred to as the "Agreements"). Claimant's allegations relate to Claimant's services of conducting an offering under Regulation Crowdfunding for Organiponic, Inc.
Under the FINRA Arbitration Decision heading "Nature of Dispute," we are told that this matter involves a "Funding Portal Member vs. Customer," and that the customer Respondent Dewey appeared pro se. Claimant StartEngine sought $50,000 in compensatory damages. In the Matter of the FINRA Arbitration Between StartEngine Capital LLC, Claimant, vs. Andrew Dewey, Respondent (FINRA Arbitration 18-00489, July, 12, 2018)
SIDE BAR: Hey, Bill, you might ask, what the hell is a "FINRA Funding Portal Member?" Great question because there's no explanation of that term offered in the FINRA Arbitration Decision.
Ask a dozen lawyers to explain what a "funding portal member" actually is and how it's regulated and I would bet you that you would be charged for at least 36 different answers and possibly one of those answers may actually be correct and useful. A broad explanation might touch upon the fact that a funding portal member is typically a so-called "crowdfunding intermediary" which must register with the Securities and Exchange Commission as a broker or as a funding portal and also become a member of a national securities association such as FINRA.
What's "crowdfunding" you might ask? Hey, that's another great question. You ever heard of Wikipedia? Wonderful . . . howsabout you put your fingers to good use and type some crap into your search bar?
Since its founding, StartEngine's mission has been to help entrepreneurs achieve their dreams by providing democratized access to capital. This mission was first enabled by the Jumpstart Our Business Startups (JOBS) Act, which facilitated investment in early-stage startup businesses for everyone, regardless of wealth, in the United States for the first time.
StartEngine was among the first to enter the nascent fundraising space created by the JOBS Act in May 2016. We've worked tirelessly since to realize our core mission of helping entrepreneurs to achieve their dreams.
Our company is growing. Since inception, nearly 150 successful financings have been completed for startups and other businesses via the StartEngine platform. Our revenue is growing on an average 22% month over month. . .
In denying Claimant StartEngine's claims, the sole FINRA Arbitrator offered this rationale:
The Arbitrator found that Claimant has not provided evidence that Respondent either executed a personal guarantee or subsequently agreed to personally repay the sums Claimant provided to Respondent's company, Organiponic, Inc.
Bill Singer's Comment
No . . . it's not you. And, no, it sure as hell ain't me either. This is simply another in an ever-extending line of FINRA Arbitration Decisions that lack sufficient content and context so as to render intelligible either the underlying facts in dispute or the award. I don't actually know what went wrong between StartEngine, Organiponic, and Dewey but it appears to have to do with $50,000 in crowdfunding services provided by StartEngine for Organiponic but which weren't repaid to StartEngine. Why would Organiponic have had to repay those costs to begin with? I dunno and the Decision doesn't say. Why didn't StartEngine just sue its customer Organiponic? Another great question. And, again, I have no idea as to the answer, and no explanation is provided in the FINRA Arbitration Decision.
Similarly, I'm not exactly sure why the FINRA Arbitration Decision characterizes Dewey as a "customer." Although I understand that StartEngine alleged that an Issuer Engagement and Posting Agreement, and two Addendum to Posting Agreement Advertising Advance proved that Dewey was personally responsible for repayment of the $50,000 in crowdfunding services provided to Organiponic, I'm not sure that such a guarantee/indemnification establishes a customer status, and certainly I don't know whether pro se litigant Dewey ever raised jurisdiction as a defense.
What initially caught my eye about this FINRA arbitration was that it involved one of FINRA's newfangled, so-called funding portal members. The other interesting aspect of this arbitration is that it involved the the rare, and I mean rare, scenario of a "customer" being sued by a member firm. The overwhelming bulk of FINRA's arbitration docket involves allegedly defrauded customers suing FINRA member firms and their registered representatives, FINRA member firms suing their registered representatiaves, and registered representatives seeking expungement. We just don't see a lot of member firms suing their customers on the old FINRA arbitration docket.
In some sense StartEngine is victimized by the FINRA Arbitration Decision because the funding portal member's conduct in initiating litigation against a purported "individual" customer rather than the entity to whom services were provided doesn't seem to make sense. Moreover, going by the outcome, StartEngine miscalculated the merits of its case. Unfortunately, StartEngine's reputation suffers because it filed a relatively rare FINRA Arbitration Statement of Claim against a customer for a relatively modest amount of money and lost -- and not only lost but apparently did so because it could not produce to the satisfaction of the sole arbitrator "evidence that Respondent either executed a personal guarantee or subsequently agreed to personally repay . . ." Which further makes you wonder if Dewey had been represented by a lawyer if StartEngine might have been liable on a counter-claim.
Finally, the FINRA Arbitration Decision asserts that:
Seriously? FINRA waived the costs of this arbitration but no explanation for that extraordinary decision is provided? The BrokeAndBroker.com Blog recently criticized the imposition of fees and charges in "Stockbrokers Victimized By Customer Imposter And FINRA Fees And Charges" (BrokeAndBroker.com Blog, July 10, 2018) http://www.brokeandbroker.com/4070/imposter-finra-expungement/ As noted in part:
OTHER FEES: FINRA Office of Dispute Resolution has administratively waived the
Member Surcharge and Member Process Fees.
Adding up all the fees and charges, FINRA made $8,350 from entertaining the MacKinnons' expungement requests. That's a nice chunk of change in order to have a panel of arbitrators "recommend" the expungement of two complaints that were apparently never made by any customer but by an imposter -- and the customer pointedly withdrew both complaints! All of which should prompt any fair-minded individual to wonder as to what kind of twisted regulatory system profits from such a set of facts. Why weren't the $2,700 in fees assessed against the MacKinnons have been waived under the circumstances presented in this case?