Broker Dealer President And Chief Compliance Officer Sued By Firm

February 26, 2013

A picture taken on February 8, 2011 in Rennes,...

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in September 2011, and amended thereafter, Claimant Newport Coast Securities alleged that Respondent Scott had failed to properly perform her duties; engaged in conduct infractions; and violated policies and procedures during her employment as the firm's President and Chief Compliance Officer (and at times subsequent).  According to online FINRA records as of February 26, 2013, Scott was first registered in 1993 and appears to have been employed by Claimant Newport Coast from December 2007 to August 2011.

Claimant Newport Coast sought at least $600,000 as anticipated compensation for what the FINRA member firm characterized as monetary sanctions likely to be imposed by FINRA against the firm for conduct attendant to Scott's alleged failure to supervise and discharge her compliance responsibilities during her tenure.  Further, Claimant sought $250,000 in punitive damages. In the Matter of the FINRA Arbitration Between Newport Coast Securities, Inc.,Claimant/Counter-Respondent, vs. Deborah Ann Scott, Respondent/Counter-Claimant/Third Party Claimant; and  Joseph Mangiapane, Jr., Kathleen Margaret McPherson, and Stephen Paul Washburn, Third Partv Respondents(FINRA Arbitration 11-03419, February 22, 2013).

I Call Ya And Raise!

Respondent Scott generally denied the allegations; asserted various affirmative defenses; and filed aCounterclaim and Third-Party Claim in which she asserted:

  • wrongful termination in violation of public policy;
  • fraud;
  • negligent misrepresentation;
  • conspiracy to retaliate and wrongfully terminate;
  • breach of contract;
  • defamation, including libel per se;
  • breach of the implied covenant of good faith and fair dealing;
  • unlawful age discrimination; and
  • negligence.

Ultimately, Respondent Scott sought at least: compensatory damages inclusive of her lost income since the allegedly wrongful termination with 10% interest; $1 million in punitive damages; attorneys' fees; costs; forum fees; and an expungement of the sentence on her Uniform Termination Notice For Securities Industry Registration ("Form U5″), which purportedly stated that:

Ms. Scott failed to adequately perform her compliance monitoring responsibilities thereby exposing the firm to significant risk.

One Day In May

On May 23, 2012, Newport Coast dismissed its claims against Scott.


The FINRA Arbitration Panel found Newport Coast, Mangiapane, McPherson, and Washburn jointly and severally liable and ordered them to pay to Respondent Scott:

  • $300,000.00 in compensatory damages;
  • $125,863.06 in attorneys' fees; and
  • 10% per annum interest on the sum of $425,863.06 until paid in full.

Also, the the Panel recommended the expungement of the Termination Explanation in Section 3 of Scott's Form U5 as filed on August 26, 2011, because of a finding that the language was defamatory. In addition to the explanation remaining blank, the Panel recommended that  The Reason for Termination  remain as "voluntary."

Regarding Scott's statutory claims of wrongful termination and constructive termination, the Panel found liability on the part of Newport Coast Respondents; however, the arbitrators noted that the Award took into account Scott's failure to mitigate her damages.

Bill Singers Comment

Frankly, an intriguing case and one in which you have to ask what the Claimant member firm was thinking when it filed. I do not raise that question necessarily as a criticism of the strategy but as a sincere expression of curiosity.

At the time of the filing of the claim, it appears that Claimant Newport was embroiled in a FINRA regulatory investigation and contemplated a "likely" $600,000 fine - which the firm apparently blamed Respondent Scott for.  Nonetheless, it's sort of an iffy proposition to seek damages for a "likely" fine in the absence of proof that any fine or a fine of a specific amount will be imposed.  Given that threshold damages issue, the strategy here might simply have been to get a placeholder of an arbitration case filed so that by the time the anticipated FINRA fine was imposed, you could amend the pleading to reflect that actual fine.  An interesting bit of jockeying here as the race was underway.

All of which might have you scratching your head as to Claimant Newport's seemingly inexplicable withdrawal of its claims against Respondent Scott on May 23, 2012.  I too couldn't figure out what the hell prompted that dramatic about-face; however, as noted below, I may be able to offer a plausible explanation.

In the end, the outcome here seems a win for Respondent Scott - over $400,000 in damages and an expungement.  As such, an interesting case study as to the ramifications of starting a litigation that you may not ultimately want to finish.

As to the May 23rd withdrawal of claims by Claimant Newport, here's what I think may shed some light on that development:

SIDE BAR: For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Newport Coast Securities, Inc submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Newport Coast Securities, Inc,Respondent (AWC 2009017333501, May 22, 2012).

The AWC characterized FINRA member firm Newport Coast  as having changed its name in 1986 from that of Grant Bettingen, Inc. During the period under review in the AWC ( January 1, 2008 through December 31, 2010), the firm had about 58 branch offices and some 151 registered representatives (and those numbers were respectively reduced by the time of the AWC to about 61 offices and 146 reps). During the review period, the majority of the Firm's revenue was derived from the retailing of corporate equity securities.

The AWC alleged that during the review period, Newport Coast failed to establish and implement policies and procedures that could be reasonably expected to detect and cause the reporting of suspicious transactions and, as a result, failed to file suspicious activity reports, as appropriate, in contravention of NASD Rule 3011(a) and FINRA Rule 3310(a). Moreover, the Firm failed to establish and implement controls reasonably designed to achieve compliance with the Bank Secrecy Act, in violation of NASD Rule 3011(b) and FINRA Rule 3310(b). In conducting its business in this manner, the firm failed to observe the high standards of commercial honor and just and equitable principles of trade required by NASD Conduct Rule 2110 and FINRA Rule 2010.

In accordance with the terms of the AWC, FINRA imposed upon Newport Coast a Censure; $100,000 fine, and an undertaking that the Firm's President shall certify within 60 days of the effective date of this AWC, that the Firm is in compliance with FINRA Rule 3310 by establishing and implementing AML policies, procedures, and internal controls with respect to its monitoring for suspicious transactions that are reasonably designed to achieve compliance with the requirements of the Bank Secrecy Act and the Treasury's implementing regulations.

As of February 26, 2013, online FINRA records do not reflect any regulatory charges having been filed against Respondent Scott or the existence of any AWC, Offer of Settlement, or disciplinary hearing. Scott is indicated as not having been registered with a FINRA member firm since August 2011.

Assuming that Claimant Newport Coast's assertion in its Arbitration Statement of Claim was made in good faith, the FINRA member firm was apparently expecting to get walloped with something like a $600,000 FINRA regulatory fine. For whatever reason, FINRA settled for one-sixth of the "likely" fine and perhaps that took the wind out of Newport's sails - unfortunately, having started the arbitration, the Claimant now found that the Respondent had become a Counter-Claimant with no desire to reciprocate with a similar withdrawal of her claims.  It's noteworthy that the AWC is dated May 22, 2012, which is one day before the May 23rd withdrawal of the Arbitration claim by Claimant Newport Coast.