In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in April 2010, public customer Claimant Phillips asserted various causes of action including breach of fiduciary duty; fraud, and negligence concerning unspecified options trading in his account for which he sought about $5 million in compensatory damages plus interest, punitive damages, attorneys' fees, and costs. In the Matter of the FINRA Arbitration Between Ronald E. Phillips, Claimant, vs. Wells Fargo Advisors, LLC, Respondent (FINRA Arbitration 10-02055, April 27, 2012).
Respondent Wells Fargo generally denied the allegations and asserted various affirmative defenses.
On or about December 20, 2011, Claimant notified FINRA that the matter had settled.
SIDE BAR: According to FINRA online regulatory records as of May 1, 2012, Claimant Phillips sought the $5 million in damages from allegedly unsuitable options investments that occurred from 2006 - 2007. On December 21, 2011, Respondent Wells Fargo settled the claim for $550,000, about one-tenth of the amount sought. This information was not disclosed in the Arbitration Decision.
Respondent Wells Fargo requested an expungement hearing on behalf of non-party registered representative Michael Toth. In response to that request, Claimant Phillips asserted that the request was improper and did not comply with the limited grounds under which a FINRA Arbitration Panel may recommend expungement. Additionally, Claimant stated that he would not participate in the expungement hearing other than to provide the aforementioned response.
After conducting an expungement hearing at which Claimant did not appear, the FINRA Arbitration Panel recommended the expungement of all reference to the arbitratrion from Toth's Central Registration Depositiory recordsf ("CRD"). The Panel offered the following rationale:
As a discount broker, Mr. Toth is prohibited from offering advice to clients or soliciting trades in any manner. All (100%) of his clients' trades are self-directed.
Mr. Toth presented uncontroverted testimony under oath that he never provided advice to the customer and played no part in the customer's options strategy.
No evidence was presented to the Panel supporting any of the customer's claims and/or allegations.
Evidence was presented to the Panel which clearly casts doubt on many of the customer's allegations in the Statement of Claim.
Tape recordings of the customer's phone calls with Mr. Toth while making trades reveal that the customer was clearly making his own decisions and did not receive advice or recommendations from Mr. Toth. The recordings were played for the Panel during the hearing.
Bill Singer's Comment
This case presents a blunt and dismissive commentary from a FINRA Arbitration Panel concerning allegations of misconduct by a public customer against an individual broker - it is as close to a total exoneration of Toth's conduct as he could desire. Of course, we must not forget that although this registered person was not named as a respondent by Claimant Phillips, Toth was still obligated to amend his Form U4 to disclose that he was an "involved" party (although not a "named" Respondent) in the Arbitration Statement of Claim:
Customer Complaint/Arbitration/Civil Litigation Disclosure
Answer questions (4) and (5) below only for arbitration claims or civil litigation filed on or after 05/18/2009.
(4) Have you ever been the subject of an investment-related, consumer-initiated arbitration claim or civil litigation which alleged that you were involved in one or more sales practice violations, and which:
(a) was settled for an amount of $15,000 or more, or;
(b) resulted in an arbitration award or civil judgment against any named respondent(s)/defendant(s), regardless of amount?
(5) Within the past twenty four (24) months, have you been the subject of an investment-related, consumer-initiated arbitration claim or civil litigation not otherwise reported under question 14I(4) above, which:
(a) alleged that you were involved in one or more sales practice violations and contained a claim for compensatory damages of $5,000 or more (if no damage amount is alleged, the arbitration claim or civil litigation must be reported unless the firm has made a good faith determination that the damages from the alleged conduct would be less than $5,000), or; (b) alleged that you were involved in forgery, theft, misappropriation or conversion of funds or securities?
In the Instructions guidelines for the Form U4, the following guidance is provided:
Questions 14I(4) or 14I(5) should be answered "yes" if the individual was not named as a respondent/defendant but (1) the Statement of Claim or Complaint specifically mentions the individual by name and alleges the individual was involved in one or more sales practice violations or (2) the Statement of Claim or Complaint does not mention the individual by name, but the firm has made a good faith determination that the sales practice violation(s) alleged involves one or more particular individuals.
How does all that get applied in a case such as Toth's - and perhaps one that you are facing or already part of? For starters, carefully note the language of Item 14I that asks:
Have you ever been the subject of an investment-related, consumer-initiated arbitration claim or civil litigation which alleged that you were involved in one or more sales practice violations, and which:
(a) was settled for an amount of $15,000 or more . . .
The key element in the equation is whether the claim or litigation settles for $15,000 or more -not whether "you" (the individual) settle. As such, if you were not named in the claim or litigation but your firm determined that you were "involved" andthe claim/litigation settled for $15,000 or more, then you will have a "YES" answer.
What if you don't personally pay a penny towards the settlement? Sorry, you still have a "YES."
What if the FINRA Arbitration Panel only awards $100 against a $10 million claim that didn't name you as a respondent but alleged that you were "involved" in the underlying matters? Sorry, you still have a "YES" because the outcome of the matter was an award against at least one named party, "regardless of amount."
What if it turns out that the customer's allegations were bogus but, nonetheless, suggested that you were "involved"? Sorry again - if the case settled over the threshold noted, then you still have a "YES" unless you obtain an expungement of the matter from your record.
If you are being represented by the member firm's legal counsel (either in-house or outside), always insist upon a clear disclosure from that lawyer as to whether you are being personally represented - and ask for a clear explanation as to the conflicts of interest in representing both you and the brokerage firm. Frankly, I'd get that in writing for my future protection. If nothing else, you may be quite surprised to learn about the limits of the nature of the representation being provided to you by the lawyer, who is also representing your former/current employer.
What if you want to sue a customer who didn't name you as a respondent but got you involved in a mess of an arbitration, replete with a "YES" answer on your once pristine Form U4? The firm's lawyer might inform you that you can't file a counterclaim because you are not a named party. Okay, how about if we file a separate claim in my name against the customer, you might ask. That could make the firm's lawyer uncomfortable - I'd have to check that with the General Counsel's Office. I don't know who will be paying for that. It could jeopardize the firm's chances of settling with the customer. If I were you, I'd focus on keeping a low profile and persuading the Panel to grant an expungement, there's not much chance of you winning damages against a customer who won a settlement from your firm. You might get those replies and more, and it doesn't matter whether you're an employee of Wells Fargo or Merrill Lynch, Morgan Stanley, JP Morgan, UBS, or any other major or minor brokerage firm on the Street. It still comes down to protecting your personal and professional reputation.
After some thirty years of handling these cases on both sides of the table, I know that, more often than not, it's best for the involved, unnamed individual broker to go with the flow, let the case settle, and, afterwards, seek an expungement. However, "more often than not" isn't "always," and some brokers unfairly caught up in the vortex of these cases might be entitled to an aggressive response that initiates litigation against the customer. When that consideration becomes a balancing act of what's best for the firm versus what's best for you, then you need to reevaluate the relationship between you and the firm's legal counsel. Similarly, trying to get a lawyer to take your case on a contingency when the public customer got a six-figure settlement (even if only a fraction of what was sought), might prove difficult if not impossible. How much are you willing to spend out of your own pocket? Regardless, ask questions, demand answers, and make sure that you understand the conflicts and your exposure.