In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in December 2010, Claimants asserted causes of action including fraud, failure to supervise, and elder abuse related to the purchase and/or recommendation to hold securities (among which were Barret Business Services, IShares and Growth Fund of America) in three accounts owned by Claimants. According to online FINRA records as of December 27, 2011, the disputed transactions allegedly occurred from January 2007 through February 2009. Claimants sought at least $43,831.27 in compensatory damages, punitive damages, interest, and attorneys' fees. In the Matter of the FINRA Arbitration Between Jack F. Immel, individually and as trustee for the Jack F. Immel IRA; and Valerie R. Immel, individually and as trustee for the Valerie R. Immel IRA,Claimants, vs. Citigroup Global Markets, Inc. , Respondent (FINRA Arbitration 10-05548, December 19, 2011).
In addition to generally denying the allegations, Respondent Citigroup Global Markets sought an expungement of unnamed party Kenneth C. Camarella's Central Registration Depository record ("CRD"). Camarella was the financial advisor to Claimants Jack and Valerie Immel during the relevant time in which the alleged losses were sustained.
On December 2, 2011, Claimant advised FINRA of the settlement and dismissal of the matter with prejudice. According to online FINRA records as of December 27, 2011,Respondent Citigroup settled with Claimant on December 12, 2011, for $11,000.
An expungement hearing was held concerning Camarella's CRD. Claimants did not oppose the request and did not attend the expungement hearing.
The sole FINRA Arbitrator who conducted the hearing recommended the expungement of Camarella's CRD. Let me permit the Arbitrator's superb commentary in the Decision to speak for itself:
b. Evidence established at the hearing clearly indicated that Mr. Camarella fully and frequently (verbally and in writing) advised the Claimants that the majority of their investments would be made in equities, rather than fixed income assets as they state was their desire in their claim.
c. The evidence also states that the Claimants were well aware of the nature of these investments which comported with their stated risk tolerances and objectives before and after these investments were made by Mr. Camarella on their behalf.
d. It is also evident that the Claimants disregarded the advice of Mr. Camarella concerning a portion of their portfolio, insisting rather to self-manage that portion of their investment which resulted in approximately one-third of the overall financial loss stated in their claim.
e. The Claimants did suffer an asset value loss in their accounts, but this was due to unpredictable and catastrophic market dynamics at the time rather than mismanagement of their accounts by Mr. Camarella.
My compliments to the FINRA Arbitrator for the concise and compelling rationale that offers useful lessons for both industry registered persons and public customers. For starters, always make sure that the account's investment strategies and goals are memorialized. Camarella demonstrated through testimony and the production of records that he had advised the Claimants that the majority of their investments would be made in equities - a critical point given that customers claimed that they had largely wanted to invest in fixed income.
An equally important lesson from this case for public investors is GET IT IN WRITING! If you have instructed your registered representative to pursue a specific investment strategy (or you have agreed to his/her recommendation), make sure it's memorialized in either a letter from you to the broker or vice versa. As a customer, you are likely going to receive trade confirmations for each and every purchase and sale; and those transactions will be memorialized on a monthly statement; and those transactions may also be included in your tax returns to compute profits/losses or show dividends/interest. You're not going to be on particularly strong footing if you argue that you expected to be invested only in stocks but received months/years of notices about investments in bonds and options.
Industry participants should never lose sight that the overwhelming majority of customer arbitrations involve LOSSES. Duh! Although that should be obvious, too many stockbrokers fail to grasp the fundamental importance of that single fact. The minute you walk into a FINRA customer arbitration hearing, your credibility is under attack because you recommended or pursued a losing strategy in the complaining client's account. As such, keep in mind that what you're attempting to do is build a convincing body of proof in the face of account losses. Document. Memorialize. Communicate.
Consequently, if a client is dismissive of your recommendations as a broker, industry professionals should seriously consider dumping the client. Yeah, I know, that ‘s a tough one. Still - good luck facing a FINRA Arbitration Panel when your defense is "I told her so" and there are massive losses in the customer's account and you earned significant commissions and your firm earned a ton of margin interest. If you're going to let your client commit economic suicide through the pursuit of an asinine investment strategy, you're inviting litigation and the attendant damage to your reputation.
Finally, just as a rising tide floats all boats, a falling tide strands all boats. In bull markets, even the worst stock picker can be rescued; and, accordingly, in a crashing market, even market geniuses can be sunk. To the FINRA Arbitrator's credit, he was not persuaded that Camarella was in the wrong simply because the Claimants sustained losses. To the contrary, this Arbitrator saw the cause of the losses for what they were: "unpredictable and catastrophic market dynamics at the time rather than mismanagement of their accounts by Mr. Camarella."
The takeaway for customers is that your broker and brokerage firm are not insurance companies that will protect your investment from folly or macro-market events and repay your losses. The warning for Wall Street professionals is that a failure to communicate with customers may force you to defend your conduct by shrugging your shoulders, offering an uneasy smile, and pointing to a stock graph that starts higher in the upper left and falls much lower in the lower right.
I don't care if you're employed by Citi, JP Morgan, Merrill Lynch, Morgan Stanley, or a smaller regional/indie. Trust me, you don't want to defend your actions by sheepishly blaming the customer's losses on the market. Frankly, you're being paid commissions to outperform the market - if not, the customer can just as easily lose their own money at a discount shop.