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Scottsdale Sues Rep For Contacting FINRA But FINRA Bars Him For Not Testifying Against Firm
December 26, 2018
If you look it up, you will learn that there is -- purportedly -- only about three tablespoons of liquid in a typical egg. One of the great mysteries of the universe is displayed when you drop an egg on your kitchen floor. As you start to clean up the mess, you use one paper towel, then a few damp paper towels, and then you get a mop. Three tablespoons of liquid in an egg? No way!! The contents of a broken egg expand to flood any space with immeasurable quantities of goop. In today's FINRA arbitration, we have the lawsuit/regulatory equivalent of an unending mess that flows from inside a fairly small (egg-like) dispute. We start off with an arbitration complaint filed by FINRA member firm Scottsdale Capital Advisors against a former registered representative. It leads to six-figures in compensatory and punitive damages plus costs and fees. As we pick up the bits and pieces of shell from the arbitration, we need to get a mop and a bucket as we come upon one hell of a battle royale between FINRA and Scottsdale, which has expanded to include a missing witness, a FINRA Bar, and an SEC appeal.
Case In Point
In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in July 2017, FINRA member firm Claimant Scottsdale Capital asserted:
Breach of Written Contract; Breach of Implied Covenant of Good Faith and Fair Dealing; Violation of Arizona Uniform Trade Secrets Act; Common Law Misappropriation of Confidential Information. The causes of action relate to Respondent allegedly divulging confidential information about Claimant, and allegedly making false and defamatory statements of and concerning Claimant to the Financial Industry Regulatory Authority ("FINRA") and the financial press.
Claimant sought at least $100,000 in compensatory damages, interest, and costs. In the Matter of the FINRA Arbitration Between Scottsdale Capital Advisors Corp, Claimant, vs. Eric Joseph Miller, Respondent (FINRA Arbitration 16-02576, December 20, 2018).
Respondent Miller appearing pro se generally denied the allegations and asserted various affirmative response; however, he did not appear at the evidentiary hearing.
Award
The FINRA Arbitration Panel found Respondent Miller liable and ordered him to pay to Claimant Scottsdale:
- $61,000.00 in compensatory damages;
- $122,000.00 in punitive damages
- $179,986.25 in attorneys' fees; and
- $7,897.25 in costs.
Arbitrators' Findings
The Panel published the following "Findings" for its Award:
Claimant asserts that Respondent sought to destroy its business by: (1) violating his confidentiality obligations under his nondisclosure agreement, and statutory and common law, by initiating, directing, and encouraging an investigation of its practices by FINRA; (2) speaking with a reporter of an industry publication causing business opportunity to be abandoned and a loss of revenue, and; (3) disclosing confidential client information to a third party in order to obtain employment. Claimant further asserts that Respondent is not entitled to protection as a whistleblower.The Panel determines that Respondent had a reasonable good faith belief that Claimant's activities were such that FINRA should investigate Claimant. While Respondent took great pleasure in the FINRA inquiry and encouraged FINRA to take certain actions causing disruption to Claimant's operations during the investigation, Respondent's actions were not such that would cause the Panel to hold that Respondent was not entitled to be characterized as a whistleblower.The temporal relationship between the publication of articles in the industry publication was not such to establish a cause and effect relationship between such publications and either Claimant's loss of revenue or abandonment of the Wilson-Davis acquisition deal.Respondent improperly provided to an outside entity confidential information about Claimant's customers in order to obtain employment with the outside entity. These actions were in violation of Respondent's contractual, statutory and common law obligations to Claimant and resulted in specific damage to Claimant. In addition, Respondent's actions constitute a willful and malicious misappropriation of confidential and trade secret information such that Claimant is entitled punitive damages under the Arizona Trade Secret Act A.R.S. section 44-403. Claimant is entitled to recover its compensatory damages, attorneys' fees, costs and punitive damages as determined by the Panel.
Bill Singer's Comment
Truly one of the more fascinating intra-industry disputes that I've come across.
Three Prongs
Scottsdale argued that Miller sought to "destroy" its business by:
(1) violating his confidentiality obligations under his nondisclosure agreement, and statutory and common law, by initiating, directing, and encouraging an investigation of its practices by FINRA; (2) speaking with a reporter of an industry publication causing business opportunity to be abandoned and a loss of revenue, and; (3) disclosing confidential client information to a third party in order to obtain employment. Claimant further asserts that Respondent is not entitled to protection as a whistleblower.
In parsing through those allegations, we should note that they raise three distinct issues. First, that Respondent Miller violated his nondisclosure agreement ("NDA") by "initiating, directing, and encouraging an investigation of its practices by FINRA." The FINRA Arbitration Panel offers no explanation as to the nature of Miller's allegations about Scottsdale to FINRA beyond the telltale reference in the FINRA Arbitration Decision to "Claimant's loss of revenue or abandonment of the Wilson-Davis acquisition deal." These FINRA-communication allegations raise whistleblower protection/anti-retaliation concerns, which Scottsdale appears to accept because it argued that Miller was not entitled to whistleblower protection. The Panel's somewhat obtuse, double-negative finding that "Respondent's actions were not such that would cause the Panel to hold that Respondent was not entitled to be characterized as a whistleblower," appears to reject Scottsdale's assertion and imbues Miller with at least a grudging concession that he may be a whistleblower and, as such, protected under federal law. FINRA and other Wall Street regulators may want to consider just what Scottsdale's NDA did and didn't say on the issue of "initiating, directing, and encouraging an investigation of its practices by FINRA."
Second, Claimant Scottsdale argued that Miller had improperly communicated with the press, and that the press published articles that caused the firm to suffer a "loss of revenue or the abandonment of the Wilson-Davis acquisition deal." The arbitrators referred to the "temporal relationship" between the publication of the articles and their argued impact, and essentially found that if there was a loss of revenue or a deal, that there were more substantive causes at play than the mere publication of articles in an industry publication.
The FINRA arbitrators were not persuaded that Respondent Miller had engaged in any misconduct vis-a-vis his communication with FINRA, and there does not appear to be any finding to the contrary. Ultimately, what caused the FINRA Arbitration Panel to sanction Respondent Miller was the arbitrators' finding that he had:
Having largely discounted Claimant Scottsdale's allegations about wrongful communications with FINRA and the press, the arbitrators were clearly angered by Respondent Miller's communications with a potential employer -- pointedly, the arbitrators found Miller's conduct to be a "willful and malicious misappropriation" warranting the extreme sanction of punitive damages. All of which would explain why the FINRA Arbitration Panel slammed Respondent Miller with over $370,000 in damages, fees, and costs. On the other hand, let's not lose sight of the fact that Respondent Miller represented himself pro se and did not appear at the evidentiary hearing.[I]mproperly provided to an outside entity confidential information about Claimant's customers in order to obtain employment with the outside entity. These actions were in violation of Respondent's contractual, statutory and common law obligations to Claimant and resulted in specific damage to Claimant. In addition, Respondent's actions constitute a willful and malicious misappropriation of confidential and trade secret information such that Claimant is entitled punitive damages under the Arizona Trade Secret Act A.R.S. section 44-403. Claimant is entitled to recover its compensatory damages, attorneys' fees, costs and punitive damages as determined by the Panel.
Miller's Background
Online FINRA BrokerCheck records as of December 26, 2018, disclose that Miller was first registered in 1988, and did two stints at Scottsdale Capital Advisors from February 2012 to October 2014 and from October 2015 to April 2016.
BrokerCheck further discloses that in 2006, Miller was charged with "COMPUTER CRIME - SCHEME/DEFRAUD over $15,000" in Colorado state court, and he pled not guilty to a felony and a misdemeanor charge, and that the case was dismissed in 2007. Miller's alleged "Broker Statement" for this disclosure asserts:
ACCUSED OF STEALING PROPRIETARY INFORMATION FROM FORMER EMPLOYER. FORMER EMPLOYER FILED FOR BANKRUPTCY AND THE BANKRUPTCY TRUSTEE DEEMED THE INFORMATION I HAD IN MY POSSESSION HAD NO VALUE AND ASSISTED ME IN CLEARING MY NAME. BK TTEE DEEMED THAT ALL DATA IN MY POSSESSION WAS OPENLY AVAILABLE AND NOT ANY TYPE OF TRADE SECRET. AFTER CONSIDERING THE STATEMENTS OF THE BK TTEE, DOUGLAS COUNTY COURT DISMISSED THE CASE AGAINST ME.
2017 FINRA Bar of Miller
In FINRA Department of Enforcement, Complainant, v. Eric Joseph Miller, Respondent (Default Decision, Office of Hearing Officers, Disc. Proc. No. 2014041724602 / February 22, 2017), Respondent Miller was barred from associating with any FINRA member firm in any capacity for failing to appear and provide testimony at a disciplinary hearing. As set forth in part in the FINRA Default Decision [Ed: Footnotes omitted]:
In the weeks leading up to the Scottsdale hearing in June, Enforcement made telephone calls and sent emails to Miller reminding him of his anticipated testimony, but he did not respond to such contacts starting the last week of May; and, he did not appear as a witness during the hearing sessions. FINRA deemed Miller's conduct to have constituted violations of FINRA Rules 8210 and 2010. In imposing a Bar from associating with any FINRA member firm in any capacity for his failure to appear and provide testimony and the disciplinary hearing, the FINRA Hearing Officer noted in the FINRA Default Decision that:On May 3, 2016, Enforcement sent the Request Letter to Miller requesting, pursuant to FINRA Rule 8210, that he appear as a witness at an upcoming disciplinary hearing in the disciplinary proceeding, Department of Enforcement v. Scottsdale Capital Advisors Corp. The Request Letter informed Miller that the hearing was scheduled for June 13-24, 2016, and that Enforcement would provide Miller with a time frame for his testimony before the Scottsdale hearing began. The Request Letter advised Miller that "you are obligated to appear as requested and to answer any questions fully, accurately and truthfully" and that "[a] failure on your part to satisfy these obligations could expose you to sanctions, including a permanent bar from the securities industry."
When you finally put all the pieces of this puzzle together, you get to view a fairly impressive picture of a registered rep who is sued, in part, for allegedly contacting FINRA and prompting it to investigate his former firm; and, he is also barred from the industry for failing to appear and testify against his former firm. Talk about damned if you do and damned if you don't!FINRA's Sanction Guidelines recommend that, if an individual did not respond in any manner to a FINRA Rule 8210 request, a bar should be standard. Miller's failure to provide testimony at the Scottsdale hearing impeded Enforcement's ability to put forth an effective case. Moreover, there are no mitigating factors present in this case. . .
FINRA v. Scottsdale et al.
In FINRA Department of Enforcement, Complainant, v. Scottsdale Capital Advisors Corporation, John Joseph Hurry, Timothy Brian DiBlasi, and Darrel Michael Cruz, Respondents (FINRA National Adjudicatory Council Decision, Complaint No. 2014041724601; July 20, 2018), the preamble asserts that:
Scottsdale Capital Advisors sold unregistered and nonexempt microcap securities, failed to establish and maintain supervisory systems, including written supervisory procedures, that were reasonably designed to prevent the sale of unregistered microcap securities, and failed to supervise, and adequately respond to red flags indicative of, the unlawful sale and distribution of microcap securities. Held, findings and sanctions affirmed.John Hurry engaged in unethical conduct when he created, managed, and controlled a foreign broker-dealer to distance Scottsdale Capital Advisors from its offshore microcap liquidations. Held, findings and sanctions affirmed in relevant part.Timothy DiBlasi failed to establish and maintain supervisory systems, including written supervisory procedures, that were reasonably designed to prevent the firm's sale of unregistered microcap securities. Held, findings and sanctions affirmed.Darrel Michael Cruz failed to supervise, and adequately respond to red flags indicative of, the firm's unlawful sale and distribution of microcap securities. Held, findings and sanctions affirmed.
[W]e fine Scottsdale Capital Advisors $1.25 million ($250,000 per violative deposit) for its unregistered and nonexempt microcap securities sales, impose an additional $250,000 fine on the Firm as an aggregate sanction for its supervisory violations, and order that Scottsdale Capital Advisors engage an independent consultant to monitor the Firm's acceptance and liquidation of microcap securities deposits and review the firm's supervisory procedures related to its microcap securities liquidation business. We bar Hurry in all capacities, suspend DiBlasi in all capacities for two years and fine him $50,000, and suspend Cruz in all capacities for two years and fine him $50,000.
Page 2 of the NAC Decision
SEC Appeal
Scottsdale Capital Advisors Corporation, John J. Hurry, Timothy B. DiBlasi, and D. Michael Cruz filed an for the Securities and Exchange Commission's review of FINRA's disciplinary action. In the Matter of the Application of Scottsdale Capital Advisors Corporation, John Joseph Hurry, Timothy Brian DiBlasi, and Darrel Michael Cruz , (Order Scheduling Briefs , '34 Act Rel. No. 83961; Admin. Proc. File No. 3-18612 / August 27, 2018). https://www.sec.gov/litigation/opinions/2018/34-83961.pdf Also read the Administrative Proceeding File No. 3-18612 https://www.sec.gov/litigation/apdocuments/ap-3-18612.xml
Also read:
- BREAKING NEWS: FINRA Wins Round One of Scottsdale 144 Case (BrokeAndBroker.com Blog, June 21, 2017) http://www.brokeandbroker.com/3506/finra-oho-scottsdale/
- UPDATE: Scottsdale Sues FINRA In Edgy Effort To Halt Disciplinary Case (BrokeAndBroker.com Blog, December 27, 2016) http://www.brokeandbroker.com/3336/scottsdale-finra-4cir/
- FINRA Wins Scottsdale Capital Advisors Motion to Dismiss (BrokeAndBroker.com Blog, May 9, 2016) http://www.brokeandbroker.com/3121/finra-scottsdale-dismiss/
- Scottsdale Sues FINRA In Edgy Effort To Halt Disciplinary Case (BrokeAndBroker.com Blog, March 28, 2016) http://www.brokeandbroker.com/3079/scottsdale-finra-exhaustion/