FINRA Public Customer Arbitration Decision Becomes A Legend

August 23, 2017

For those of you who love mandatory customer and industry arbitration before the Financial Industry Regulatory Authority ("FINRA"), I am pleased to present today's analysis of a recent public-customer arbitration. Without question, this case presents FINRA arbitration in a very favorable and compelling light. Unlike many cases that fail to offer readers sufficient content and context so as to render them comprehensible, this decision speaks for itself. Speaks volumes about the benefits of alternative dispute resolution before FINRA. No question about it: I've been wrong in my criticism of forced arbitration. Wrong for years. Clearly, I've been confused and misguided. I'm sorry. I apologize. After you read today's Blog, I'm sure that you will recognize mandatory FINRA arbitration for what it is. Contrary to my years of doubts, you will be able to precisely explain why this particular panel of arbitrators ruled as they did. The facts compelled their award and you will be able to rub my nose in such an obvious outcome. More to the point, if anyone should ever ask you to explain this specific FINRA Arbitration Decision, you will being your answer with the preface that notwithstanding the erroneous views of that moron Bill Singer (what a jerk!), this is a slam-dunk of an arbitration replete with sufficient content and context so that anyone with half a brain (which I don't think that Singer fellow has) could tell you what happened here and why the arbitrators made their ruling

Case In Point

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in January 2017, public customer Claimant Kaplan asserted misrepresentations; suitability; nondisclosures; and failure to follow instructions.  As stated in the FINRA Arbitration Decision:

[C]laimant alleged that Respondent inappropriately recommended the purchase of, and failed to monitor, highly speculative securities for the account. Claimant further alleged that Respondent failed to follow his instructions to sell the securities. 

In the Matter of the FINRA Arbitration Between Harold Kaplan, Claimant, vs. Legend Securities, Inc., Respondent (FINRA Arbitration 17-00115, August 10, 2017).

Waving Bye-Bye

Respondent Legend failed to file an executed Submission Agreement but, nonetheless, the arbitrators determined that the firm was required to submit to arbitration and would be bound by their determination. As set forth in the FINRA Arbitration Decision:

On or about January 12, 2017, FINRA notified Claimant that records show that on December 8, 2016, Respondent filed an application to withdraw its registration with FINRA. Due to Respondent's membership status, Claimant was advised that he may, but is not required to, arbitrate this claim in FINRA's forum, even if Claimant previously signed a predispute arbitration agreement with Respondent to arbitrator the claim here. 

Ummm . . . let's see here . . . in January 2017, public customer Claimant Kaplan filed a lawsuit against a FINRA member firm that as of December 2016 had filed to withdraw its FINRA membership. Okay, so by the time Claimant had filed the Respondent was looking to exit the biz. Not a fact that's going to necessarily auger well for any recovery in the event that the FINRA arbitrators render an award of monetary damages against Legend, but, hey, there are reasons to pursue such a claim in any event.

Notably, the FINRA Arbitration Decision does not assert that the request for withdrawal had been granted as of January 12, 2017.
  • What exactly does the FINRA Arbitration Decision mean when it says that Claimant had been advised that due to Legend's "membership status," he was not required to submit to mandatory arbitration before FINRA's forum? 
  • What exactly was Legend's "membership status" other than that the member firm had requested the withdrawal of its FINRA registration? 
  • Until such time as FINRA grants the withdrawal, wouldn't Legend remain a  FINRA member firm? 
  • If Legend remained a FINRA member pending the regulator's approval of the withdrawal request, wouldn't the firm remain subject to mandatory arbitration? 
And puhlease!!!! I am a fervent opponent of mandatory FINRA arbitration - so don't confuse my above questions as indicating my approval of FINRA's arbitration forum.

Moving along, the Decision states that:

On or about March 31, 2017, FINRA notified Claimant that it has been unable to perfect service on Respondent and that this case will continue to be processed with or without the Statement of Answer of Respondent.

No Contest. No Response. No Problem

We are informed in the FINRA Arbitration Decision that around August 8, 2017, about four months after the March 31st notice from FINRA to Claimant that Claimant sent the following communication to FINRA:

This is to confirm that insofar as the allegations in my complaint against Legend have not been contested or responded to and my counsel is located in New York City, it is my intent to appear tomorrow to present the case and any evidence, along with my assistant [name omitted], who was a witness to the most relevant facts in the complaint. I am also an attorney licensed in both Illinois and New York.

Claimant is a lawyer and, as such, he is likely pursuing a strategy that he feels make legal sense in terms of winning his arbitration against Legend. Not set forth in the FINRA Arbitration Decision is that FINRA cancelled the member firm's registration on January 19, 2017 and, thereafter, expelled the firm for failure to pay fines and costs on April 17, 2017. 

Motion to Bar

According to the FINRA Arbitration Decision, Claimant appeared at a hearing, moved to bar Respondent Legend from presenting any defenses or facts pursuant to FINRA Rule 12308:

FINRA Rule 12308. Loss of Defenses Due to Untimely or Incomplete Answer

(a) If a party does not answer within the time period specified in the Code, the panel may, upon motion, bar that party from presenting any defenses or facts at the hearing, unless the time to answer was extended in accordance with the Code. The party may also be subject to default proceedings under Rule 12801, if the conditions of Rule 12801(a) apply.

(b) If a party answers a claim that alleges specific facts and contentions with a general denial, or fails to include defenses or relevant facts in its answer that were known to it at the time the answer was filed, the panel may bar that party from presenting the omitted defenses or facts at the hearing.

In a ruling that, frankly, I would consider a no-brainer given that Legend didn't file a Submission Agreement and didn't appear at the evidentiary hearing, the FINRA Arbitration Panel granted Claimant's Motion to Bar.

And Now A Word From Our Omniscient But Unseen Narrator
(The Affable Bill Singer, Esq.)

Having come to this point in my reading of the FINRA Arbitration Decision, I pretty much knew where this was going. No question about it. It was a given! The Panel will rule in Claimant's favor because the Respondent member firm is a dead duck in the water. Legend didn't file a Submission Agreement. Legend didn't show up at the evidentiary hearing. Legend was barred from presenting any defenses. The only thing left to do is get some shovels and toss the dirt onto Legend's coffin. 

Claimant says Legend's speculative stock recommendations were inappropriate and here's why. In response, Legend says:

Also, Claimant says Legend failed to monitor the speculative securities in his account  and here's why. In response, Legend says:

Finally Claimant says Legend didn't follow his sell instructions and here's why. In response, Legend says:


And so, in anticlimactic fashion, in presenting the obviously foregone conclusion, here's what the FINRA Arbitration Decision stated

After considering the pleadings, the testimony and evidence presented at the hearing,
the Panel has decided in full and final resolution of the issues submitted for
determination as follows:

1. Claimant's claims are denied in their entirety.
2. Other than forum fees, which are specified below, the parties shall each bear
their own costs and expenses incurred in this matter.
3. Any and all claims for relief not specifically addressed herein are denied. 

Bill Singer's Comment