FINRA Arbitrators Hit Firm for Failure to Supervise

January 18, 2011

You got your arbitrations and then you got your arbitrations - and this case sounds like it was a doozy.  After all, it's not every day that a FINRA Arbitration Decision warns us that

This was a highly contentious case. Claimants submitted six (6) four-inch notebooks, each filled with 1500 to 1700 sheets of paper, literally hundreds of separate "exhibits"totaling nearly 10,000 separate pieces of paper - most of them duplexed - resulting in up to 15,000 pages, with no index for each separate document.1

Respondent submitted one four-inch notebook with Exhibits 501 through 558. .  .


Fn 1: This inundation of paper work on the Panel was excessive and, together with the lack of a separate numbering of each document, made unnecessarily difficult the conduct of the hearings and deliberations of this case.

In the Matter of the Arbitration Between Ivan Sleight  and Hazel M. Sleight, Claimants, v. Centaurus Financial, Inc., Respondent  (FINRA Arbitration  10-00536, January 7, 2011)

Okay, batten down the hatches because this is gonna be quite a storm.

Failure to Supervise

In a FINRA Arbitration Statement of Claim filed in February 2010, public customers Ivan and Hazel Sleight sought damages of at least $435,000 from Respondent Centaurus Financial. The Sleights claimed that they had sustained losses and damages because Respondent Centaurus failed to supervise its registered representative Bart B. Bertholic.  Respondent Centaurus generally denied the allegations and asserted various affirmative defenses.

According to the FINRA Decision, the Sleights met Bertholic and became his customer about the time he went to work for Fortis Investments, Inc. (approximately 1995). Bertholic left Fortis in November 2000.

In December 2000, Respondent Centaurus hired Bertholic as an independent registered representative and investment advisor. The  Sleights followed Bertholic to Respondent and remained there as customers until February 2, 2006, when the firm fired their broker. Apparently, the Sleights argued that Centaurus just didn't make it clear to them why Bertholic had been fired, and, as a result, they not only moved on with what they thought was their trusted stockbroker, but they sustained further damages as a result of what they likely viewed as unwarranted and misplaced trust.

What's Past is Prologue

At the time Respondent hired Bertholic in 2000 (nearly 2001), the member firmknew that he had filed personal bankruptcy in 1991 and still had two unsatisfied IRS judgment liens. You could make the point that the bankruptcy was old news by then -- a decade or so in the past. Frankly, that may be a fair point. However, there's far more to come.

In 2002 - 2003, Bertholic's credit card debt apparently got so out of hand that he employed a credit service for about six months.

In 2004 - 2005 he sold securities in his own corporation in violation of applicable securities laws. During this same period, Bertholic obtainined loans from two customers of Respondent Centaurus for the purpose of investing in realty

From June to July 2005, Bertholic obtained over $600,000 in "loans" from two Centaurus customers for the purpose of investing in realty. At this time, the Sleights lost $17,000.00 by cashing in an annuity to raise funds to lend to Bertholic, who violated applicable laws by issuing promissory notes (deemed "securities").

In October 2005, Bertholic commenced a widespread public advertising campaign soliciting investments in his real property ventures. In August of that year, he reported to Respondent that he was engaged in the outside business activity of "Purchase of Real Estate," which he described as "buying real estate for my own account -- 10-20 hours per month."  

In January 2006, the State of Washington commenced an investigation of Bertholic's real estate activities and during his initial interview by the State, Bertholic asked if he should notify Centaurus. He did and on February 2, 2006, Respondent terminated its contract with Bertholic. 

And then there's the kicker: Bertholic filed bankruptcy in 2009, which seemed to leave both Claimants and Centaurus without further possibility of recovery or indemnification.

Arbitrators Not Impressed

The FINRA Arbitration Panel found no proof that Respondent Centaurus notified the Sleights of its actions (and reasons) for terminating Bertholic - although the former broker did notify the Claimants that he was leaving Centaurus and joining a new firm.  From the Panel's perspective, Centaurus left the Sleights in a vacuum.  Clearly, Panel was disturbed by the absence of "any follow-up by Centaurus of Berhtolic's unlawful activities once it learned of them . . ."Moreover, such failure was viewed as contributing to the Claimant's maintaining ongoing relationship with Bertholic after he left Respondent's employ.

Moreover, the Panel took a particularly dim view of Respondent's reaction to Bertholic's 2005 advisoryt that he was spending ten to twenty hours a month buying real estate. Although such activity was approved by Respondent, the FINRA Arbitration Panel chastized the firm:

Totally lacking was any reasonable follow-up by Centaurus to ascertain the detail as to what these "real estate" activities involved, particularly when it was going to consume"10-20 hours per month." Even the slightest inquiry at the time would have uncovered the "selling away" activities and might have nipped them in the bud.

Further, the Panel noted disapprovingly that in 2005, Respondent conducted four on-site inspections of Bertholic and did not uncover the above activities.

Accordingly, the FINRA Panel found Centaurus' supervision of Bertholic was inadequate.


The FINRA Arbitration Panel found Respondent liable and ordered it to pay to Claimants

  • $163,549.07 in compensatory damages, and
  • $49,936.75 in attorneys' fee (including costs and expenses of their expert witness in the amount of $9,936.75)

If compensatory damages and attorneys' fees are not paid within 30 days, interest will accrue at the rate of 5.375% per annum