In a Statement of Claim filed July 2009, Claimant Kajeet, Inc. sought $110,000,000 (One-Hundred and Ten Million Dollars) in consequential damages arising from its inability to access its funds in an investment in student loan Auction Rate Securities ("ARS"). Respondent UBS generally denied the allegations and asserted various affirmative defenses. In the Matter of the Arbitration Between Kajeet, Inc., Claimant, versus UBS Financial Services, Inc., Respondent. (FINRA Arbitration #09-03990, August 3, 2010),
The ARS Market Collapse
The ARS market collapsed in mid-February 2008, leaving over 40,000 UBS customers (as well as customers of other firms) holding illiquid ARS indefinitely. When UBS marketed ARS as "cash alternatives," it failed to adequately disclose that the liquidity of these securities was premised on UBS providing support bids for auctions it managed when there was not enough customer demand. When UBS stopped supporting auctions in February 2008, it led to widespread auction failures for UBS customers.
In August 2008, the United States Securities and Exchange Commission ("SEC") announced a preliminary settlement in principle with UBS Securities LLC and UBS Financial Services, Inc. (collectively, UBS) that included proposed charges and a plan that would restore approximately $22 billion in liquidity to its customers who invested in auction rate securities (ARS). This plan included approximately
- $8.2 billion for individual investors, small businesses, and charitable organizations,
- $3.3 billion for holders of tax-exempt Auction Preferred Shares (subject to regulatory review), and
- $10.3 billion for institutional investors.
To the extent that UBS customers incurred consequential damages beyond the loss of liquidity in the customer’s holdings of ARS (which should be restored pursuant to the settlement terms above), UBS agreed to participate in a special arbitration process that the customer may elect, and that will be overseen by the Financial Industry Regulatory Authority (FINRA), whereby UBS may not contest liability for its misrepresentations and omissions concerning the ARS, but may challenge the existence or amount of any consequential damages. This arbitration process is voluntary on the part of the customer and if a customer elects not to take advantage of these special procedures, a customer may pursue all other arbitration or legal or equitable remedies available through any other administrative or judicial process available to the customer.
Read the UBS' Consent with the SEC at
and the SEC's August 8, 2008, Press Release at
NOTE: Kajeet, Inc. v. UBS was submitted to the FINRA Arbitration Panel pursuant to Special Arbitration Procedures ("SAP") that were implemented for investors of FINRA member firms that had entered into ARS settlements with the SEC.
- Under the FINRA's special procedures, firms pay all fees related to the arbitration, including filing fees, hearing session fees and all the fees and expenses of arbitrators. If investors do not opt for this special arbitration procedure, they retain the choice of other remedies, including initiating a regular FINRA arbitration claim.
- Under the SAP, firms have limited defenses. The firm may not contest liability relating to the illiquidity of the underlying ARS position or to the ARS sales, including any claims of misrepresentations or omissions of its agents. The firm cannot use as part of its defense an investor’s decision not to sell ARS holdings prior to the ARS settlement date or the investor’s decision not to borrow money from the firm if such loan facility was made available to ARS holders. The firm also cannot assert statutes of limitations or repose or any other time bar principles, except that the firm may assert lack of eligibility to proceed under the SAP. However, arbitrators may consider a firm's unconditional buyback offer at par, including the timing and .
- ARS investors have the option of selling their ARS holdings back to the firms under the regulatory settlements and, at the same time, pursuing consequential damages. Investors who wish to seek punitive damages or attorneys' fees have the option to do so under FINRA's standard arbitration procedures.
- To speed the arbitration process under the special procedure, cases claiming consequential damages under $1 million will be decided by a single, chair-qualified public arbitrator. In cases with consequential damage claims of $1 million or more, the parties can, by mutual agreement, expand the panel to include three public arbitrators.
- For a more comprehensive discussion of FINRA's procedures, see http://www.finra.org/arbitrationmediation/P117440
The FINRA Arbitration Panel found that Respondent UBS was liable and ordered it to pay to Claimant $80,800,000 (Eighty Million and Eight-Hundred Thousand Dollars) in consequential damages.
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In a Statement of Claim initially filed in January 2009, Claimant Rohan Russell, who proceeded pro se, claimed to have sustained damages as a result of his inability to liquidate his position in Calypso Wireless, Inc. Claimant sought $31,500 in compensatory damages, $63,000 in lost opportunity damages, and $3,600 in interest. Claimant also sought $100,000 in punitive damages. In the Matter of the Arbitration Between Rohan Russell, Claimant vs. Northgate Securities, Inc., Respondent (FINRA Arbitration # 09-00329, July 30, 2010)
Respondents generally denied the allegations.
The FINRA Arbitration Panel found Respondent liable and ordered it to pay to Claimant:
- $31.500.00 in compensatory damages, and
- $50,000.00 in punitive damages "for egregious conduct on the part of Respondent and ite representative Richard Pattin not to have fully disclosed to Claimant all information available to Respondent relative to the transaction in question."
Bill Singer's Comment: As FINRA arbitration cases go, this one slams the Respondent with a whopping punitive damage, which is nearly double the alleged compensatory damage sought. Apparently, the Panel found that the non-disclosure of information wasn't just mere negligence or an everyday oversight but "egregious." Of course, you know my old complaint about these FINRA decisions -- like, maybe, just maybe, the decision could have set forth what the hell the "egregious conduct" was? Nonetheless, yes Virginia, FINRA arbitration panels do award punitive damages.
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In a Statement of Claim filed in June 2009, Claimant Marcia Baker alleged various causes of action including fraud and negligence related to the "purchase of unspecified stocks and options." Claimants requested $658,255.87 in compensatory damages plus fees, costs, punitive/exemplary damages. Respondents generally denied the allegations and asserted various affirmative defenses. In the Matter of the Arbitration Between Marcia Baker,Claimant vs. Global Trading Group,Inc. and William Savary, Respondents (FINRA Arbitration # 09-04019, July 30,2010)
The FINRA Arbitration Panel found Respondents jointly and severally liable and ordered them to pay Claimant Baker
- $226,419.59 (consisting of Claimant's $200,000 investment plus 8% compound interest from May 2003 until July 8, 2010, minus all withdrawals); and
- $84,257 in attorney fees.
Bill Singer's Comment: And speaking of FINRA arbitration decisions that drive me nuts (so,yeah, okay -- maybe that's not such a long drive these days), here's a classic.
Claimant alleges fraud and negligence in the purchase of . . . "unspecified stocks and options." Gee, that clears that up!
Claimant seeks a signficant compensatory damage of some $658,000. How did Claimant arrive at that number? Dunno. The decision doesn't offer any explanation.
Respondents denied the allegations. That's nice. Of course, I'm not sure what the hell they're denying.
Based upon that dearth of facts, the FINRA Arbitrators awarded Claimant's $200,000 investment plus compounded interest, which we are told adds up to over $226,000. Ummm . . . what $200,000 investment? How did the Panel get from the requested $658,000 down to $226,000?
Thankfully, the Claimant's lawyer go $84,257 in awarded fees. What he or she did to earn that is beyond me because the FINRA decision simply explains that some kind of claim was filed about some trades involving some money and that there were allegations about some misconduct that was denied by the Respondents but that the Panel found that someone did something wrong and awarded some damages and attorneys' fees.
You got all of that?