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by Bill Singer

UPDATE: FINRA Arbitrators Award Punitive Damages For Fraud, Malice, And Bad Faith

July 30, 2014


In his Second Inaugural Address, President Abraham Lincoln famously said "With malice toward none, with charity for all."  In a recent FINRA arbitration, a group of arbitrators expanded upon that theme when they found that industry respondents had "engaged in fraud and malice in the bad faith manner in which they defrauded Claimant." Unlike Lincoln, there was little in the way of charity that emanated from the arbitration panel. 

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in December 2012, Claimant Negotiart of America asserted causes of action including breach of fiduciary duty and negligent supervision in connection with its investments in the common stocks of companies such as Assured Pharmacy, Aura Systems, and Digital Development Group. Claimant Negotiart of America sought at least $437,603.00 in compensatory damages, punitive damages, interest, fees, and costs. In the Matter of the FINRA Arbitration Between Negotiart of America, Inc., Claimant, vs. Ascendiant Capital Markets, LLC and Sean Anthony Spearman, Respondent (FINRA Arbitration 12-04191, February 6, 2014). 

Respondents generally denied the allegations and asserted various affirmative defenses. 

SIDE BAR: Sorry but that's about all I can relate to you from the FINRA Arbitration Decision. As is too often the case, it's pretty much a teaser when it comes to the underlying facts. As best we can tell, Claimant was unhappy about its investments -- to the tune of over $400,000 of unhappiness.  Sort of wish we had more to go on but that's what we get from FINRA these days in terms of arbitrations.

The FINRA Arbitration Panel found Respondents jointly and severally liable and ordered them to pay to Claimant:
  • $437,603.25 in compensatory damages with 10% per annum interest from December 7, 2012 to January 10, 2014; 
  • $10,000 in punitive damages;
  • $60,586.50 in attorneys' fees; 
  • $2,399.08 in costs; and 
  • $30 in FINRA filing fees.
Punitive Rationale

As to the $10,000 in joint/several punitive damages and sanctions, the FINRA Arbitration Decision offers the following explanation:

[T]he Panel finds, by clear and convincing evidence, that Sean Anthony Spearman, who at all times acted as a principal and representative of Ascendiant Capital Markets, LLC, and Ascendiant Capital Markets, LLC (i) committed acts of fraud and malice in their dealings with Claimant; and (ii) Sean Anthony Spearman was not truthful at the hearings and he and Ascendiant Capital Markets, LLC engaged in fraud and malice in the bad faith manner in which they defrauded Claimant and then tried to cover up that fraud by giving false testimony at the hearings. The Panel finds that Respondents' conduct is such that an award of sanctions and punitive damages should be made against them, jointly and severally, for the sake of example and to punish the Respondents for their  conduct. This part of the award is based upon California Civil Code Section 3294. 

Bill Singer's Comment

Ouch! That's pretty strong language from a FINRA Arbitration Panel and likely reflects the arbitrators anger.  Those folks didn't leave any room for doubt: They found that Respondent Spearman and Ascendiant Capital Markets had committed acts of fraud and malice. No mincing those words. Further, the arbitrators slammed Spearman as not being "truthful at the hearings." On top of that, the Panel concluded that the Respondents "tried to cover up that fraud by giving false testimony at the hearings." Small wonder that this Panel ordered punitive damages.  What I'm less clear about is whether the Panel referred this matter to FINRA for a regulatory investigation -- or whether FINRA will institute such an inquiry on its own.

Although I compliment this FINRA Arbitration Panel for explaining the basis for its award of punies, I wish that the FINRA Arbitration Decision had better explained the nature and extent of the underlying issues.  Ah, but that's what BrokeAndBroker is here for. We uncovered online FINRA regulatory records as of February 13, 2014, in which Acsendiant [sic] Capital Markets submitted to the self-regulatory organization the following statement about the genesis of the customer arbitration:

SOPHISTICATED INVESTOR CLAIMS 16 OF 30 TRADES CONDUCTED BETWEEN APRIL AND SEPTEMBER 2012 IN ONE ACCOUNT WERE UNAUTHORIZED DESPITE RECEIVING CONFIRMATIONS FOR ALL TRADES AND MONTHLY STATEMENTS SHOWING ALL ACCOUNT ACTIVITY. CUSTOMER ORIGINALLY DEMANDED REIMBURSEMENT FOR LOSSES RESULTING FROM THESE TRADES. ALTHOUGH DOZENS OF EMAILS AND PHONE CALLS WERE EXCHANGED WITH CUSTOMER DURING THIS PERIOD THERE WAS NO MENTION OF UNAUTHORIZED TRADING OR ANY IMPROPRIETY UNTIL RECEIVING WRITTEN COMPLAINT IN NOVEMBER 2012 FOLLOWED BY AN ARBITRATION FILING IN DECEMBER 2012.

The "Summary" of that same online disclosure record notes:

SPEARMAN (AND THE FIRM) FILED ANSWER TO THE ARBITRATION STATEMENT OF CLAIM AND DENY ALL ALLEGATIONS OF UNAUTHORIZED TRADES. CUSTOMER WAS IN CONSTANT CONTACT WITH SPEARMAN AND OTHERS AT THE FIRM WITHOUT MENTIONING ANY IMPROPRIETY UNTIL UP TO 6 MONTHS AFTER ALLEGED UNAUTHORIZED TRADES OCCURRED. CUSTOMER HAD PREVIOUSLY DEMANDED REIMBURSEMENT OF LOSSES ON THE TRANSACTIONS ALLEGED TO BE UNAUTHORIZED. ALL OTHER TRANSACTIONS IN THE ACCOUNT (WITH ONE EXCEPTION) WHICH THE CUSTOMER ACCEPTED AS ‘AUTHORIZED' WERE PROFITABLE.

In fairness to Respondent Ascendiant Capital Markets and Respondent Spearman, online FINRA records discloses that this arbitration is the only disclosure event on the member firm's record and one of only two on Spearman's record (the other pertains to a disputed IRS tax lien, which seems to have been resolved with he IRS agreeing to remove the lien).

UPDATE

As noted in the original blog of February 13, 2014, there were a number of aspects of this dispute that didn't quite sit well with me. For starters, there was no substantive statement of facts or background upon which to gauge the Panel's ruling -- particularly when there was such harsh language directed at Respondents, replete with the sanction of punitive damages. Moreover, as I also noted, both the firm and the individual respondent had fairly pristine records at the time of the decision -- admittedly, a clean record doesn't mean much these days BUT, as I would argue, such a circumstance should at least compel a more meaningful presentation of the facts in dispute in an arbitration that lambasted the purported malefactors and slapped them with a heavy financial package of damages, interest, fees, and costs. 

I was just advised today that on June 19, 2014, in Ascendiant Capital Markets, LLC. and Sean Anthony Spearman, Plaintiffs, v. Negotiart of America, Inc., Defendant (Superior Court for the State of California, Orange County, 30-2014-00709950, June 19, 2014),  the FINRA Arbitration Decision was vacated based upon a Stipulation between the parties, and the Court entered judgment in favor of Plaintiffs. As set forth in the Judgment, "Defendant Negotiart of America shall take nothing on the award. Each side to bear its own attorneys' fees and costs."

Why? Dunno? It's not set forth in the Court's Judgment.

All of which is the perfect imperfect ending to a perfectly imperfect FINRA arbitration!

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