Customer Settled Suitability and Churning Case But Stockbroker Wins Expungement

September 11, 2012

Giant Gavel

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in March 2011, public customer Ash alleged causes of action including fraud, negligence, suitability, and churning in connection with the handling of his margin accounts, and his investments in Citibank Preferred Stock and a high-income mutual fund.  Claimant Ash sought at least $250,000 in compensatory damages, costs, and fees. Jay E. Ash, Claimant, vs. Ronald Allen Lavo, Wells Fargo Advisors, LLC, and Merrill Lynch, Pierce, Fenner & Smith Incorporated,Respondents (FINRA Arbitration 11-00939, September 6, 2012).

Respondents generally denied the allegation and asserted various affirmative defenses.


On March 26, 2012, Claimant notified FINRA that the parties settled.

SIDE BAR: Online FINRA records as of September 11, 2012, disclosed that Lavo was first registered in the industry in 1986 with Merrill Lynch, Pierce Fenner & Smith, where he remained until 2008, at which time he joined Wachovia Securities (n/k/a Wells Fargo Advisors LLC). FINRA's  online record characterizes the disposition of the Ash arbitration as follows:



On July 31, 2012, Respondents Wells Fargo and Lavo filed an Unopposed Request for Expungement of Lavo's Central Registration Depository records  ("CRD"). During the expungement hearing, the FINRA Arbitration Panel considered:

  • the Client Profile signed by Claimant on August 6, 2008;
  • the activity in Claimant's account;
  • multiple letters to Claimant regarding the margin balance and interest rate;
  • a $12 million dollar judgment awarded to an LLC of which Claimant was a significant member;
  • Claimant's 2006-2008 tax returns;
  • Respondent Lavo's handwritten daily notes of March 5, 6, and 10, 2009; and
  • the Settlement and General Release Agreement.

SIDE BAR:  In considering the parties' settlement, the FINRA Arbitration Panel noted:

[T]he Panel opined that since the settlement was divided between two broker-dealers and was substantially less than Claimant's requested relief, it is quite possible or even probable that the settlement was of nuisance value and cost rather than an admission of liability.

Following the expungement hearing and its review of the cited materials, the FINRA Arbitration Panel recommended the expungement of the matter from Respondent Lavo's CRD and offered the following commentary:

a) It is false to say that Claimant was insufficiently diversified with only two positions in the portfolio. Claimant was in fact sufficiently diversified for a $300,000.00 portfolio with four bank preferred stocks and an income mutual fund which is, in and of itself, diversified over many issues, along with two growth stocks and these investments met client's stated objectives.

b) It is false for Claimant to state that he was excessively margined. Claimant was not excessively margined at 25-30% of equity considering the customer's stated liquid net worth. Margin accounts may borrow to 100% of equity. The problem is that the customer grossly exaggerated his income and net worth figures on which the broker relied in assessing the total picture. The macro picture which accounts for the extreme losses was the demise of Bear Stearns and Lehman Brothers, followed by AIG and a huge government rescue package to save the entire banking system.

c) The losses in the account could not have represented Mr. Ash's life savings given his signed statement of $1 million to $5 million in liquid net worth and settlement of a lawsuit which earned him $7 million, which Mr. Lavo believed would be paid imminently.

d) It is false to say that Mr. Lavo had a prior history of complaints regarding margin suitability. A review of Mr. Lavo's CRD Form U-4 reveals a clean record over many years as a broker. There was only one prior allegation, and the claim was dismissed with no award granted to Claimant.

e) It is false to say that Mr. Lavo churned the account for commissions when, in fact, very few trades were executed.

Based on Claimant's established pattern of exaggerating his income, net worth, and the significant cash settlement due from a judgment award, it was not possible for the broker to have a reliable picture of his client's true financial condition. This hindsight was known only after the fact.

Bill Singer's Comment

So, lemme see if I got this.

The public customer Claimant sought at least $250,000 in damages arising from, among other nastiness, negligence, fraud, unsuitability, and churning. Ultimately, over a year after having filed the Statement of Claim, Claimant settled for $38,750 -  about 15.5% of the low-end of the damages demanded.

Then there's the fact that the FINRA Arbitration Panel essentially eviscerated Claimant's claims and, to some extent, his integrity.  In recommending the expungement, the arbitrators ticked off their findings, among which were that:

  • Claimant's allegation of being insufficiently diversified is false;
  • Claimant's allegation of being excessively margined is false;
  • Claimant had "grossly exaggerated his income and net worth;" and
  • Claimant's allegation that Lavo had churned his account is false.

At this point, I and perhaps you can only wonder why Respondent Lavo didn't Counterclaim against Claimant Ash and seek damages.  Not having first-hand knowledge of the facts, I cannot fairly hazard a guess as to why the respondents in this arbitration paid any settlement to this pubic customer or why the individual stockbroker named in the case simply took the blows and opted for nothing more than expungement.  As I have often noted in such matters, it may well be that little stood to be gained by getting into the ring with the customer, there would be some risk to Lavo's reputation if the arbitrators rejected his claims, and, hell, it's the cost of doing business: You get sued by a customer, you cut your losses via a paltry settlement, and you move on with your life.  Those allowances aside, every so often a stockbroker needs to counterpunch and not be content to be a mere punching bag for a disgruntled customer.

As a lawyer who represents both industry and public customer clients, I also appreciate the other side of this equation.  The public customer may have had a case but with less than compelling facts.  That public customer may also have decided to only spend a certain amount to litigate or hired counsel on a contingency basis (and counsel may not have had a ton of confidence in the ultimate dollar value of the case - hence, the rationale behind a 15.5% settlement).  In this line of logic, the settlement constituted some admission of wrongdoing, even if only by the firms, and the "principle" of the customer's case was validated.

Again, to be clear, I lack the facts to say whether Ash or Lavo made the right call. When you sue for at least $250,000, taking a $38,750 settlement doesn't rise up to the level of a stunning victory; particularly so when the arbitrators hearing your case are dismissive of your conduct and allegations.  In the end, a fair inference drawn from the disposition of this arbitration is that Lavo emerged exonerated.  If that result satisfied him, so be it.