October 1, 2018
A disgruntled customer alleges $633,000 in damages in a FINRA Arbitration complaint. She says she received bad advice about her home refinancing and various unsuitable investments. The stockbroker says he did absolutely nothing wrong and points with pride to the account's performance during the Great Recession. The broker-dealer makes an apparent business decision and settles for about 20% of the damages sought. The stockbroker does not contribute a penny towards settlement. About five years later, still stewing in his own juices, the stockbroker files his own FINRA Arbitration in an effort to clear his name and rid his record of what he views as a scurrilous customer complaint. READ today's BrokeAndBroker.com Blog to see how it all turns out.
Case In Point
In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in March 2018, Claimant Warner sought the expungement of a customer complaint from his Central Registration Depository record ("CRD") and $1 in compensatory damages. The customer complaint had alleged "Misrepresentation of Home Refinancing Transaction and Unsuitability of Variable Annuity Investments and Advisory Account Investments in Mutual Funds, Exchange Traded Funds, and Equities." In the Matter of the FINRA Arbitration Between William Frederick Warner, Claimant, vs. LPL Financial LLC, Respondent (FINRA Arbitration 18-00938, September 28, 2018)
Respondent LPL Financial generally denied the allegations, did not contest the requested expungement, and sought the denial of the $1 in compensatory damages.
The sole FINRA Arbitrator determined that the customer had been provided a copy of Claimant Warner's Statement of Claim and informed of the date of the scheduled expungement hearing; but she did not participate at the hearing and did not contest the requested relief.
The Arbitrator denied the $1 in compensatory damages but recommended the expungement. In recommending expungement, the Arbitrator found pursuant to FINRA Rule 2080 that
Claimant Warner was not involved in the alleged investment-related sales
practice violation, forgery, theft, misappropriation, or conversion of funds; and
the claim, allegation, or information is false. The Arbitrator provided the following rationale:
Bill Singer's Comment
(a) he had nothing to do with the refinancing of the customer's home. The
documentation submitted shows that customer had 40 years of real estate
experience, owned investment properties, and entered into the Refinance
Agreement on her personal residence on her own.
(b) the investments made by the customer were suitable and met her personal
needs. Mr. Warner testified, without objection, that the customer (through her
children) requested his assistance in helping them with their financial situation.
According to the testimony, upon meeting Mr. Warner the customer only had 13
months of liquid income left to live on, and to meet her medical obligations. Mr.
Warner testified, without objection, that after advising the customer about an
investment, the customer was able to not only meet her financial obligations, but the
customer made bi-monthly withdrawals from her brokerage account in the amount of
$10,000.00. In addition, Mr. Warner testified, without objection, that during 2008,
when there was a market crash of 41% the customer's investment only dropped
10%, and by August 5, 2008 the customer had withdrawn in excess of $230,000.00
for personal expenses. Mr. Warner testified, without objection, that the investment
suggested to the customer exceeded her expectations and was surely suitable for
her families' needs.
(c) the customer's investment was more than suitable for her requests and needs,
and therefore, her claim of "Unsuitability of Variable Annuity Investments and
Advisory Account Investments in Mutual Funds, Exchange Traded Funds, and
Equities", as stated in her complaint was false.
According to online FINRA BrokerCheck records, Warner was first registered in 1995 and as of October 1, 2018, the only "Customer Dispute" disclosure references a 2013 FINRA Arbitration seeking $633,000 and which settled in 2014 for $127,500 without contribution from Warner.
Compliments to the sole FINRA Arbitrator for penning a thoughtful rationale. As to the misrepresented refinancing of the customer's home, the Arbitrator ticks off the boxes in Claimant Warner's favor by finding that he "had nothing to do with the refinancing;" and that the complaining "customer had 40 years of real estate experience," which included both ownership of investment properties and the prior refi of her personal residence. Not having anything to do with the refi at issue is a pretty conclusive finding in Warner's favor.
As to the unsuitability allegations by the customer, the Arbitrator presents a compelling picture of a customer with only "13 months of liquid income left to live on." Faced with such a scenario, Claimant Warner apparently proposed an investment plan that enabled the customer to make "bi-monthly withdrawals from her brokerage account in the amount of $10,000.00 . . . [and] during 2008, when there was a market crash of 41% the customer's investment only dropped 10%, and by August 5, 2008 the customer had withdrawn in excess of $230,000.00 for personal expenses." Frankly, it's tough to characterize such an outcome as indicative of an unsuitable investment recommendation.
The $127,500 Settlement
There are those who will read today's featured expungement arbitration and latch on to the fact -- admittedly an important one -- that LPL had settled the customer's complaint in 2014 for $127,500. There is no getting around that. Moreover, there is no getting around that the initial customer claim was for $633,000. Further, I have no intent of pretending that the allegations and damages were other than what they were. The facts are what they are.
How then are we to reconcile the six-figure settlement of a public customer's complaint with a FINRA Arbitrator's recommendation to expunge that complaint from a stockbroker's CRD?
Sometimes, broker-dealers enter into settlements out of fear that no matter the facts and no matter the explanations, that a panel of arbitrators or a jury or a judge will harbor a bias against Wall Street and simply slather on compensatory and punitive damages. And, yes, there are many cases in which the facts clearly demonstrate wrongdoing by industry members that horribly victimizes customers. Those faced with responding to claims for damages have to weigh the wisdom of settling versus the risks of contesting. As such, business decisions are often made to cut one's losses and cobble together the best exit from a bad situation. Hence, many bull-shit claims get settled and many cases that should have been settled are foolishly contested. Sometimes you regret settling. Sometimes you regret demanding your day in court.
Sure -- If LPL had declined to settle and fought the customer complaint at arbitration, Claimant Warner may well have persuaded a trier-of-fact that he was wrongly accused. On the other hand, it's likely that LPL and Warner's legal bill for such vindication may have exceeded the settlement price-tag of $127,500. There is also the possibility that the customer may have been right, that her version of events may have persuaded others to find in her favor, and that LPL could have been on the hook for $633,000 in compensatory damages plus attorneys' fee plus interest plus costs and expenses. It is often cheaper to be wrong than right.
In the end, my instincts tell me that justice was done and Claimant Warner was entitled to his expungement. In no small measure, the victory was likely secured by the able representation of Dochtor Kennedy, Esq., and Christopher Cummings, Esq., AdvisorLaw, LLC, Broomfield, Colorado.
FINRA Rule 2080: Obtaining Customer Dispute Expungement
FINRA Rule 2081: Prohibited Conditions Relating to Expungement of Customer Dispute
FINRA Rules 12805 and 13805: Expunging Customer-Dispute Information Under Rule 2080
READ the BrokeAndBroker.com Blog Expungement Archive