Public Customer Wins Messy Private Placement Arbitration

May 16, 2013

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in November 2011, Claimant Process Engineering Services asserted breaches of contract and fiduciary duty, misrepresentation, and omission of fact in connection with its purchase of a private placement of Emerald Communications, Inc.  Claimant sought:
  • $25,000 in compensatory damages; 
  • $50,000 in punitive damages;
  • $22,221.11 in interest;
  • $1,250.00 in attorneys' fees; and
  • $975.00 in costs.
In the Matter of the FINRA Arbitration Between Process Engineering Services, Inc., Claimant, vs. Charles Morgan Securities, Inc., Respondent (FINRA Arbitration 11-04357, May 9, 2013).

Respondent Charles Morgan Securities generally denied the allegations and asserted various affirmative defenses.

The sole FINRA Arbitrator found Respondent Charles Morgan Securities liable and ordered the firm to  pay to Claimant:
  • $25,000 in compensatory damages ;
  • $12,084.00 in accrued interest; and
  • $225 in filing fees.
Bill Singer's Comment

Among the bread-and-butter items in the shopping cart of many public-customer-claimants' lawyers is the old standby lawsuit involving private placements.  This popular method of raising capital casts a wide net, which fills up with half-baked start-ups, dubious promoters, misrepresentations about upcoming IPOs, unsavory brokerage firms, pump-and-dump stock jockeys, and, also with many once-in-a-lifetime opportunities to get in on the ground floor, on the cheap for some developing companies that turn out to be stocks trading in the hundreds of dollars.  Frankly, private placements come as close to feast or famine as any investment on Wall Street.  Although I suspect that far more of these deals will break your heart (and your bank), there's always that lottery ticket that propels you to fortune.

This reported case struck me as an oddball simply because of the relatively small dollars in dispute.  Frankly, you just don't see that many FINRA arbitrations going to verdict when they involve not only a disputed private placement but also $25,000 in compensatory damages -- I mean, geez, it's got to cost a brokerage firm at least that much to merely retain respondent's legal counsel.  

Why this case didn't settle is one of those puzzles that we often are unable to figure out because we lack enough background to know what, if any, settlement offers were on the table, what the final dollars for settlement were, and whether there were other non-financial issues impeding an amicable resolution.  In the end, the claimant customer walks away with about $40,000 (versus the nearly $100,000 sought) and either had to pay legal fees or perhaps a 1/3 contingency fee.  The respondent brokerage firm gets a lot of unwanted publicity plus has to foot a legal bill and the award. From my perspective it's a boxing match with a lot of blows landed by both parties, each fighter is bloodied, and the customer likely gets the win on points.

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