Pro Se Customer Alleges Unsuitability of Self Directed Put Sales

August 13, 2019

Some litigants jump the gun in an effort to improve the so-called "optics" of litigation. In situations where two parties each have claims against the other, there's a sense that it's better to be cast in the role of the Claimant than of the Respondent. The theory is that it's better to frame the lawsuit in the language of the aggrieved rather than as the alleged malefactor. In a recent FINRA arbitration, a public customer representing himself pro se sought to recover hundreds of thousands of dollars in put-sales losses. In response to his claims, the respondent brokerage firm counterclaimed for a couple of hundred thousand in its own claimed damages. 

Case In Point

In a FINRA Arbitration Statement of Claim filed in April 2018, public customer Claimant Hu representing himself pro se asserted suitability and negligence in connection with his alleged sales of put options in the exchange traded fund ProShares Short VIX Short-Term Futures ("SVXY"). Hu sought $437,895.65 in damages plus costs and expenses. In the Matter of the Arbitration Between Jay Z. Hu, Claimant/Counter-Respondent, v. Regal Securities, Inc., Respondent/Counter-Claimant (FINRA Arbitration Decision 18-01515)
http://www.finra.org/sites/default/files/aao_documents/18-01515.pdf

Respondent Regal Securities generally denied the allegations and filed a Counterclaim asserting that Hu had breached his August 2017 New Account Agreement when he failed to pay the unsecured debit balance in his account. The FINRA Arbitration Decision states that:

In the Statement of Answer, Respondent confirmed that Claimant opened a self-directed trading account with eOption is [sic] a division of Respondent.

Regal Securities sought $265,338.43 plus interest, attorneys fees, and expenses by way of its Counterclaim.

Discovery Disputes

After a few months of apparent haggling over Discovery, in March 2019, Respondent Regal Securities filed a Motion for the Imposition of Sanctions Against Claimant citing Hu's alleged failure to comply with Discovery orders. As explained in the FINRA Decision:

[B]y Order dated May 8, 2019, the Panel advised that the parties spent approximately 80 minutes describing the discovery process to date, and both parties agreed that the evidentiary hearing scheduled to begin July 23 could proceed as scheduled. In the Order, the Panel directed Claimant to comply with the prior discovery orders and, for Claimant's clarification, itemized the documents to be produced. The Panel also ordered the following: 

2). Regarding documents which have been failed to be produced, the Panel further orders sanctions in accordance with Rule 12212 that it will: 
A) Preclude Claimant from presenting evidence at the hearing in connection with the subject-matter of those documents, and/or 
B) Make an adverse inference against the Claimant at the hearing 

3). The Panel has deferred its assessment of monetary damages in connection with Claimant's failure to comply with the FINRA Code [of Arbitration Procedure] to the conclusion of the hearing. 

After being advised by the Respondent that Claimant had not complied with the above Discovery orders and following Claimant's disagreement with said assertion, the FINRA Arbitration Panel issued a June 4, 2019, Order, which stated in pertinent part that:

1- The Panel finds that the Claimant has continued to fail to comply with discovery orders and guidelines, therefore in addition to previous sanctions assesses a monetary penalty payable by Claimant to Respondent of $23,000. 

2- The Panel denies Respondent's request to dismiss the claims - the hearing scheduled for July 23, 24 and 25th is still on [c]alendar. 

As likely comes as no surprise, On June 27, 2019, Respondent Regal Securities filed a Request for Dismissal of Claimant's Claim citing Claimant Hu's alleged failure to comply with the FINRA Arbitration Panel's June 4th Order. In response the Panel took the request under advisement and eventually denied it.

Award

The FINRA Arbitration Panel denied Claimant Hu's claim. 

The FINRA Arbitration Panel found Claimant Hu liable and ordered him to pay to Respondent Regal Securities:
  • $265,338 in compensatory damages plus interest
  • $43,000 in attorneys' fees; and
  • $23,000 in sanctions per the Panel's June 4, 2019, Order.
Additionally the following fees were assessed by FINRA and/or the Panel:

Claimant Hu: $1,425 Initial Claim Filing fee; $160 Discovery-related motion fee;$200 contested motion for issuance of subpoena fee; and $7,537.50 hearing session fees

Respondent Regal Securities: $2,125 Counterclaim Filing Fee; $1,900 Member Surcharge; $3,750 Member Process Fee; $40 Discovery-related motion fee; $50 contested motion for issuance of subpoena fee; and $787.50 hearing session fees.

Bill Singer's Comment

The fact that Hu's trading was characterized as "self-directed" likely increased the difficulty of demonstrating unsuitability because of the reduced likelihood that he was trading on the recommendations of Respondent Regal Securities in contradistinction to his own ideas. Given Hu's pro se status (and assuming that he is not a lawyer), his chance of winning such a claim was marginal at best.

You got to wonder what would have happened here had Claimant Hu not filed his lawsuit seeking $437,895.65 in damages, purportedly for losses that arose from put sales. Regal Securities had a $265,338.43 claim for the unsecured debit in Hu's account, but that was presented as a Counter-claim. Given the amount at issue, I'm guessing that Regal would have gone after Hu in any event. On the other hand, had Hu not fired the first salvo, who knows. If nothing else, Hu's conduct during Discovery earned him an additional $23,000 sanction. Further, if Hu had been able to settle the case, he may not have incurred some $43,000 in his adversary's attorneys' fees -- and also saved the tacked-on fees. 

FINRA Small Firm Member Board of Governors Election
Voting Ends August 19, 2019
VOTE for LINDE MURPHY

The FINRA Small Firm community is once again up in arms over the ongoing election for the open 2019 Small Firm Member Board of Governors' seat. "UPDATE: 2019 FINRA Contested Small Firm Election: Vote for Linde Murphy" (BrokeAndBroker.com Blog /  July 26, 2019). In this latest dust-up, FINRA's National Nominating & Governance Committee nominated sitting Small Firm Governor Robert A. Muh for re-election and, thereafter, transmitted an email on July 25, 2019, urging eligible voters to support their nominee's candidacy despite the existence of Small Firm Member Petition Candidate Linde Murphy. Murphy needed to obtain the requisite 3%-plus petitions in support of her candidacy, whereas Muh, who previously ran for his first term as a petition candidate, avoided that inconvenient qualifying step by accepting the Nominating Committee's nod. 

Why does any of this matter? 

A Board of 24

The FINRA Board of Governors consists of 24 members: 
Chief Executive Officer of FINRA; 
13 Public Governors; 
1 Floor Member Governor; 
1 Independent Dealer/Insurance Affiliate Governor; 
1 Investment Company Affiliate Governor; 
3 Small Firm Governors (1 to 150 registered representatives);
1 Mid-Size Firm Governor (151 to  registered representatives); and 
3 Large Firm Governors (500 or more registered representatives) 

A Powerful Committee


According to FINRA's website:

NOMINATING & GOVERNANCE COMMITTEE (NOMINATING COMMITTEE)
https://www.finra.org/about/standing-committees#

The Nominating and Governance Committee is responsible for nominating persons for appointment or election to the FINRA Board, as well as nominating persons to fill vacancies in appointed or elected governor seats on the Board. The Committee also nominates Industry and Public members for positions on FINRA's National Adjudicatory Council.

The Committee is responsible for periodically reviewing and recommending changes to standing committee charters and, in consultation with the CEO, nominates the members and chairs of each standing committee of the Board. Also in consultation with the CEO, the Committee develops and recommends to the Board guidelines for effective corporate governance. In addition, the Committee reviews and approves appointments to each of FINRA's advisory committees and changes to the advisory committee enabling resolutions.

Kathleen A. Murphy, Chair

Brian J. Kovack

Rochelle B. Lazarus

Hillary A. Sale

Timothy C. Scheve

Leslie F. Seidman


3,261 FINRA Small Member Firms

In "Upcoming FINRA Board of Governors Election" (FINRA Election Notice / May 24, 2019)
https://www.finra.org/sites/default/files/notice_doc_file_ref/Election-Notice-052419.pdf, we are informed that:

As of the close of business on Thursday, May 23, 2019, the number of FINRA large firms was 174, and small firms was 3,261.

According to FINRA's online "Statistics" https://www.finra.org/newsroom/statistics, as of June 2019 there were 3,589 Member Firms. As such, FINRA's 3,261 Small Firms account for 91% of the self-regulatory-organization's membership; however, that 91% majority has been allocated only 3 out of 24 FINRA Board of Governors seats -- which amounts to 12.5% of the Board seats for 91% of the organization's member firms! 

The Power to Appoint. The Power to Nominate.

Somewhat lost in all the verbiage of the FINRA Election Notice is this nugget:

Of the 24 Board members, the following seats are appointed by the FINRA Board from candidates recommended by the Nominating Committee: the Public Governors, Floor Member Governor, Independent Dealer/Insurance Affiliate Governor and Investment Company Affiliate Governor (Appointed Governors).

The Nominating Committee also may nominate individuals to run for election for the seven elected governor seats that comprise the three Small Firm Governors, one Mid-Size Firm Governor and three Large Firm Governors (Elected Governors). . . . 

FINRA's Nominating Committee of three industry and four public governors appoints 16 of the Board's 24 Governors (which works out to 67% of the Board): 13 Public Governors and the 1 Floor Member Governor and the 1 Independent Dealer/Insurance Affiliate Governor and the 1 Investment Company Affiliate Governor. In addition, the Nominating Committee "may nominate" the 7 industry governors. Apparently, FINRA's CEO gets a free pass and is neither appointed nor nominated. We should all be so lucky!

91% With Little Proportionate Power -- FINRA's Dirty Little Governance Secret

Consider these extracts from the FINRA Nominating Committee's July 25th email in support of Muh's nomination:

[O]ur committee is comprised of three industry governors and four public governors. . .

The role of the small firm representatives on the Board, representing over 3,200 such institutions, is a crucial one that demands significant industry experience. . . 

The majority of the FINRA board are not from the industry and they have all looked to Bob to get an understanding of the impact of rule proposals on the small firm. . . .


Given how the small firms' Board representatives roles are "crucial" since the majority of FINRA's Board "are not from the industry," it's no small wonder that such non-industry folks would look to Bob Muh in order to "get an understanding," Thankfully Bob sits on the all-power FINRA Nominating Committee. 
Having been unfairly restricted to disproportionate representation on the Board, at least the Small Firm community has 1 of 7 seats on the all-powerful Nominating Committee, which is about 14% of the Committee's seat and a modest bump-up from the 12.5% of the Board seats. 

Ummm . . . hold on a sec. What???

I see from the 2019 roster of the FINRA Nominating Committee that, in fact, Robert Muh is not a member of the Nominating Committee

So . . . which Small Firm Member Governor is a member of the Nominating Committee? 

I don't see the name of Small Firm Member Governor Stephen A. Kohn. 

I don't see the name of Small Firm Member Governor Page W. Pierce. 

That's all there is. There ain't no more Small Firm Governors. 

Omigod, FINRA engineered its Small Firm Member community out of any Nominating Committee seats! There are three "industry" seats set aside on the Nominating Committee. There are three "industry" categories of Large, Mid-Sized, and Small. Shamefully, there is not a single set-aside for a Small Firm Member Governor to sit on the Nominating Committee.  91% of FINRA's member firms have 0% representation on FINRA's Nominating Committee.

As to the so-called independence of the National Nominating Committee, consider this from "Upcoming FINRA Board of Governors Election" (FINRA Election Notice / May 25, 2018)
https://www.finra.org/sites/default/files/notice_doc_file_ref/Election-Notice-052518.pdf

FINRA Nominating Committee Nominee

FINRA's Nominating Committee has nominated the following individuals: 

Large Firm Governor Candidate: Timothy C. Scheve, Janney Montgomery Scott LLC 

Mid-Size Firm Governor Candidate: Brian J. Kovack, Kovack Securities, Inc. 

Small Firm Governor Candidate: The Nominating Committee determined it would not nominate a candidate for election in 2018. Instead, any eligible candidates who obtain the requisite number of petitions will be included on the ballot. 

Similarly, as to the Nominating Committee's Chair, consider this from "FINRA Announces Governor Elections and Appointments" (FINRA News Release / August 22, 2017)
https://www.finra.org/newsroom/2017/finra-announces-governor-elections-and-appointments

At the July 2017 meetings, the Nominating Committee nominated and the Board made a number of appointments to the Board that became effective at the Annual Meeting. Governor Kathleen A. Murphy, President of Fidelity Personal Investing, was appointed to succeed Governor John J. Brennan as the Investment Company Affiliate on the Board. . . 

All three of the industry member firm governors sitting on FINRA's Nominating Committee were appointed or nominated by that same committee, and not one of those appointed/nominated industry governors is designated as a Small Firm Member Governor. 

So those who do the appointing are appointed to appoint those who do the appointing -- and that's a conflict-free, democratic process? 

And that's not designed to marginalize and silence the voice of 91% of the organization's member firms? 

Just imagine how one of the many public companies traded by FINRA's member firms would fare if they proposed to restrict 91% of their public shareholders to 12.5% of their Board seats and shut them out of any role on the Nominating and Governance Committee!

And FINRA wonders why its Small Firm Member community feels isolated?  Why some 3,261 firms feel marginalized? Why the Small Firm community looks upon the Nominating Committee's email as an unwanted interference in a contested election? 

The Protest Vote for Candidate Linde Murphy

Before this whole mess blew up on July 25th, Petition Candidate Linde Murphy submitted a public statement to the BrokeAndBroker.com Blog by a July 24, 2019, 5 p.m. EDT deadline, http://www.brokeandbroker.com/4713/2019-finra-board/ (as did Nominee Robert Muh). In her prescient statement, Murphy assured the Small Firm Member community that:

Nominations

As you know, my name is on the ballot this year because I went through the petition process to get it there.  Let's not forget the efforts of a small group of dissidents that first contested the FINRA nominee years ago.  They fought for the rights of small firms and against what they felt was a nominee handpicked by FINRA. 

At no point in the future would I accept the FINRA nomination for the Small Firm Seat for the Board of Governors.  The person who represents small firms at the board level should go to the members and ask for their support by signing a petition.

The FINRA Small Firm community must send a clear and unequivocal message to FINRA to "remain strictly neutral" when it comes to Small Firm politics.
 
http://brokeandbroker.com/
PDF/MurphyBio1907.pdf


FINRA Censures and Fines Member Firm for 13 Unregistered Prop Traders. In the Matter of Seven Points Capital, LLC, Respondent (FINRA AWC) 

Pro Se Customer Alleges Unsuitability of Self Directed Put Sales
(BrokeAndBroker.com Blog). 

Conman Who Posed as Beverage Entrepreneur Sentenced to more than 7 Years in Federal Prison for Running $7.5 Million Ponzi Scheme (DOJ Release)

Manhattan U.S. Attorney Announces Insider Trading Charges Against Analyst At Investment Bank (DOJ Release)

SEC Charges Investment Banking Analyst with Insider Trading (SEC Release)

SEC Obtains Final Judgment Against Second Defendant in Fitbit Stock Manipulation Scheme (SEC Release)

SEC Charges Massachusetts Investment Adviser with Persuading Retail Investors to Place Money Into an Apparent Overseas Scam (SEC Release)

FINRA Small Firm Member Board of Governors Election / Voting Ends August 19, 2019 / VOTE for LINDE MURPHY