An irreverent Wall Street Blog
by Bill Singer
by Bill Singer
Egregious Behavior Earns Stockbroker Punitive Damages
February 26, 2014
No -- this is not a typo: A FINRA Arbitration Panel awarded a public customer $10,000 in compensatory damages against his former stockbroker and also a whopping $250,000 in punitive damages. Now that I have your attention, take a few minutes to read about this fascinating case.
In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in February 2013, public customer Claimant Goldman alleged causes of action including breach of fiduciary duty, unsuitability, and fraud in connection with his investments in Wolf Creek Land Company, LLC and Wolf Creek Land Company II LLC. Claimant Goldman sought $175,000 in compensatory damages, $300,000 in punitive damages, attorneys' fees, interest, costs, and expenses. In the Matter of the FINRA Arbitration Between Greg Goldman, Claimant, vs. Transamerica Financial Advisors, Inc. and Charles B. Davis, Respondents (FINRA Arbitration 13-00438, February 18, 2014).
Respondent Transamerica Financial Advisors generally denied the allegations and asserted various affirmative defenses.
MIA
Respondent Davis did not file a Statement of Answer or sign a Submission Agreement; and he did not enter an appearance.
One Down
In January 2014, Claimant Goldman notified FINRA Dispute Resolution that he had settled with Respondent Transamerica and dismissed with prejudice his claims solely against that firm.
Egregious Behavior
The FINRA Arbitration Panel found Respondent Davis liable and ordered him to pay to Claimant Goldman $10,000.00 in compensatory damages; and, pursuant to Section 51-12-5.1 of the Official Code of Georgia Annotated, $250,000.00 in punitive damages. In setting forth the rationale for that stunning award of punitive damages, the FINRA Arbitration Decision states that:
The basis for the award of punitive damages is Respondent Davis' egregious behavior. Specifically the Panel found that Respondent Davis engaged in the following activities:a. Breach of fiduciary responsibility;b. Failure to disclose material facts of the investments;c. Material misrepresentation of investments;d. Conflict of interest;e. Self-dealing in putting his self-interest before client;f. Failure to cease and desist investment activity after being suspended as a licensed representative;g. Failure to abide by FINRA Rule 2010 Standards of Commercial Honor and Principles of Trade; andh. Refusal to acknowledge the authority of the financial industry's governing body and its representatives.
Bill Singer's Comment
Claimant Goldman sought $175,000 in damages, for which Respondent Transamerica apparently offered a settlement. What we don't know from the FINRA Arbitration Decision is the amount of Respondent Transamerica's settlement (Spoiler Alert: $95,000). Subtracting that settlement amount from the Claimant's demand, there is an $80,000 shortfall from the $175,000 sought.
Why did this FINRA Arbitration Panel slam Respondent Davis with $250,000 in punitive damages but only hit him with $10,000 in compensatory damages -- when it appears that there was room to award up to $80,000?. Was Claimant's calculation of damages erroneous? If Claimant's calculation was accurate, then how are we to reconcile the partial reimbursement of losses via compensatory damages with the awarding of $250,000 in punitive damages?
Let me be clear -- very clear -- I am NOT criticizing the award of punitive damages. Clearly, this Panel was outraged with Respondent Davis' conduct. As such, the quarter of a million dollar award is a loud and clear expression of the arbitrators' disgust with what they deemed Davis' "egregious conduct." As such, it is totally appropriate to award public customers punitive damages when a registered person's conduct is deemed so outrageous. In fact, such a sanction is commendable. Unfortunately, we just don't know the specifics of what the hell went on here in terms of the transactions in dispute or Davis' horrific conduct. We have conclusory assertions, for example, of a conflict of interest or a failure to disclose material facts, but the Decision is bereft of any details pertaining to those findings. Given the extraordinary remedy of a six-figure punitive damages award coupled with a mere $10,000 in compensatory damages, I think the Panel had some obligation to do a paint-by-numbers here rather than broad brushstrokes.
More Content And Context
According to online FINRA documents as of February 26, 2014, Respondent Transamerica discharged Respondent Davis on February 23, 2010, and settled this arbitration for $95,000. Online FINRA online disclosure by the firm explains that:
THE REPRESENTATIVE WAS TERMINATED FOR SELLING LIFE SETTLEMENTS AWAY FROM THE FIRM AND FOR PARTICIPATING IN UNAPPROVED OUTSIDE BUSINESS ACTIVITIES. TFA NOTIFIED ITS CLIENTS OF THE REPRESENTATIVES [sic] TERMINATION AND PARTICIPATION IN THESE ACTIVITIES. THIS CLIENT CONTACTED TFA PREVIOUSLY IN 2010 AND ADVISED THAT HE WAS COMFORTABLE WITH THE PURCHASE. IN ORDER TO AVOID A LENGTHY AND COSTLY ARBITRATION, TFA CHOSE TO SETTLE THE MATTER FOR $95,000 WITHOUT ADMITTING TO THE CLIENT'S ALLEGATIONS
FINRA AWC
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, Charles Barnett Davis, Jr. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Charles Barnett Davis, Jr., Respondent (AWC 201002153000, October 17, 2012).
Davis entered the securities industry in January 1972, and was associated with Transamerica Financial Advisors, Inc. from 1996 until February 22, 2010.
The AWC alleged that during the relevant period from February 2007 through February 2010, Davis was the Managing Member and registered agent for two limited liability companies that had been formed to pool investor funds and purchase unoccupied tracts of land in Georgia and North Carolina. Purportedly, each company had seven members, most of whom were Transamerica customers, and each company raised approximately $500,000 to purchase land with the intention of subsequently reselling it.
In addition to his roles as Managing Member/registered agent, Davis received the companies' bank statements, signed checks, and received yearly interest income. Further, "key-man" life insurance had been procured on Davis.
In alleged violation of NASD Rule 3030 and FINRA Rule 2010, Davis did not provide prompt written notice to Transamerica of his outside activities and inaccurately certified on three annual compliance questionnaires that he was not involved in any undisclosed outside business activities.
Although Transamerica had approved Davis to participate in the firm's life settlement program, such was conditioned upon the requirement that all registered persons obtain quotes for life settlements through the firm's designated list of approved companies. On May 13, 2009, Transamerica suspended Davis from participating in its life settlement program because he had obtained purchase quotes from a company not on the designated list. Despite this suspension, on the day after it went into effect, Davis violated the terms of the suspension with one customer (and then subsequently with four others) when he assisted five Transmerica customers to prepare their applications for purchase quotes and by placing the customers in direct contact with companies that purchase life insurance policies. The AWC deemed such conduct to constitute a further violation of FINRA Rule 2010.
In accordance with the terms of the AWC, FINRA imposed upon Davis a $5,000 fine and a four-month suspension from association with any FINRA member in all capacities.
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