Spousal Cases: Till FINRA Do Us Part?

August 24, 2010

In a FINRA Arbitration Statement of Claim filed in October 2008, Claimant Illa Mellul alleged that Respondent David Allan Marcus sold off every posttion in her account without her direction, consent, or acquiescence; and then transferred the proceeds to Claimant's estranged husband. Claimant Mellul further alleged that as a result of Respondent M Holdings Securities's failure to have proper  procedures in place, Respondent Marcus was able to close Claimant's account based on documentation provided by Claimant's estranged husband wtthout verification by Claimant. Claimant alleged breaches of fiduciary duty and contract, failure to supervise, and negligence, and sought $1 million in damages. Illa Mellul, Claimant, versus M Holdings Securities, Inc. and David Allan Marcus, Respondents, (FINRA Arbitration #08-03976, August 12, 2010) .

Respondents generally denied the allegations and asserted various affirmative defenses.

In June 2010, the parties resolved this matter and Claimant voluntarily withdrew her claims with prejudice. The FINRA Arbitration Panel entered a Stipulated Award noting the settlement.

Broker Seeks Expungement

Claimant acknowledged that Respondent Marcus did not commit any forgeries and did not personally liquidate her account. Accordingly, Respondent Marcus sought an order of expungement concerning his Central Registration Depository (CRD) files concerning this arbitration and the underlying allegations.

The FINRA Arbitration Panel recommended the expungement of Respondent Marcus's CRD files, subject to his obtaining confirmation of that expungement from a court of competent jurisdiction.  In accordance with FINRA Rule 2080, the Panel found that Respondent Marcus had confirmed all written instructions by telephone with the Claimant. 

Bill Singer's Comment: Surprisingly, these spousal cases are not uncommon. 

Frequently, a couple may have three accounts: the husband's, the wife's, and a joint account; and a pattern of dealing develops over time whereby one spouse instruct the broker concerning investment decisions or securities/cash transfers for all three accounts.  Further, in the beginning of the customer-broker relationship, the other spouse may orally confirm the authorization of the other spouse to engage in various account activity (both for their joint account and for the individual accounts).  Because the couple often meet with or communicate with their broker together, that registered person may become complacent about ensuring that there is ongoing authority for one spouse to act in a manner that may involve the individual account of the other (or may involve transactions in the joint account that result in improper disbursements in the name of only one of the account holders of record). 

Unfortunately, how the couple acts in the branch office or during a home visit may not always be the true picture of their relationship.  Whatever civility is apparent may be an act.  Once the broker leaves, the couple may go at each other hammer and tong.  Inevitably, should the relationship dissolve, the couple enter into a legal separation, or the husband and wife divorce, one spouse may be in desperate financial straits and will forge letters authorizing all sorts of actions by financial institutions -- or will swear that the other spouse approved whatever action is being proposed.  Down the road, such pressures are likely to result in lawsuits -- and brokerage firms and their registered person will frequently be named as respondents/defendants and the failure to follow written supervisory procedures concerning customer accounts will be cited.  Thereafter, both the firm and the individual RR could be named in regulatory actions.

Human nature being what it is, many registered person simply "assume" that their history of dealings with a husband and/or wife ensures that what went on in the past will be okay for the future. Unfortunately, just because no one has recently complained about your administrative short-cuts does not mean that they will remain silent about such practices in the future -- particularly if their investments go south or the couple becomes embroiled in a nasty divorce.

For a variation on the theme, consider the FINRA regulatory case involving Preston Douglas Runyan (OS/2007007727601/September 2009), who entered into an Offer of Settlement without admitting or denying the facts.  http://www.rrbdlaw.com/RegulatoryLinks/CASESOFNOTE/NASD/2009.htm. In that case, Runyan affixed the signature of a public customer's spouse to a spousal consent provision on an individual retirement account (IRA) application without the spouse's permission and authorization. Runyan signed his name on the application as witnessing the spouse's signature, which he had not. The application that Runyan signed on the spouse's behalf did not contain any notation evidencing that someone other than the spouse had signed it. Runyan's member firm maintained a compliance manual prohibiting registered representatives from committing forgery. FINRA settled the matter with a  $5,000 fine and four-months suspension.

Ultimately, it's easy to dismiss Mellul and Runyan as minor cases that make much ado about nothing. But that would be a misunderstanding of the potentially serious issues raised in spousal cases. Spousal cases have the ability to explode with disastrous effect for both the servicing broker and the member firm.  If you are confronted with a similar fact pattern, go by the book.  It's there for your protection.




Regulatory lawyer Bill Singer has analyzed and posted the latest crop of FINRA disciplinary cases

  • Some three decades on Wall Street and you can only imagine all the regulatory cases that I've come across -- which is why this is all the more amazing. Quite possibly, this is the most staggering number of allegations of violations that I've ever seen. READ HERE at http://www.rrbdlaw.com/enforcement-actions/index.php?cid=1#2008011678303
  • What happens if you sell shares of a security to public investors using a private placement memorandum that omitted a convicted felon's association with the issuer, which is a material fact
    READ HERE  at http://www.rrbdlaw.com/enforcement-actions/index.php?cid=1#2008011678302
  • You know that old line about asking someone up to your apartment to see your etchings? Well, did you hear the one about the broker who got barred because of his lithographs?  
    READ HERE at http://www.rrbdlaw.com/enforcement-actions/index.php?cid=1#2008015279301
  •   You think that I'm tough on the SEC or FINRA?  Well, consider this slam from a recent federal appeals court:

    This case involves wealthy and sophisticated customers who were under no press of time to decide whether to invest; customers who invested specifically in furtherance of a desire to speculate; and a broker who did not profit from his wrongdoing and who has been fined and suspended for his violations. There is nothing in the SEC's decision to indicate why, in these circumstances, awards of restitution are appropriate under Principle 5. Indeed, the SEC's decision is incomprehensible insofar as it attempts to amplify any meaningful causal connection between Siegel's putative bad acts and the Downers' and Landrys' losses. And the SEC has cited no precedent, and we have found none, supporting restitution in a case of this sort. The SEC's judgment is fatally flawed for two reasons: First, the SEC's judgment is not supported by reasoned decisionmaking. Second, the SEC cites to no controlling precedent that includes reasoned decisionmaking supporting restitution under Principle 5 in a case of this sort. We therefore vacate the restitution order.

    READ HERE at http://www.rrbdlaw.com/enforcement-actions/index.php?cid=1#C05020055

  • Talk about things getting testy on Wall Street.  Consider all these innovative approaches to not exactly taking various industry examinations in accordance with the rules.  READ HERE at http://www.rrbdlaw.com/enforcement-actions/tags.php?term=Testing




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