In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in February 2010, Claimants Marta and Robert Toscano initially sought $29,784.05 in damages plus $21,115.47 in interest (subsequently increased by an additional $4,181.70 at the close of the hearing) and attendant costs and fees arising out of their purchase of Unit Investment Trusts ("UITs") from Respondent Chase Investment Services Corporation ("CISC"). The Claimants alleged, among other causes of action, unsuitability, unauthorized trading, and failure to supervise. In the Matter of the Arbitration Between Marta Toscano and Robert M. Toscano, Claimants vs. Chase Investment Services Corporation and Marshall H. Foster, Respondents (FINRA Arbitration 10-00672, February 17, 2011).
Respondent CISC and Respondent stockbroker Foster generally denied the allegations and asserted various affirmative defenses.
Fasten Your Seatbelts
The sole arbitrator hearing this case begins his explanation of his decision with these ominous words:
I am providing a rationale because during the hearing my focus shifted from the conduct of Mr. Foster to the conduct of CISC. NASD Rule 2310, entitled "Fair dealing with customers", imposes a duty of fair dealing on both the member and the registered representative. I believe that the registered representative - Marshall Foster has met his obligation to the Claimants but that the member - CISC has not.
The FINRA Arbitrator found that Respondent Foster acted in good faith with the Claimants. In discharging Foster of any misconduct in this matter, the Arbitrator reasoned that the stockbroker used his firm's approved application and his recommendations (which he reasonably believed were suitable for and understood by the Claimants) were sanctioned by CISC.
In contrast to exonerating Respondent Foster, the Arbitrator's findings concerning Respondent CISC can only be considered a lambaste, which starts off with this slam:
As to CISC there was a colossal lack of foresight and attention to detail . . . clearly inadequate when it came to making an assessment of the Claimants' situation . . .
Preliminarily, the Arbitrator notes that CISC was not paid to manage the Claimants' account and, as such, the firm would normally not be deemed to be acting in a fiduciary capacity and, accordingly, CISC would not be deemed to have a fiduciary duty to the clients. However, the Arbitrator did not simply end his consideration with whether CISC charged and/or received a fee for account management. The Arbitrator sought to get to the heart of the matter. In deeming that CISC was acting in an apparent fiduciary capacity, the Arbitrator found compelling the fact that the firm was "housing itself on the bank floor and taking referrals from the bank personnel." You got your form. You got your substance. Clearly, this was not an adjudicator merely punching in and going through the motions.
Inadequate UIT Application
Additionally, the Arbitrator found that CISC's UIT application form was inadequate and failed to elicit sufficient information about the Claimants' financial situation. The Arbitrator believed that the substandard nature of the form exacerbated CISC's obligations to oversee such transactions and supervise because the form was the only document reviewed by the firm's designated principal. Further, the Arbitrator was mystified as to why the UITs were even placed on CISC's approved list (upon which Respondent Foster relied when making his recommendation to his clients). While conceding that the UITs "performed as promised," the arbitrator ultimately dismissed the appropriateness of the product as little more "akin to a 'wager' than a long term investment."
Following Respondent Foster's departure in December 2007 from CISC, the arbitrator slammed CISC's conduct pertaining to the Claimants' account as
[S]lip shod. No one looked at the portfolio until the Claimants came in again and then were met with apparently contradictory advice The market was in free fall and prompter more affirmative action on behalf of CISC may have helped the Claimants.
Dramatically - and in the forceful exercise of prerogative rarely seen in FINRA arbitrations - the Arbitrator concluded that given the totality of the facts presented in this case, CISC violated its independent duty to deal fairly with the Claimants. The Arbitrator summed it all up in this succinct explanation:
[T]he ongoing oversight was inadequate given the type of customers that CISC attracted, the manner in which they were attracted, the inadequacy of the account opening forms, the volatility of the market, the type of "approved" investments offered, and the insufficient transition process from one representative to another.
The Arbitrator found CISC solely liable and ordered it to pay to Claimants $39,784.05 in compensatory damages. Pointedly, the arbitrator declined to award Claimants interest because he concluded that they "should have been more attentive and assertive with respect to their investments." In keeping with that admonition, the arbitrator also split FINRA's forum fees evenly among the parties.
Bill Singer's Comment: A breathtaking FINRA Arbitration Decision -- among the best that I have read in some three decades on Wall Street. Having chaired many arbitration panels and having served as a panelist on even more, I know that the overwhelming majority of arbitrators are dedicated men and women who render a valuable service to the public. Unfortunately, FINRA does not require a comprehensive Decision in all cases and, as such, we are often left to wonder how cases were decided and why.
In this case, the sole Arbitrator dissected the evidence. Not only did he refuse to sanction the stockbroker, but the Arbitrator made it clear that Respondent CISC's questionable policies and practices set a cascade of misconduct into play -- and that the stockbroker justifiably relied upon his firm's apparent assurances. However, the Claimants were not fully exonerated. To the contrary, the Arbitrator chided the Toscanos for not doing their own due diligence and failing to undertake a minimal level of responsibility for their investments. In truth, sometimes there is blame enough to be shared between the brokerage firm and its customers.
Kudos on a superb effort. Job well done!