Suitability Arbitration Raises Questions About FINRA AWC

May 13, 2013

In this FINRA arbitration, public customers were incensed over their inability to reach their stockbroker to discuss their unhappiness with what they deemed unsuitable mutual funds. A FINRA arbitrator seems to exonerate the respondent broker but it's not that simple. Not by a long shot -- particularly when the arbitrator admonishes the broker's characterization of his earlier regulatory settlement.

Unsuitable Funds?

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in July 2012, public customers Claimants Kelly and Pinsent asserted claims including unsuitability, excessive commissions, and negligence. Claimants sought $9,867 in compensatory damages, $131 in punitive damages, and $500 in costs and fees. In the Matter of the FINRA Arbitration Between Susan Kelly and Michael Pinsent, Claimants, vs. Robert Joseph Kennedy, III, Respondent (FINRA Arbitration 12-02685, May 7, 2013).

Respondent Kennedy appeared pro se.

The sole FINRA arbitrator denied all of Claimants' claims but required Respondent to reimburse Claimants $325 for FINRA filing fees.

I was puzzled as to how a Respondent prevails in an arbitration but gets hit for $325 in filing fees.  Up the the point in the Decision where the FINRA arbitrator revealed his ruling, there was virtually no explanation of the substance of the underlying dispute in this case; however, in a thoughtful explanation of his rationale, the arbitrator offered the following content and context:

1. Claimants did not meet their burden of proof that the realized losses they suffered were the result of Respondent's misconduct, despite my appreciation for Claimant Kelly's emotionally-charged complaint letter to Mr. Elkin of American Portfolio, which appeared to present inconsistent directions from her to Respondent.
2. The dichotomy in Claimant Kelly's directions was that, on the one hand, she said she was conservative and desired "to retain what we finally gained." Thereafter, she asked Respondent "to be moderately risky, hopefully to retrieve some of my lost money." Thereafter, she says she was "moderately conservative."
3. A review of the Statement of Claim, the Answer and the exhibits thereto compels me to conclude that Claimants were aware, from their investment experience, that equity investing comes with the risks of the market and that they were willing to take a degree of risk.
4. It does not appear that the mutual funds purchased by Respondent for Claimants were particularly risky and, as Respondent stated, had Claimants stayed in them and not sold them, they would have generated the profits they sought.
5. What troubles me about Respondent's submission is unrelated to Claimants' accounts but goes to a representation made at the outset of his Answer -"Literally, five years [after a customer arbitration], I attended a mediation hearing due to a rule violation that came from the initial 2007 arbitration case....Due to the mediation agreement, I accepted a temporary suspension to mitigate the legal costs involved with pursuing my case further."
6. In her Statement of Claim, Claimant Kelly relates, in detail, her fruitless and frustrating attempts to communicate with Respondent and other representatives during Respondent's unannounced "temporary suspension." In fact, that so called mediation agreement referred to by Respondent in his Answer was a FINRA Order Accepting Offer of Settlement, dated May 7, 2012 [Disciplinary Proceeding 200901069101], in which Respondent consented, without admitting or denying the allegations of the Department of Enforcement's Complaint, to the entry of findings and violations consistent with the allegations of the Complaint and the imposition of a two month suspension, the requirement to re-qualify as a  General Securities Representative and the payment of a $5,000 fine. That appears to be why Respondent was unavailable to respond to Claimant Kelly's inquiries. . .

Bill Singer's Comment

Whoa -- didn't see that comin'!  I'm not sure that the best way to present a FINRA Arbitration Decision is to back-load the document with the bulk of the meaningful facts after the arbitrator has rendered the ruling but, in this case, all's well that ends well.

What we learn in a non-linear fashion is that the Claimants' were apparently unhappy with Respondent Kennedy's purchase of certain mutual funds -- which the Claimants seem to have concluded were more risky than what they desired but the FINRA Arbitrator concluded were suitable. The arbitrator based, in part, his finding on the inconsistency of Claimant Kelly's various characterizations of her risk profile as "conservative," "moderately risky," and "moderately conservative." To the extent that Claimants sought to argue that they wanted risk-free investing, this arbitrator would have none of that and admonished that equity investing always entails some exposure to market risk. Finally, the arbitrator did not view the subject mutual funds as "risky" and noted that had the Claimants remained in their funds' positions, that they would have realized the profits that they had originally sought.

The Decision veers off the beaten track and offers a stunning disclosure of Respondent Kennedy's representations about his regulatory history. The FINRA arbitrator notes that what Respondent Kennedy had described as a "temporary suspension"arising from a mediation and mediation agreement was, in fact, a FINRA enforcement action that was settled pursuant to an Acceptance, Waiver and Consent ("AWC"). Pursuant to the terms of the AWC, Kelly was apparently suspended for two months, required to requalify as a General Securities Representative, and fined $5,000.  

SIDE BARPursuant to my own review of the cited AWC, I noted that FINRA alleged the following:

In connection with the sale of six deferred equity-indexed and fixed annuities, Robert Joseph Kennedy III obtained customers' signatures on sales application forms in the state of New York but falsely listed New Jersey on the forms as the state in which the documents were signed. Kennedy falsified the applications in this manner because the annuities in question could not be sold in the State of New York.

The arbitrator seems to have offered his findings about Respondent's AWC for two purposes. One, to explain why the Claimants were frustrated in their attempts to communicate with their stockbroker (apparently during the time of his suspension); and two, to express some annoyance with what we are likely asked to infer was Respondent's "spin" of his regulatory history as a less serious outcome of mediation.  It will be interesting to see what, if anything, FINRA the regulator does when it reviews this arbitration Decision.

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