A FINRA JP Morgan Arbitration,Jamie Dimon's Embarrassment and Bill Singer's Apoplexy

July 21, 2017

BrokeAndBroker.com Blog publisher Bill Singer, Esq. lives and works in New York City. The Big Apple has become the Baked Apple the last few days as it is stewing in the midst of a heat wave. Bill doesn't like 90 degree weather. Frankly, Bill doesn't like a lot of things, as readers know from his daily jeremiads and rants. Imagine how cheerful Bill is today, a steamy, hot Friday in late July. Not exactly a picture conjuring the cheerful "Mr. Bubbles," the nickname many of Bill's friends give him. For the record, Bill doesn't have any friends just acquaintances, and he tends to unfriend or block most of them. 

Today's installment of "Dyspepsia with Bill" involves a recent FINRA arbitration that sort of looks like a loss for a former JP Morgan Securities employee except he won punitive damages. The FINRA Arbitration Decision also seems to make sense except when Bill puts it under his magnifying glass and notices lots of scratches, nicks, and shmutz (yeah, that's a word, look it up). Finally, Bill read, and re-read, and then re-re-read the arbitration panel's proposed revision of the employee's reason for termination. Bill was not a happy camper after that. If you plan on reading Bill's commentary, go find a pair of oven mitts before you put your hands on your computer keyboard, tablet, or smartphone.

Case In Point

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in January 2015 and as amended thereafter, associated person Claimant Valencia asserted Form U5 defamation; negligence; intentional interference with contractual relationships; breaches of contract and covenant of good faith and fair dealing; and unjust enrichment in connection with his alleged wrongful termination by Respondent J.P. Morgan Securities, LLC. Ultimately, Claimant sought $1,400,000 in compensatory damages plus attorneys' fees, costs, and an expungement of the defamatory language on his Form U5. In the Matter of the FINRA Arbitration Between Jose Anthony Valencia, Claimant, vs. J.P. Morgan Securities, LLC, Respondent (FINRA Arbitration 15-00186, July 12, 2017). 

Respondent JPMorgan generally denied the allegations. 


The FINRA Arbitration Panel denied Claimant Valencia's request for compensatory damages but found Respondent JP Morgan liable and ordered it to pay to Claimant $100,000 in "punitive damages for reckless disregard of the accuracy of Valencia's Form U5."

Although the Panel left unchanged the Form U5's "Reason for Termination," based on a finding of defamation, the arbitrators recommended the expungement of the "Termination Explanation" from Claimant's Form U5 with conforming changes to Question 4 of the Termination Disclosure Reporting Page. The Panel recommended that the explanation be revised to:
registered representative requested and received excessive and unreasonable bank account fee reversals.

Bill Singer's Comment

According to online FINRA BrokerCheck disclosures as of July 21, 2017, Valencia was first registered in 2005 and was registered with JP Morgan Securities from October 2012 to July 2014.

Reckless Disregard

As to this FINRA Arbitration Decision -- well, frankly, I'm not quite sure what to make of it. Moreover, I'm not even sure where to begin with my commentary. For lack of any explanation other than just picking any old place to start, let's tackle the arbitrators' finding that JP Morgan had engaged in "reckless disregard of the accuracy of Valencia's Form U4." 

As has been amply covered by the BrokeAndBroker.com Blog over many years, few regulatory issues attract more fines, suspensions, and bars by FINRA than those pertaining to a registered person's failure to accurately disclose events on his or her Form U4. Just by way of underscoring that point, consider all of the settlements and hearing decisions that we have analyzed involving an individual's failure to disclose (timely or at all) a criminal charge, a criminal conviction or plea, a bankruptcy, a lien, a compromise with creditors, a civil judgment, a customer complaint, an outside business activity, a private securities transaction . . . and that's merely touching on FINRA's ample checklist of things that the industry's men and women don't accurately disclose and for which they are censured, fined, suspended, or barred.

The nuclear option in FINRA's arsenal when it comes to punishing registered reps for failures to disclose is when the self-regulatory organization deems the misconduct to have been undertaken in a willful manner: Such a finding often results in the statutory disqualification of the respondent.  The rationale behind that ultimate sanction is that the regulatory community depends upon the accurate filing of various disclosures and any intentionally inaccurate filing could dangerously subvert the investigative process.  As far as rationales go, that one makes a lot of sense in theory. In practice, the rationale is often rank hypocrisy by which regulators destroy a man or woman's career while often looking askance when similar conduct is taken by larger broker-dealers. It's all part of the disparate treatment afforded to the small fry versus the big fish.

Keeping in mind that Valencia v. JP Morgan Securities is a FINRA arbitration and not a FINRA regulatory matter, we should still ask the tough questions and demand something more from FINRA the self-regulatory organization than the mere verisimilitude of integrity. I'm not quite sure where on the spectrum between "inadvertence" and "willful" FINRA-the-SRO would place the term "reckless disregard." Depending upon the judicial or regulatory setting, "reckless disregard" is sometimes deemed the same as or sometimes a shade less severe than "willful." In FINRA's lexicon, however, I note that many of its published settlements or decisions use the phrase "willful and reckless disregard," which strongly suggests that the self-regulatory organization views the two forms of misconduct as one and the same or intimately linked.

To best understand what's at stake here, consider how Valencia would have fared during a FINRA regulatory investigation if the regulator believed that he had "recklessly disregarded" the accuracy of his Form U4 and had failed to timely disclose or to ever disclose any number of events. My guess is that FINRA would have interpreted Valencia's conduct as warranting at least a charge of "willfulness" and would press its case on that point. Although "negligence" often engenders considerations of misunderstanding or inadvertence and would not necessarily rise to "willfulness," in contradistinction to mere negligence, when someone "recklessly disregards" a regulatory obligation, the implication is that they knew that there was an issue that might require disclosure but just didn't give a damn about it and didn't give a damn about the ramifications of such non-disclosure. Given those latter considerations, will FINRA investigate the alleged reckless disregard of JP Morgan's approach to at least one Form U5's accuracy -- and, you know, maybe see if this is an isolated, one-off thing or a more pervasive policy?

Punies But No Comps

Moving on to another aspect of this FINRA Arbitration Decision, how are we to reconcile Claimant Valencia's request for at least $1.4 million in damages with the arbitrators' denial of any compensatory damages but ordering a $100,000 punitive award? After some 32 years as an admitted lawyer, I can offer up a nuanced explanation of that oddball result. Yes, there are reasons for such an outcome; however, all the legalese in the world can't explain how or why the FINRA arbitrators denied compensatory damage but slapped the Respondent with a $100,000 punitive damages award for engaging in "reckless disregard" of an obligation to essentially be truthful when communicating with regulators. Seems to me, a FINRA Arbitration Panel should have ordered at least $1 in compensatory damages when awarding punies. The Valencia arbitrators may well have a sound basis for their unusual award notwithstanding the lack of rationale explaining it. I would have appreciated just a tad of explanation for this unusual dichotomy.

Ask And You Might Receive

Then there was the Panel's proposed revised language to the U5 that left my jaw agape, my eyebrows arched, and my head shaking in some disbelief. Three arbitrators awarded a respondent $100,000 in punies yet proposed the amendment -- an amendment, I say -- of his Form U5 to disclose that he had "requested and received excessive and unreasonable bank account fee reversals." Excessive and unreasonable. Notwithstanding the wad of punitive-damages cash in his pocket (minus likely attorneys' fees and attendant costs and expenses), Valencia could hardly walk away from this litigation feeling great about the Panel's proposed new language. At the end of the day, he initiated the lawsuit and his industry record will now be revised to assert that he asked for "excessive and unreasonable" fee reversals.

You know those moments in life when something seems to make sense but when you start giving it some thought and also try to explain it to someone, it doesn't? Welcome to one of those moments. 

Valencia asked for bank account fee reversals. Umm, whose account -- his or a customer's or what? Valencia received the reversals -- as in more than one request, and as in he "asked" someone and that second party was empowered to grant or den y request. How could there possibly be anything wrong with "asking" for something if it's not within your power to grant the request -- and assuming that you didn't misrepresent what you were asking for (and no such allegation was made by the arbitrators in Valencia)After all, isn't Wall Street about asking for the Sun and settling for the Moon? When FINRA engages in settlement discussions with its respondents, doesn't the self-regulatory Staff initiate discussions by demanding what many view as "excessive and unreasonable" fines, suspensions, or bars, only to subsequently accept a much lesser package of sanctions?

As best I understand the Panel's proposed Form U5 revised disclosure, it will state that Valencia was somehow terminated because he asked for excessive and unreasonable fee reversals. If those requests were both excessive and unreasonable, then why the hell did JP Morgan grant them and apparently on multiple occasions? Given that this huge FINRA member firm was found to have been "reckless" in its approach to the accuracy of regulatory disclosures by three independent arbitrators, why should we also not assume that it was reckless in considering Valencia's fee reversal requests and, as such, victimized the employee by falsely creating the impression that his requests were neither excessive nor unreasonable?

As was recently attributed the JP Morgan Chief Executive Officer Jamie Dimon, he said that

"It's almost an embarrassment being an American citizen ... and listening to the stupid shit we have to deal with in this country."

I agree with Dimon. Everyday we have to deal with far too much stupid shit coming out of Washington, D.C. As a staunch libertarian (with a small "l"), I am angered by the inept and inefficient regulation of Wall Street and place much of the blame on an entrenched, politicized superstructure that fouls up the ability of ethical and dedicated regulators and prosecutors to do their jobs fairly but effectively. If we could just get rid of the folks who got the job because of who they knew and not what they knew; if we could just retain the men and women who want careers in regulation and enforcement rather than those candy-assed idiots who spent a couple of years working for some Senator or Representative and were then forced down an agency's or department's throat (short circuiting the promotion of someone who deserved the job) . . . if . . . if . . . if . . .

I admire Dimon and his penchant for bluntness -- and I don't say that with any reservation or qualification. Some 20 years ago, I helped engineer the historic NASD Board contested election that defeated Dimon's nomination (See, "THE MARKETS; Two Independents Are Elected To Serve on N.A.S.D.'s Board" (New York Times, December 22, 1998). I still like the guy even though we've never met and he has no idea of who I am or that I even exist. Yeah, I know, I handle my fame with grace and humility. 

Dimon has made mistakes, as we all have. Frankly, Dimon should be careful what he wishes for because I believe that JP Morgan has benefited from an overly cozy relationship with politicians and compromised regulators and prosecutors.. In a less politicized criminal and regulatory system, someone might have put a few of JP Morgan's executives in prison, imposed more severe fines than were paid, and shuttered for painful periods of time the entire firm or key divisions. If Dimon thinks he's dealing with stupid shit at the lofty heights of the bridge at JP Morgan, he ought to dive into the depths where the industry's little folk and smaller firms swim and see what it's like from their perspective. Talk about snorkeling in a cesspool! Talk about dealing day to day with stupid shit and lacking the ability to write checks for this fine or that and have your public shareholders pay the freight.