An irreverent Wall Street Blog
by Bill Singer

Arbitrators Say Customer Was In Charge And Broker Just Took Orders

June 11, 2014

A lot of folks -- both customers and registered representative -- have opinions about just what constitutes "suitability." Opinions are wonderful things. Nice to have 'em. On the other hand, sometimes an opinion misses the mark. In today's BrokeAndBroker.com Blog we consider a FINRA Arbitration Decision that offers us a sparse fact pattern involving a $770,00 public customer's claim about a variable annuity policy and apparently a bit of a dispute about whether the investment was suitable.

Case In Point

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in May 2012, in connection with a dispute concerning a variable annuity policy, public customer Claimant Pritsker asserted causes of action for omission, breach of contract, breach of fiduciary duty, suitability, gross negligence, negligence, misrepresentation, and failure to supervise. Claimant sought $770,000 in compensatory damages, punitive damages, attorneys' fees, costs, and interest. In the Matter of the FINRA Arbitration Between Robert Pritsker, Claimant, vs. American General Equity Services Corp., and Manor House Capital LLC, Respondents (FINRA Arbitration 12-01702, May 29, 2014).

Respondents generally denied the allegations and asserted various affirmative defenses.

Not So Moving

At the conclusion of Claimant's case-in-chief on April 30, 2014, Respondents moved to dismiss, whichi the FINRA Arbitration Panel granted with leave to consider Respondent Manor House's request for an expungement on behalf of an unnamed party. Thereafter, on May 1, 2014, Claimant Pritsker filed a Motion for Directed Verdict, which the Panel subsequently denied.

Down And Out

The FINRA Arbitration Panel denied Claimant's claims and granted the requested unnamed party's expungement. In recommending the expungement, the Panel offered this rationale [The unnamed party's name appears in the Decision but has been REDACTED by BrokeAndBroker.com Blog]:

The Panel decided this application based on the proofs presented by the Claimant at the hearings. This evidence demonstrated that all the trades made by [REDACTED]  for the Claimant were initiated by the Claimant. No proof was presented that [REDACTED] had any influence or involvement in the Claimant's decision to make these trades. To the contrary, the evidence presented by the Claimant demonstrated that the Claimant had already determined what investments to make when he contacted [REDACTED] merely to place the orders.

Additionally, the Claimant presented no proof to support his claims of unsuitability or that [REDACTED] breached any fiduciary duty or made any misrepresentations to Claimant. No evidence was presented at the hearings that [REDACTED] violated any FINRA regulations or any state or federal statute or law.

Bill Singer's Comment

If the trades at issue were "initiated" by the Claimant, then I'm assuming that this Panel found no basis for any inappropriate recommendations or suitability.  Moreover, the Decision strongly asserts that most of the contested aspects of this account were best placed at the feet of the complaining public customer, who was found to have "determined what investments to make." At best, it appears that the registered person was a mere order taker.

As any veteran Wall Street lawyer will tell (and, yes, I am a veteran Wall Street lawyer, and, so, yes, I will tell you), the mere fact that a public customer wants to place an order doesn't relieve the stockbroker or the brokerage firm of any and all responsibility. In the evolving area of "economic suicide" cases, there is some consensus that you can't accept any order if you truly believe that it is not in the client's best interests and, worse, it may cause serious financial harm to the client. Of course, geez, have fun turning down such an order if the client is outraged and as a result of your substitution of your sense of what's best, he or she loses money when the failed buy order results in paying more to acquire the shares at another brokerage firm or a declined sell order results in getting less at another brokerage firm. 

Here's what FINRA's Rule 2111: Suitability actually says:

(a) A member or an associated person must have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the member or associated person to ascertain the customer's investment profile. A customer's investment profile includes, but is not limited to, the customer's age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information the customer may disclose to the member or associated person in connection with such recommendation.

(b) A member or associated person fulfills the customer-specific suitability obligation for an institutional account, as defined in Rule 4512(c), if (1) the member or associated person has a reasonable basis to believe that the institutional customer is capable of evaluating investment risks independently, both in general and with regard to particular transactions and investment strategies involving a security or securities and (2) the institutional customer affirmatively indicates that it is exercising independent judgment in evaluating the member's or associated person's recommendations. Where an institutional customer has delegated decisionmaking authority to an agent, such as an investment adviser or a bank trust department, these factors shall be applied to the agent.


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