August 17, 2018
The BrokeAndBroker.com Blog's publisher, Bill Singer, has long advocated for the creation of an Anti-Fraud Fund on Wall Street to serve as a back-stop for defrauded public investors who obtain awards of compensatory damages against insolvent industry firms and registered representatives. Bill does not favor extending such a guaranty into punitive damages or "unreasonable" attorneys' fee and other charges, but he does believe that the securities industry has the wherewithal and the moral/ethical obligation to put its money where its dirty mouth has been. While there may be legitimate debate as to how best to fund the anti-fraud fund, that only goes to the mechanics of doing the right thing. In the case of the Financial Industry Regulatory Authority, we have a self-regulatory-organization that needs to get behind this pro-consumer effort and with haste. Over the years, the BrokeAndBroker.com Blog has presented cases that question the fairness of FINRA's mandatory arbitration forum. Similarly, Bill Singer often criticizes FINRA for the regulator's inept and incompetent oversight of miscreants and recidivists. In today's featured FINRA public customer arbitration, we see the troubling history of two victims dealing with the FINRA community, and we are forced to ask whether their apparent arbitration "victory" is anything more than a sham. FINRA's regulatory mandate is set out in FINRA Rule 2010: Standards of Commercial Honor and Principles of Trade: "A member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade." Today's BrokeAndBroker.com Blog asks whether the self-regulatory-organization itself will observe high standards of commercial honor and just and equitable principles of trade when it comes to seeing that justice is done for defrauded public investors.
Case In Point
In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in February 2017, public-customer Claimants Patrick Shea and Mary Shea asserted churning; unsuitable investment recommendations; fraudulent trades in violation of FINRA Rules, state blue sky laws, and Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934; violation of FINRA Rules 2010, IM-2310-2, and 2020; and failure to supervise broker conduct. The causes of action related to Claimants' allegations that Respondents failed to supervise stockbroker (referenced in the Decision only as "JA"), who Claimants asserted excessively and unlawfully traded unspecified securities in their accounts. At the close of the hearing, Claimants requested $1,380,804.00 in compensatory damages $552,321.60 in attorneys' fees, forum fees, $44,450.00 in sanctions (already imposed in prior Orders entered by the Panel), and punitive damages of $4,142,412.00. Claimants waived their request for prejudgment interest on the record at the hearing. In the Matter of the FINRA Arbitration Between Patrick Shea and Mary Shea, Claimants, vs. Windsor Street Capital, LP and Bruce Meyers , Respondents (FINRA Arbitration 17-00360 / August 13, 2018)
Respondent Windsor and Respondent Meyers generally denied the allegations
made in the Statement of Claim and asserted various affirmative defenses.
November 2017: $5,000 Sanction
In November 2017, Claimants filed a Motion for Sanctions Against Respondent Windsor, and following argument during a pre-hearing conference, the Panel awarded $5,000.00 to be paid within five days.
March 2018: Moving On
In March 2018, Claimants filed a Second Motion for Sanctions against Windsor, and the Panel ordered the member firm to pay the previously-ordered $5,000.00
plus an additional $1,000 sanction within ten days; and, further, the Panel ordered that, should
Windsor fail to comply, an additional sanction of $100.00 per day
would be assessed until the total sum was paid. The Panel expressly reserved the
right to assess additional sanctions in the event Windsor's continued defiance.
In March 2018, Respondent Windsor filed a Motion to Postpone, which the Claimants opposed and further moved for additional sanctions. In April 2018, the Panel granted Windsor's Motion to Postpone, addressed rescheduling issues and also service issues regarding Respondent Meyer. The Panel further ordered that the previously ordered
sanctions be paid by May 1, 2018, including any additional $100.00 per day charges. Finally, the Panel awarded an additional $2,000.00 in sanctions against Windsor and cautioned the member firm regarding additional penalties for
failure to comply.
May/June 2018: Fourth Time No Charm
In May 2018, Claimants filed a fourth motion for sanctions, which the Panel granted in June 2018. Further, the Panel ordered Windsor to pay all sums due and owing its previous Orders within five days; and admonished that its failure to comply would result in additional sanctions of $15,000 plus $350.00 per day until all sums under all prior Orders were paid.
July 2018: Pre-Hearing Conference
Following further motion practice, at a telephonic pre-hearing conference in July 2018, attended by Claimants, Respondent Meyers, and non-party "JA" (but not Windsor), the Claimants requested that the evidentiary hearing be held telephonically and Respondent Meyers requested
adjournment of the evidentiary hearing. In its Order dated July 5, 2018, the Panel
- Windsor's Motion to Amend Answer to Include Third-Party Claim,
Motion to Dismiss,
- Claimants' Motion for Default Judgment Against Windsor,
(oral) Motion to Conduct the Hearing by Telephone, and
- Meyers' (oral) Motion to
Adjourn the Hearing.
At the evidentiary hearing, Claimants advised the Panel that they had
reached a settlement with Respondent Meyers.
The FINRA Arbitration Panel found Respondent Windsor liable and ordered it to pay to Claimants $1,380,804 in
compensatory damages with interest; $3,000,000 in punitive damages; $552,321.60 in attorneys' fees; $44,450 in sanctions, $425 in reimbursed Claimants' filing fees.
Bill Singer's Comment
As set forth under the heading "Introduction" in FINRA's National Adjudicatory Council's ("NAC's") Decision:
On September 7, 2017, Windsor Street Capital, L.P. (f/k/a Meyers Associates, L.P.) (the "Firm") filed a Membership Continuance Application ("MC-400A" or "the Application") with FINRA's Department of Registration and Disclosure ("RAD"). The Application requests that FINRA permit the Firm to continue its membership in FINRA notwithstanding its statutory disqualification . . .
After a careful review of the record, we find that the Firm has not met its burden of demonstrating that its continued membership in FINRA is in the public interest. Specifically, we find that the Firm: (1) has failed to comply with the terms of its disqualifying order; (2) failed to propose a meaningful plan to help ensure that it does not engage in misconduct going forward; (3) proposed inadequate principals and supervisors to oversee the Firm's future compliance with securities rules and regulations; and (4) has not demonstrated that it is able to comply with securities rules and regulations going forward. The Firm's continued participation in the securities industry presents an unreasonable risk of harm to the market and investors, and we therefore deny the Firm's Application.
In denying Windsor's request for a stay, the SEC set forth the following four-part test, which is deemed that Windsor had not satisfied [Ed: footnotes omitted]:
In deciding whether to grant a stay under Rule of Practice 401, the Commission considers: (i) the likelihood that the moving party will eventually succeed on the merits of the appeal; (ii) whether the moving party will suffer irreparable harm without a stay; (iii) whether another party will suffer substantial harm as a result of a stay; and (iv) the public interest. Because the first two factors are the most critical, an applicant's failure to demonstrate any likelihood of success or irreparable harm ordinarily will be dispositive."Indeed, recent decisions from the courts of appeals suggest that the failure to show a strong likelihood of success or irreparable harm eliminates the need to balance the other factors." And even under the view that a stay may be granted absent a showing of a strong likelihood of success, the movant must at least show that it has "raised a 'serious legal question' on the merits." The movant would also have to show "that the other factors weigh heavily in its favor."
FINRA expelled this firm from the securities industry in May 2018
Oddly, despite having expelled Windsor in May 2018, in August 2018, FINRA is still "suspending" the firm. I'm not quite sure how you suspend a firm after you expelled it but, hey, Wall Street's world of self-regulation is such a fun place. On page 28 of the August Disciplinary Actions
Firms Suspended for Failing to Pay Arbitration Awards Pursuant to FINRA Rule 9554
(The date the suspension began is listed after the entry. If the suspension has been lifted, the date follows the suspension date.)
Windsor Street Capital, LP fka Meyers Associates, L.P. (CRD #34171)
New York, New York
(June 4, 2018)
FINRA Case #2018058118001/ARB180010
https://www.sec.gov/litigation/apdocuments/3-18494-event-9.pdf , following the denial of the Stay by the SEC:
[W]indsor's FINRA membership was terminated by FINRA on May 29, 2018 and Windsor
has ceased its broker/dealer business.
In view of the foregoing, Windsor Street Capital, L.P. hereby withdraws its application to
the Commission for Review of the NAC Decision.
After a while, it all just gets silly. I mean, sure, FINRA and its Dispute Resolution business come off looking good here because a FINRA Arbitration Panel awarded to public customers some $5 million in damages, fees, and sanctions, but it all doesn't hold up under scrutiny. Not only should this arbitration be filed under beating a dead horse but the Panel's actions (or inactions) certainly warrant some criticism. I mean, c'mon already, how many goddamn warnings does a dying, wheezing, about-to-close FINRA member firm get before a FINRA Arbitration Panel is really, really, really going to draw a line in the sand and enforce it with some oomph?
The victimized public customers filed their FINRA Arbitration Statement of Claim in February 2017, which is now about a year and half ago. Starting in November 2017, the Claimants began a steady drum beat asking the FINRA arbitrators to do something -- as in "do" something -- about Respondent Windsor's alleged misconduct during the arbitration process. In response, the Panel issued sanctions. And then issued more sanctions with dollars-a-day add-ons. And the Panel admonished Windsor Street that "we're serious -- you better pay." And the Panel cautioned Windsor that "like what part of we're serious aren't you getting?" And the Panel warned Windsor that "like, seriously, aren't you getting our message about how you need to step up and get with the program here?" All of which comes off as tepid and farcical. Is this a tiger that's going to gum me to death?
In the end, yeah, sure, the public customer Claimants walk away with a huge win. Good luck getting paid. No . . . I am not suggesting that an earlier intervention by the FINRA Panel would have produced a substantially altered outcome. Respondent Windsor was likely not going to survive long as a FINRA member firm and might not emerge as a particularly productive subject for collection efforts. That being said, Claimants were ably represented by Adam Gana, Esq. of the law firm of Gana Weinstein LLP https://www.ganalawfirm.com/adam-gana.html, and I am certain that he will do all in his power to get whatever bucks can be squeezed out of Windsor's carcass, to the extent that there's even a drop left.