A Matter of AppearancesThe causes of action related to allegations that Respondent, through its agent, recommended that Claimant invest in GPB Holdings II, LP and Shopoff Commercial Growth and Income Fund III, LP, private placement offerings which were high-risk, illiquid investments and unsuitable for Claimant.
Respondent Capital Financial Services, Inc. ("Respondent") was represented by Gordon Dihle, Esq., Corporate Legal, LLC until on or about October 5, 2021, after which time it was not represented.
Claimant retired and was required to remove his retirement funds from his employer's custodianship. He had no previous investment experience. Seeking preservation o/f capital and a modest return, he placed those and other funds with Respondent's agent ("Broker"), who put some of them into two private placements for which Claimant clearly was financially unqualified, based on the accurate assets and income information he provided to Broker. One security is now worthless and the other cannot be sold through any securities firm. Respondent is out of business and, after a long series of motions on various issues, including Respondent's lack of full response to discovery obligations, its counsel withdrew just before the hearing and Respondent did not appear to contest the claims. The hearing proceeded pursuant to Rule 12603 of the Code. Based on the sworn testimony and other evidence presented at the hearing, and after review of the full record, the Panel finds that these securities were unsuitable for Claimant and were illegally sold to him, constituting a major infraction of FINRA Rule 2111 on suitability. Further, the Panel finds that Respondent failed to have procedures in place to prevent such flagrant violations of the securities laws and rules, acted with reckless disregard for its client's interests, and caused Claimant unnecessary trouble and expense. Further, the Panel finds clear and convincing evidence of willful misconduct by Respondent and conscious indifference to the consequences of its actions.
ALTHOUGH THE FIRM DISPUTES ALL CUSTOMER CLAIMS, IN ADDITION TO ITS NET CAPITAL OF $50,249 AT JUNE 30, 2020, THE FIRM HAS ALSO ACCRUED $20,056 OF CONTINGENT LIABILITIES AND HAS AN ESCROW RESERVE ACCOUNT OF $5,497 (BOTH FOR THE SETTLEMENT OF CUSTOMER CLAIMS).
[I] urge FINRA to create a Wall Street Anti-Fraud Fund, a proposal that I have made for some two decades and which continues to fall on deaf ears. Wall Street should have an "Anti-Fraud Fund" for the benefit of defrauded public customers who have proven the liability of a FINRA member firm but are unable to fully collect their compensatory damages, costs, and fees because of that firm's insolvency. I do not favor extending such a guaranty into punitive damages or "unreasonable" attorneys' fee and other charges. Fervently, I believe that the securities industry has the wherewithal and the moral/ethical obligation to put its money where its dirty mouth has been. There may be legitimate debate as to how best to fund the anti-fraud fund, but that only goes to the mechanics of doing the right thing. . . .
End Mandatory Customer and Industry Arbitration
- Permit voluntary arbitration
- Eliminate industry-sponsored arbitration forums as sole optionCreate a Fund for Full Payment to Defrauded Investors
- Impose fee on all trades
- Impose annual renewal fee on firms and financial services providers
- Initially allocate all regulatory fines to this Fund (until fully funded)
- Require proof of prevailing decision in court or arbitration
- Limit fund compensation to compensatory damages and reasonable fees/expenses
- Require proof of insolvency of respondent or defendant
Implement Bounty Program for Whistleblowers and Tipsters
- Model after Qui Tam or False Claims Acts
- Offer a percentage (sliding scale of between 10% to 33%) of funds recovered
I urge FINRA to reinvent itself as a "private sector regulatory organization" ("PSRO") and to expand and enhance its mission from one for the broker-dealer industry towards one for the larger private sector served by the financial services community. In furtherance of that change, the PSRO would serve in a holding-company role that oversees each of three regulatory divisions dedicated to Small member firms (smallest 25% of broker-dealers), Mid-sized member firms (50% of broker-dealers measured from midpoint), and Large member firms (largest 25% of broker-dealers). Pursuant to that restructuring, each division would draft a rulebook responsive to the unique needs of its constituency. The PSRO would fully enfranchise associated persons, and provide for the proportionate representation for such stakeholders as public customers, issuers, and regulators. Without question, a PSRO Board seat should be set aside for an investors' advocacy group such as PIABA.As part of reimagining the SRO into a more expansive PSRO, all industry registration and continuing education should be undertaken directly by an applicant through the PSRO holding company and not through the member firms. FINRA should establish an Anti-Fraud Fund whereby all defrauded public customers would obtain restitution in the event that member firms or associated persons fail to timely honor any awards for compensatory damages, costs, and fees. Finally, I would abolish mandatory arbitration for customers and associated persons.
The BrokeAndBroker.com Blog's publisher, Bill Singer, has long advocated for the creation of an Anti-Fraud Fund on Wall Street to serve as a back-stop for defrauded public investors who obtain awards of compensatory damages against insolvent industry firms and registered representatives. Bill does not favor extending such a guaranty into punitive damages or "unreasonable" attorneys' fee and other charges, but he does believe that the securities industry has the wherewithal and the moral/ethical obligation to put its money where its dirty mouth has been. While there may be legitimate debate as to how best to fund the anti-fraud fund, that only goes to the mechanics of doing the right thing. In the case of the Financial Industry Regulatory Authority, we have a self-regulatory-organization that needs to get behind this pro-consumer effort and with haste. . . . FINRA's regulatory mandate is set out in FINRA Rule 2010: Standards of Commercial Honor and Principles of Trade: "A member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade." Today's BrokeAndBroker.com Blog asks whether the self-regulatory-organization itself will observe high standards of commercial honor and just and equitable principles of trade when it comes to seeing that justice is done for defrauded public investors.