Broker Dealer Wins Indemnification Arbitration Against Stockbroker

February 27, 2018

Buried somewhere among the bundle of papers that you never really read when you joined your current firm is likely an Indemnification Agreement. I'm not going to attempt to explain all the variations that exist among such undertakings but suffice it to say that should your employer incur costs in defending you against lawsuits or reimburses a client for losses, you may get a demand to  indemnify your employer.  In today's Blog, we present a recent FINRA arbitration in which member FINRA firm Kovack Securities comes after a former employee for indemnification arising out of a settled customer arbitration. It's an unusual lawsuit because most of these matters either get resolved prior to the need for the employer to sue the employee, or the employer firm simply eats the charges as a cost of doing business. Whatever the circumstances between Kovack Securities and its employer, nothing got worked out between the employer and employee, and, alas, we wind up with a lawsuit and an arbitration hearing.

Case In Point

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in October 2017, Claimant Kovack Securities asserted breach of contract pursuant to an indemnification clause in its Representative Agreement executed by Respondent Milne, who represented himself pro se during the arbitration. Claimant Kovack Securities sought to be indemnified by Respondent for losses, expenses, costs and attorneys' fees in relation to settled FINRA Arbitration Case No.17-01079. Claimant sought $18,200.00 in compensatory damages for the settlement payment plus interest, attorneys' fees, and costs. In the Matter of the FINRA Arbitration Between Kovack Securities, Inc., Claimant, vs. Michael Corbett Milne, Respondent (FINRA Arbitration 17-02744, February 23, 2018).

The FINRA Arbitrator found Respondent Mlne liable to and ordered him to pay to Claimant Kovack Securiuties

  • $18,200.00 in compensatory damages plus interest until paid and
  • $500 reimbursement for Claimant's FINRA filing fee.

Bill Singer's Comment

Online FINRA BrokerCheck records as of February 27, 2018, disclose that Milne was first registered in 1989 and under the heading "Registration History" that Milne was registered with Raymond James Financial Services, Inc. from December 2006 to January 2011; with Brokersxpress LLC from February 2011 to November 2011; and with Kovack Securities Inc. from November 2011 to August 2015. 

Online FINRA BrokerCheck records disclose that FINRA member firms Optionsxpress, Inc. and Kovack Securities, Inc. reported receipt of a Statement of Claim in  FINRA Arbitration 17-011079 on May 12, 2017.  The customer sought damages of $50,000 based upon allegations of breaches of fiduciary duty and contract, negligence, common law fraud, negligent misrepresentation, unauthorized trading, and negligent supervision relation to Milne's trading of options and common stocks. The matter is reported as having settled on September 19, 2017, in the amount of $13,000 with no contribution from Milne.

The "Broker Statement" purported submitted by Milne to BrokerCheck states:

The allegation made against me I adamantly protest and find exception to. The documentation that was presented during the arbitration shows I was in frequent communication with the claimant both face to face and telephonically. The claimant was aware and involved in the investment choice, even her step-daughter who has investment knowledge was aware and did not discouraged [sic] her from the strategies that were being used. Also the trades made in her accounted [sic] were discounted and her risk tolerance in all these trades were taken in consideration and all trades were made with her authorization.

A settlement was reached in order to save on legal fees and t bring this matter to a close.

How does that $13,000 settlement become an $18,200 demand by Kovack Securities? That's not set forth in the arbitration against Milne but I'm guessing that the additional $5,200 is covered under the rubric of "plus interest, attorneys' fees, and costs."  If you find yourself on the receiving end of an employer's request for "contribution" towards a settlement, keep in mind that if you're subject to an Indemnification Agreement that your failure to cooperate in paying a settlement could result in your being on the hook for far more down the road.

Milne's BrokerCheck records show under the heading "Employment Separation After Allegations" that on January 25, 2011, he was "discharged" by Raymond James Financial Services, Inc. based upon allegations of "UNAUTHORIZED USE OF DISCRETION."

Under the BrokerCheck heading "Customer Dispute-Close-No Action /Withdrawn/Dismissed/Denied" there is one report by Raymond James concerning a March 2009 complaint that was denied by the firm in April 2009.

Under the BrokerCheck heading "Regulatory-Final," we find that Milne entered into a AWC settlement with FINRA date April 19, 2013, in which the regulator imposed a 15-business-days suspension and $5,000 fine. As set forth in the AWC's "Overview" section:

On November 11, 2010, Milne violated NASD Rule 2510(b) and FINRA Rule 2010 by exercising discretion in the accounts of approximately 87 customers, by selling out positions that they held in XYZ stock. Milne had previously discussed, with his customers who held XYZ shares, the strategy of selling this stock if a target price were reached or a downturn seemed likely, and generally obtained approval of this approach. However, Milne did not obtain written authorization from the customers or approval from his member firm to exercise discretion, and in most cases he did not contact customers before selling the stock.