In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in December 2009, Jeffrey and Marisel Lieberman alleged that they had been victimized by a Ponzi scheme involving their investment in Greenwich Sentry, L.P. Hedge Fund. Claimants sought compensatory damages of $200,000 plus interest, attorney's fees, costs, and punitive damages. Among Claimants' causes of action were fraud, negligence, and violations of state statutes.
Respondents Morgan Keegan and Almeyda generally denied the allegations and asserted various affirmative defenses. In the Matter of the Arbitration Between Jeffrey S. Lieberman and Marisel Lieberman, Claimants, versus Morgan Keegan & Company, Inc. and Julio Almeyda, Respondents (FINRA Arbitration 10-00009, March 3, 2011).
SIDE BAR: Greenwich Sentry, L.P. Hedge Fund is reputed to have been a so-called "feeder fund" for Bernard Madoff Investment Securities, Inc. On November 19, 2010, Greenwich Sentry, L.P. filed for Chapter 11 bankruptcy protection, largely blaming the bankruptcy filings on the cost of the Madoff-related litigation.
See a Copy of the Complaint filed by Trustee Irving Picard against Greenwich Sentry et al. on May 18, 2009.
At the close of the FINRA arbitration hearing, Respondent Morgan Keegan requested expungement of all references to the matter from the Central Registration Depository ("CRD") record of Respondent Almeyda, who was previously dismissed by the Panel at the conclusion of Claimants' case-in-chief.
The FINRA Arbitration panel found Respondent Morgan Keegan liable and ordered the firm to pay Claimants compensatory damages in the amount of
- $200,000.00, plus interest
- $14,000.00, representing expert witness fees
- $300.00, representing the non-refundable portion of the initial claim filing fee paid by Claimants
In deliberating on the request for punitive damages, the FINRA Arbitration Panel noted that an August 28, 2006, Morgan Keegan Compliance Department memorandum addressed to Financial Advisors (FA) and Branch Managers (BM), required that before any recommendation of a Hedge Fund is made to a client, the FA must review the client's New Account Form to ensure that the product is suitable. Further, this memo required BMs to review the client's New Account Form before signing the subscription agreement in order to ensure that the stated investment objectives are consistent with the proposed investment in the hedge fund.
Pointedly, the memo admonished that:
- where an account is predominantly composed of a hedge fund investment,
- "speculation" should be one of the primary objectives checked off for the account, and,
- the absence of the denoted "speculation" mandates that the BM reject the transaction.
Mindful of Morgan Keegan's memo and the three-point test above, the FINRA Panel characterized the Greenwich Sentry investment in Claimants' account as a hedge fund that comprised 100% of the investments in the Claimants' account. Since such a concentration (100%) clearly satisfied the first prong's description as an account "predominantly" invested in hedge funds, the second prong required that Claimants' account contain a primary objective of "speculation."
In reviewing Claimants' New Account Form, the Panel noted that "speculation" was not Claimants' primary investment objectives. Moreover, the Claimants had testified that "speculation" was the last of their investment objectives.
Although Respondent Morgan Keegan argued that it had undertaken adequate due diligence, the Panel noted that the firm's procedures called for "SUBSTANTIAL DUE DILIGENCE" (formatting in Decision) to be performed on alternative investment products; and NASD Notice to Members 03-07: NASD Reminds Members of Obligations When Selling Hedge Funds separately required the performance of substantial due diligence into a hedge fund before making such a recommendation to a customer.
SIDE BAR: NASD Notice to Members 03-07 reminded members of their obligations when selling hedge funds and funds of hedge funds, including:
(1) providing balanced disclosure in promotional efforts;
(2) performing a reasonable-basis suitability determination;
(3) performing a customer-specific suitability determination;
(4) supervising associated persons selling hedge funds and funds of hedge funds; and
(5) training associated persons regarding the features, risks, and suitability of hedge funds.
The FINRA Panel determined that Respondent Morgan Keegan:
did very little due diligence on the hedge fund investment in question and certainly did not perform substantial due diligence. Respondent Morgan Keegan failed to produce, as ordered by the Panel, the Price Waterhouse Audited Report of Greenwich Sentry, which it indicated that it relied on. Respondent Morgan Keegan did not do an available Internet Search. Respondent Morgan Keegan admitted that it did not even request the Audited Report of Bernard L Madoff Securities (the firm that implemented the investment strategy and also was the custodian of the hedge fund assets), which according to Claimants' Expert Witness, would had led to Red Flags. Respondent Morgan Keegan did not even produce a detailed report indicating the extent and results of its due diligence, nor did it produce any evidence of any follow-up review to indicate ongoing monitoring required as part of its due diligence.
Accordingly, the Panel found clear and convincing evidence that Respondent Morgan Keegan was grossly negligent in not performing substantial due diligence, and, as a result, the firm fraudulently misrepresented the risk of this investment to Claimants, which the Panel deemed to have caused the total loss of Claimants' investment.
Pursuant to §768.737, Florida Statutes: Punitive damages; application in arbitration, the Panel found Respondent Morgan Keegan liable for and ordered it to pay to the Claimants $50,000.00 in punitive damages. The Panel directed Claimants (as the prevailing parties) to a court of competent jurisdiction with respect to a determination regarding entitlement to and amount of attorneys' fees to be awarded.
Finally, the Panel recommended the expungement of all reference to the above captioned arbitration from Respondent Almeyda's registration records maintained by the CRD. The basis for such a finding was that Almeyda was not aware of the lack of due diligence performed by his firm and did not know that his representations to Claimants as to the level of risk were false and misleading.