FINRA Arbitrators Dissolve RIA / BD Lacking Operating Agreement

April 24, 2018

I often urge clients contemplating a new business to first consider what I call the "Dreaded Ds," which are Death, Disability, Disqualification and Divorce. Those are uncomfortable issues to contemplate but you would be foolish to sign any agreement, enter into any lease, purchase any product or service without first asking yourself some very tough questions. What if you or your business partner drops dead? Did you arrange for Key Man or life insurance? Supposing that your partner is hospitalized and won't be able to get back to work for a month . . . or for several months . . . or will be rendered permanently disabled.  Do you have to continue to pay your partner a full draw or salary -- and what if the tables are turned? What happens if the continuation of the business is solely or largely dependent upon you? If you work on Wall Street and you are suspended or barred, what happens with the biz if you are temporarily or permanently disqualified? Even if the regulators allow you to retain some passive ownership interest, what if your partner says you have to cash out? Finally, if your marriage falls apart, will your spouse be entitled to a share of the business pursuant to a divorce decree? How's that gonna work out if the former spouse wants to come into the office but that prompts open warfare on the premises? Did you draw up a Shareholder Agreement/Buy-Sell Agreement? If not, how the hell do you think you're going to deal with the Dreaded Ds?

Today's Blog presents a fabulous FINRA arbitration that wrestles with the fallout when business associates shake hands and launch a new venture. The walls are painted. The signs hung. The furniture arranged. Everything goes wells until it doesn't. Sadly, you and your best pal (at the time you opened the doors) didn't think you had to put stuff in writing. What's the point? We've known each other for years. We're like brothers. We'll make it all up on the fly. You know that feeling when you hear the door lock behind you and realize that you left your keys inside? Imagine that moment and then, think about how relieved you are when you reach for your cellphone to call the locksmith. And, then, hold that thought because you also left the cellphone on the hallway table next to the keys. Hmmm . . . did you turn off the oven? Did you leave the water running in the sink? 

Case In Point

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in November 2016, Claimant Comyns asserted usurpation of corporate opportunity; breaches of fiduciary duties and of contract; interference with contractual relations; fraud; conversion; and accounting. In the Matter of the FINRA Arbitration Between Mark Gerard Comyns, Claimant, vs. David Louis Fitzgerald, Respondents (FINRA Arbitration 16-03482, April 19, 2018)

Respondent Fitzgerald generally denied the allegations, asserted various affirmative defenses, and filed a Counterclaim asserting dissolution; slander per se; usurpation of corporate opportunity/breach of fiduciary duty/waste; unjust enrichment; and invasion of privacy.

Given the complexity of the relief sought in this case, I'm going to let the FINRA Arbitration Decision speak for itself by reprinting the content under the heading "RELIEF REQUESTED":

In the Statement of Claim, Claimant requested that the Panel issue an order: awarding unspecified compensatory damages; imposing a constructive trust on all revenue from the Papa transaction clients; directing disgorgement of all profits from the Papa transaction; awarding 40% of all revenue from the clients purchased in the Papa transaction, past and future, less any adjustment for the financing; awarding the value of all lost profits from the interruption of Wharton's recruiting business; awarding damages for all revenue withheld; reimbursement of all added costs incurred by Claimant as a result of Respondent's actions; reimbursement of all other monetary damages incurred by Claimant as a result of Respondent's actions; directing Respondent to dissolve Blue Skies Financial, LLC and assigning the Papa Agreement to Wharton; enjoining Respondent from diverting business away from Wharton; enjoining Respondent from permitting any joint advisors to divert business away from Wharton; enjoining Respondent from continuing to serve as Branch Office Manager or Chief Compliance Officer of Wharton's OSJ; awarding punitive damages; awarding attorneys fees; awarding interest on all monetary awards at the rate of 6%; and any other damages as are deemed reasonable and just. 

In the Statement of Answer, Respondent requested dismissal of the Statement of Claim in its entirety. 

In the Counterclaim, Respondent requested the Panel order dissolution of Wharton Advisory Group, LLC; money damages including quantum meruit; costs; attorneys' fees; and such other relief that the Arbitrators find just and proper.

Claimant requested the Panel dismiss and deny Respondent's Counterclaim.


No, it's not you; it's the FINRA Arbitration Decision. All the references to Blue Skies Financial, Wharton Advisory Group, and the Papa Agreement are pretty much floating untethered to any prior explanation of who, what, when, where, or why. Notwithstanding, the FINRA Arbitration Panel found Respondent Fitzgerald liable to and ordered him to pay to Claimant Comyns: 
  • $88,794.25 representing the delayed payment of 2013 - 2018 commissions;
  • $19,698 representing an annual bonus for 2013 - 2017; and
  • $5,424.62 in interest on above two sums.
Further, the FINRA Arbitration Panel ordered that Wharton be dissolved subject to terms and conditions in the Award, and with the involvement of "Receiver" Thomas Giachetti, Esq. of the law firm of Stark & Stark (or his designee). The Receiver's powers are provided for under Pennsylvania law, including disposition of fees, rents, and profits. 

Although my first instinct was to paraphrase to Panel's award in terms of the Receiver's duties and powers, the published list is so detailed and comprehensive that I thought it best to reproduce paragraphs a. to s. below:

a. The Receiver is authorized to take charge and enter into possession of all of the property of Wharton, not the limited liability company owing the real property leased by Wharton.

b. The Receiver may appoint (only if he determines is needed) an agent to protect assets of Wharton. 

c. The Claimant and Respondent are to cooperate in requesting, collecting and receiving from the brokers, advisors, occupants, tenants, and licensees of Wharton, or other persons liable therefore all the advisory fees, rents and license fees now due and unpaid or hereafter that become due. If the Receiver finds that the Claimant and Respondent are not co-operating in a timely fashion, then the Receiver shall assume the aforementioned task. Moreover, the Claimant and Respondent, if they agree, or if the Claimant and Respondent disagree or fail to take timely action, the Receiver solely is authorized to institute and carry on all legal proceedings necessary for the protection of Wharton and apply to any court of competent jurisdiction to recover reasonable fees, rents and/or fees and to compel advisors, brokers, employees, tenants and occupants to cooperate with the Receiver, or for the removal of any tenants or licensees or other persons from premises leased by Wharton. 

d. The Claimant and Respondent, the brokers, advisors, tenants, licensees or other persons in possession of or use of Wharton assets are to cooperate with the Receiver and pay over to the Receiver all advisory fees (if any), rents, license fees, and other charges by Wharton now due or that may hereafter become due. Moreover, the Receiver, if he solely decides, may enjoin in writing the Claimant and Respondent and otherwise restrain them from collecting the advisory fees, rents, license fees and other charges of Wharton and from interfering in any manner with Wharton; and from transferring, removing or in any way disturbing any of the advisors, brokers, occupants or employees; and that all advisors, brokers, tenants, occupants, employees and licensees of Wharton and other, persons liable for the advisory fees, rents, and license fees be and are hereby enjoined and restrained from paying any rent or license fees or other charges for Wharton to the Claimant and Respondent, their agents, servants or attorneys as the Receiver solely states in writing with reasonable notice. 

e. Anybody in possession of Wharton's books and records, general ledgers, rent lists, orders, unexpired and expired leases, agreements, correspondence, notices and registration statements shall turn over same to said Receiver immediately upon written request by the Receiver and retain a copy for continuing recording and operation of Wharton until dissolution is completed. 

f. Notwithstanding anything to the contrary contained in this Award, the Receiver shall not, without prior order of a court of competent jurisdiction including prior notice to the parties, make improvements or substantial repairs to the property owned by Wharton in excess of $1,000.00. 

g. Receiver shall deposit all monies received by him/her at received in a bank/ financial institution (mutually decided by the Claimant and Respondent or failing a mutual decision, then by the Receiver) and no withdrawals shall be made except as directed by either a court of competent jurisdiction or on an electronic transfer or draft or check authorized/signed by the Receiver; the Receiver shall furnish the Claimant and Respondent with monthly statements of the receipts and expenditures of the receivership, together with a photocopy of the monthly statements received from the bank/financial institution designated above. 

h. Receiver is authorized from time to time to rent or lease any part of the premises where Wharton is located for terms not exceeding one (1) year or such longer terms as may be required, by relevant law; to keep Wharton's premises and RIA insured against loss (solely determined by the Receiver as to amounts and deductibles) including as a minimum, customary physical damage for the area including at least, fire; to pay the taxes, assessments, water and sewer fees, vault rents, salaries of employees, supplies and other charges; to comply with all the lawful requirements of any federal, state, or municipal department, or self-regulatory authority, or other authority of the federal, state, or municipality or self- regulatory authority where the RIA or its premises are situated; and to procure such liability and other insurance as may be reasonably necessary. 

i. Receiver is prohibited from incurring obligations in excess of the monies available to Wharton without further Order of a court of competent jurisdiction or written consent of the Claimant and Respondent.

j. The Claimant and Respondent shall retain their respective individual clients. Any clients considered to be shared, in part or wholly, by the Claimant and Respondent, shall freely chose in writing which Partner (Claimant or Respondent) that he/she wishes to be associated with, and noting that there may be no monetary reward to any client by any entity to gain favor in this decision. Also note, that neither partner shall owe the other partner compensation for said client or clients. Furthermore, all fees and commissions, earned prior to a shared client making this decision of which partner to associate with, which were historically split between the partners, shall be shared as in the past. Moreover, a partner, including his agent or employee or associate advisor, is prohibited from contacting the other partner's clients for a period of one year from the date of this Award.

k. After paying expenses for the management and care of Wharton, the Receiver shall distribute to the Partners, in equal portions, the balance of Wharton's personal property and of monies, both as the Receiver solely determines, at the completion of the dissolution or at times before the dissolution as the Receiver solely establishes. Any personal property owned by a partner, advisor or employee ("individuals") on the Wharton premises is unaffected by this Award. Any dispute as to what is personal property of Wharton and what is personal property of an individual shall be solely determined in writing by the Receiver.

l. The reasonable fees and costs of dissolving, including but not limited to a mutually agreed upon customary compensation for this task, shall be paid out of Wharton's assets. If Wharton's assets are insufficient to satisfy these obligations, then Claimant and Respondent shall equally bear these obligations. 

m. The Receiver, or any party hereto, may at any time, on proper notice to all parties who have appeared in this arbitration, apply to a court of competent jurisdiction for further or other instructions or powers necessary to enable said Receiver to properly fulfill his/her duties. 

n. If either partner causes the unnecessary delay in winding up the affairs of Wharton, then the other partner is entitled to $2,000.00 per every fraction of or whole calendar day of delay as a liquidated damage upon further application to or a court of competent jurisdiction. 

o. Notwithstanding the above, the Receiver has no authority to wind down the LPL Financial Office of Supervisory Jurisdiction that operates out of Wharton's physical offices. Any issues regarding that commission business are to be resolved solely by LPL Financial.

p. The Respondent and Claimant shall mutually cooperate and pursue the goal of completing all outstanding tax returns as quickly as possible. Any failure to do so may be corrected solely by the Receiver by hiring an account at the delinquent partner's expense to assist in this effort. Even if both partners are working diligently, the Receiver may engage an accountant(s) at Wharton's expense to facilitate filing tax returns. The partners shall sign all tax returns and/or documents for dissolution but not to preclude the Receiver from signing such documents as applicable law and regulation permit. 

q. Unless they both agree in writing, neither partner is permitted to use the name of 'Wharton (singularly or if a compound name includes 'Wharton' is accepted by the Pennsylvania Corporation Bureau) until Wharton is dissolved by all applicable federal and state and administrative organizations including but not limited to FINRA. 

r. Neither the Claimant nor the Respondent shall use for any client communications the Wharton telephone number(s) historically made known to any clients. This prohibition begins two business days from the date of this Award for the next 180 days absent a written mutual agreement of the partners. As soon as possible, the partners shall mutually agree, or the Receiver solely, shall engage for the next six months an answering service to answer the Wharton telephone numbers used for client communications. This answering service shall notify any prospective or established Wharton client of a new telephone number associated with each Wharton advisor. 

s. Wharton shall continue to pay its employees until the Partners mutually agree in writing to cease employment of one or all. If a Partner desires to pay an existing Wharton employee for his own direction, then this Award shall not interfere. If the Partners cannot agree on retaining an employee, then the Receiver shall solely decide to retain a Wharton employee. It is noted that junior licensed brokers work as contractors in spite of some individuals having fixed salary agreements with Wharton. Upon both Wharton ceasing to pay regular wages to its employee(s) and the affected employee(s) is not immediately employed by a Partner for his own direction, Wharton will pay the employee each a lump sum severance payment equal to four weeks of their straight base salary without benefits but with Medicare and social security contributions by Wharton. This severance payment shall be made to the affected employee within the next five business days of their receiving their last regular pay.

Bill Singer's Comment

That is an amazing bit of detail. Make sure that you take advantage of the arbitrators' prodigious effort and use the above paragraphs as a checklist for your own business relationships. If you have a partnership agreement in place, test it by working through a to s above. If you don't have a partnership agreement, use the above paragraphs as the basis for putting together answers for your lawyer.

I am a bit torn in my evaluation of the FINRA Arbitration Decision. On the one hand, it is virtually impossible to understand what the dispute between Comyns and Fitzgerald was about because of the lack of meaningful underlying facts presented in the published document. Yes . . . you may make some inferences or work with whatever implications you discern exist, but, at best, you're sort of playing a guessing game. That quibble being noted, the FINRA Arbitrators did a superb job in rendering their judgment and detailing a comprehensive award. To be fair to the arbitrators, the inquisitive nature of veteran industry practitioners such as me is difficult to satisfy. When I am confronted with a fascinating Award such as presented here, my curiosity gets the better of me. I want to know more, even though that "more" isn't always a necessary part of the arbitrators' role. Regardless, I still think it's important to ask questions and prompt FINRA to recognize when a given FINRA Arbitration Decision might have needed to offer up more background.

In my tireless pursuit of answers, I pursued the reference in the FINRA Arbitration Decision to "the withdrawal of a civil law suit filed by the Respondent against the Claimant in Delaware County, Pennsylvania Court of Common Pleas . . . " My reach search brought me to a list of pleadings, motions, and orders in David L. Fitzgerald v. The Wharton Advisory Group LLC and David Comyns (Court of Common Pleas, Delaware County, Pennsylvannia; 2012-CV-006627)

As set forth in Plaintiff Fitzgerald's Verified Complaint
Wharton was formed in 2000 as a Registered Investment Advisor ("RIA") by Plaintiff Fitzgerald, Defendant Comyns, and Daniel P. Quinn, each one-third partners. 
Wharton's office also served as a FINRA member firm (LPL Financial) Office of Supervisory Jurisdiction ("OSJ"). In August 2010, Quinn transferred his 1/3 interest in equal parts to Fitzgerald and Comyns, at which time he ceased further involvement with the RIA.

Plaintiff Fitzgerald allegedly served as Wharton's Chief Compliance Officer/President, and he acted as CCO for 15 years without compensation. Fitzgerald alleged;y served as the CCO and OSJ Registered/Managing Principal for the FINRA broker-dealer. Defendant Comyns was allegedly Wharton's Vice President.  

In 2014, Fitzgerald alleges that he created Blue Skies Financial with Ross Young in order to fund the purchase of Lou Papa's advisory book of business. Apparently, a dispute arose between Comyns and Fitzgerald as to how the override on the fees generated by this acquired business was to be computed and paid. Comyns felt he was being short-changed. Fitzgerald felt otherwise. The Verified Complaint asserts that Fitzgerald and Comyns operated independent investment advisory businesses and that there was no operating agreement governing their relationship or providing for the dissolution of Wharton, which purportedly served merely as "an umbrella for the sharing of certain employees, certain expenses and certain defined revenues in the nature of an 'Overide.'"

Unable to resolve their differences, Fitzgerald filed a lawsuit seeking the appointment of a liquidating trustee to dissolve The Wharton Advisory Group because Defendant Comyns allegedly made the continued existence and operation of the company unreasonable and impracticable. The Court dismissed the complaint and deemed that the dispute was subject to arbitration before FINRA. On appeal the ruling was sustained. READ the April 6, 2017, Appellate Decision