FINRA Arbitrators Award Commission to Associated Person For Raising Capital for Customer

July 26, 2018

You enter into an agreement to do something. You think you did it. The other party to the agreement may think that you didn't. Such is the simple setting of the stage for a lawsuit. In today's Blog, we have a FINRA arbitration in which an associated person apparently believes that he raised money for a customer and is entitled to a commission in the form of cash and units. Since the matter is being litigated, the customer apparently saw things differently. The fascinating aspect of the dispute is that it presents us with the oddity of a FINRA arbitration in which an associated person is suing a customer -- as much a man bites dog story as exists on Wall Street. That being said, we're going to need a pooper-scooper by the time we've finished reading the FINRA Arbitration Decision. 

Case in Point

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in February 2017, associated person Claimant Wolf sued Respondent Omega Wireless, LLC, the latter party is characterized in the FINRA Arbitration Decision as a "customer." Claimant Wolf asserted breach of contract; promissory estoppel; and quasi-contract in what is described in the Decision as a dispute relating to:

compensation allegedly owed to Claimant pursuant to an agreement between the parties to raise capital in a Federal Communications Commission spectrum auction.

At the close of the FINRA arbitration hearing, Claimant Wolf sought $373,105.33 in damages; $60,406.70 in interest; $88.32 in daily interest after March 27, 2018; attorneys' fees; costs; and 7.73418025% of all of Respondent's "B Units."  In the Matter of the Arbitration Between Thomas Andrew Wolf, Claimant, v. Omega Wireless, LLC, Respondent  (FINRA Arbitration , 17-00336, July 19, 2018)

Respondent Omega Wireless, LLC generally denied the allegations and asserted various affirmative defenses. 

Court Order

On February 22, 2017, Claimant Wolf filed a copy of court order issued by the District Court, City and County of Denver, Colorado, which purportedly found that Respondent Omega Wireless, LLC is a "customer" and that Claimant is an "associated person" as those terms are used under FINRA Rules. In furtherance of the Court's Order, the parties are

obligated to pursue arbitration pursuant to Rule 12200 of the FINRA Manual and Rules. Accordingly, the Court also STAYS this action pending resolution of the arbitration.

SIDE BAR: FINRA Rule 12200: Arbitration Under an Arbitration Agreement or the Rules of FINRA

Parties must arbitrate a dispute under the Code if:
  • Arbitration under the Code is either:
(1) Required by a written agreement, or
(2) Requested by the customer;
  • The dispute is between a customer and a member or associated person of a member; and
  • The dispute arises in connection with the business activities of the member or the associated person, except disputes involving the insurance business activities of a member that is also an insurance company.

To "B" or Not to "B"

In May and June 2018, considered various submissions and evidence from the parties concerning aspects of the issuance of Respondent's "B Units." As set forth in part in the FINRA Arbitration Decision:

[P]ertinently, Respondent advised that the relevant "B Units" are "B-4 Units" which are reserved in the event the Panel determines that Claimant is entitled to a commission for the investment by his client ("Company CS") in Respondent. 
. . .

On July 3, 2018, Respondent filed a further response to the Panel's June 14, 2018 Order which, among other things, reiterated its belief that the appropriate method to compensate Claimant is to order the issuance of "B-4 Units" relating to Company CS's investment in Respondent.


The FINRA Arbitration Panel found Respondent Omega Wireless LLC liable and ordered it to pay to Claimant Wolf  $116,503.95 in compensatory damages plus 8% per annum interest until paid. Further, the Panel ordered Respondent to:

issue to Claimant all "B-4 Units" attributable to Claimant's commission for Company CS's investment in Respondent, no later than 30 days from the date of service of this Award. 

Bill Singer's Comment

What caught my eye about this FINRA arbitration was that it involved the oddity of an associated person suing a customer. As it turns out, the key definition of whether Omega Wireless LLC was a "customer" for purposes of FINRA arbitration jurisdiction had to be decided by a Colorado state court. For those of you who would like to play the home version of Blog, consider this absurd bit of rulemaking that reposes on FINRA's Rulebook: 
FINRA Rule 0160: Definitions

(a) The terms used in the Rules, if defined in the FINRA By-Laws, shall have the meaning as defined in the FINRA By-Laws, unless a term is defined differently in a Rule, or unless the context of the term within a Rule requires a different meaning.

(b) When used in the Rules, unless the context otherwise requires:
. . .

(4) "Customer" 
The term "customer" shall not include a broker or dealer.

Yeah, sure, that's helpful. We start with a fairly useless -- many would say asinine -- definition of "customer" that suggests that a customer is everything and anything in the universe with the exception of a "broker or dealer." So Sponge Bob could be a customer?  

Going from the sublime to the ridiculous, we are then asked to define "Associated Person" pursuant to an NASD Rule -- that from a self-regulatory-organization that went out of business in July 2007! NASD hasn't existed for 11 years but FINRA is still using its predecessor's definitions for some of the most critical jurisdictional issues.

NASD Rule 1011: Definitions

Unless otherwise provided, terms used in the Rule 1010 Series shall have the meaning as defined in Rule 0120.
. . .

(b) "Associated Person"
The term "Associated Person" means: (1) a natural person registered under NASD Rules; or (2) a sole proprietor, or any partner, officer, director, branch manager of the Applicant, or any person occupying a similar status or performing similar functions; (3) any company, government or political subdivision or agency or instrumentality of a government controlled by or controlling the Applicant; (4) any employee of the Applicant, except any person whose functions are solely clerical or ministerial; (5) any person directly or indirectly controlling the Applicant whether or not such person is registered or exempt from registration under the FINRA By-Laws or NASD Rules; (6) any person engaged in investment banking or securities business controlled directly or indirectly by the Applicant whether such person is registered or exempt from registration under the FINRA By-Laws or NASD Rules; or (7) any person who will be or is anticipated to be a person described in (1) through (6) above.

We got a  Sponge Bob rule and a definition from a regulator that went out of business 11 years ago. No wonder a court was required to determine whether the Wolf was an "associated person' and Omega Wireless a "customer" before a FINRA arbitration could proceed. Unfortunately, the FINRA Arbitration Decision doesn't explain what the Colorado court considered and, worse, fails to even provide a citation or link to that important threshold Order.

Making matters worse, the dispute between Wolf and the purported customer seems to have involved an interesting issue, and one that is likely to recur. As best I understand the FINRA Arbitration Decision, Wolf was retained by Omega Wireless to raise capital, which he apparently did. As compensation for his efforts, Omega Wireless was supposed to pay him a cash fee (perhaps) and/or convey to him 7.73418025% of B Units., which was either a firm percentage that had been agreed to or was a percentage derived from some proposed calculation. In any event, the FINRA Arbitration Panel awarded Wolf $116,503.95 in compensatory damages plus interest and B-4 Units. Sadly, we are not informed as to why the arbitrators awarded less than half of the monetary damages sought by Wolf and are not offered an explanation as to what was involved in awarding the B-4 Units. My comment is not intended to dispute the Award but merely to note that it lacks content and context to render it meaningful. Given the rarity of an associated person suing a customer, and the even more rare result of that associated person receiving an Award, the FINRA Arbitration Decision should have been mindful of those unique factors and provided a more extensive fact pattern and rationale. Ultimately, I blame FINRA for not implementing sufficient quality control over its published decisions. 

For a more expansive discussion of the definition of "customer" for FINRA arbitrations, read: "Who Is A Customer For Purposes Of FINRA Arbitration Rule 12200" ( Blog, Guest Blog by Martin P. Unger, Partner, Wexler Burkhart Hirschberg & Unger, LLP / September 16, 2016)