Man Bites Dog. Stockbroker Sues Customer. Dog and Customer Bite Back

January 16, 2019

Folks wear lots of hats on Wall Street. You got your stockbrokers. You got your investment advisers or advisors or however the hell you prefer to spell it. You got lots of confusing and redundant titles like financial consultants and financial advisors and let's not even get into the myriad of vice presidents. At times, a "customer" may be dealing with a stockbroker; and other times with a investment advisor representative; and at times with both. Of course, what would Wall Street be without lawyers and our penchant for generating lots and lots of documents. Accordingly, every time a customer opens a new account, wham, ya got new account paperwork with lots of paragraphs, clauses, and provisions. Unfortunately, sometimes that paperwork explosion blows up on the very parties who have signed their names, multiple times, on many dotted lines. In a recent lawsuit, we have a stockbroker/investment advisor suing his broker-dealer/RIA customer. The broker-dealer account requires arbitration but the investment advisory account doesn't. Anyone got a coin to flip?

The Financial Advisory Group FPA

Sometime in April or May 2014, Mary Jo Olson hired James O. Davis to provide financial planning and investment advisory services pursuant to a Financial Planning Agreement ("FPA") between Olson and Davis d/b/a "The Financial Advisory Group." 

The Centaurus Financial CFI

In late May 2014, Olson opened an Individual Retirement Account ("IRA") with Centaurus Financial Inc. ("CFI") pursuant to a new account application and client agreement. 

On the One Hand But Not On the Other

The FPA states in part that the Financial Advisory Group's associated person (Davis) is also a registered representative with CFI and an agent for various insurance companies. Although the FPA does not contain an arbitration clause, Olson's new account application with CFI states that:


Davis Sues in Superior Court

In October 2017, Davis filed a Complaint in San Francisco Superior Court alleging that Olson owed $32,396 for financial planning services under the FPA. In response, Olson filed an Answer and a Cross-Complaint asserting seven causes of action against Davis arising out of alleged misrepresentations and omissions related to his financial planning services and unfair billing practices. In January 2018, Davis answered Olson's cross-complaint, and in late February, he filed a motion to compel arbitration.

Before we move too quickly here, let me make sure that you have the characters and their roles: 
  • Olson is the customer. 
  • Davis is the financial advisor. 
  • Olson entered into an agreement with Davis via the Financial Advisory Group FPA; and she also opened an IRA via the CFI new account application and client agreement. 
  • Davis was an advisor at the Financial Advisory Group and a registered representative at CFI
Although we typically come across lawsuits in which the customer is suing the financial professional, in this twist, the financial professional (Davis) is suing the customer (Olson) for unpaid fees -- which prompted the customer to turnaround and sue for misrepresentations and unfair billing practices. 

Arbitration Denied

The Superior Court denied Davis' Motion to Compel Arbitration and offered this rationale in part:

Olson's cross-complaint is based on the fee structure of the [FPA], which lacks a covenant to arbitrate. The [FPA] does not incorporate by reference the arbitration clause in the CFI application. In addition, that arbitration clause relates to ĎANY AND ALL CONTROVERSIES OR CLAIMS BETWEEN CLIENT(S) [Olson] AND [CFI].' Olson is not suing CFI nor does she name Davis as an agent of CFI. The cross-complaint is unrelated to the CFI IRA and the arbitration clause does not apply. The [FPA] and the CFI application were not closely connected in purpose, did not incorporate one another's terms, and were not executed at the same time

Court of Appeal Affirms

Not surprisingly, Davis appealed to the Court of Appeal. James O. Davis, Plaintiff/Cross Defendant/Appellant, v. Mary Jo Olson, Defendant/Cross-Complainant/Respondent (Opinion, Court of Appeal of the State of California, First Appellate District / January 14, 2019)

The Court of Appeal rebuffed Davis' contention that the CFI arbitration provision clearly encompassed his claims against Olson. The Court of Appeal declined to accept Davis' contention that Olson's claims had their "roots" in the broker-dealer relationship established in the CFI agreement -- thus activating the arbitration clause in that document. As the Court of Appeal found in pertinent part:

[U]nder the CFI application's arbitration provision, Olson agreed to arbitrate any claims she has against CFI. Her cross-complaint, however, does not allege any claims against CFI, any claims against Davis as an agent of CFI, or any claims regarding the IRA account she opened with CFI. Rather, the cross-complaint alleges James O. Davis, as an individual "doing business under the common name of THE FINANCIAL ADVISORY GROUP," made a series of representations to Olson about his financial planning services and billing practices to induce her to enter the FPA, which she did in reliance on Davis's representations. Under the FPA, Davis was to provide services consistent with Olson's "current financial and tax status, financial goals, investment attitudes, and risk/reward parameters . . . to be billed on a fixed fee basis." Olson alleges Davis later changed his billing structure from a fixed fee to hourly rate arrangement without disclosing he was doing so, charged excessive and unreasonable fees, and placed her assets in investments that were unsuitable for her needs despite knowing she wanted a "balanced portfolio and not a growth portfolio based upon her age and desire for security and stability." The cross-complaint attaches a copy of the FPA. The allegations of the cross-complaint make clear that each of Olson's causes of action arise out of the FPA and the relationship it created between Davis as a financial services advisor and Olson as his client.

Pages 4 - 5 of the Court of Appeal Opinion

The Court of Appeal acknowledges that there may be circumstances where a customer's claims could arise out of or be related to transactions involving the financial professional's role as a "registered representative" with a FINRA broker-dealer; however, such was not found to be the case with Olson's claims -- which the Court does not find involved CFI or actions taken by Davis as CFI's agent. As the Court of Appeal makes clear, it is the FPA that establishes Olson's relationship at issue with Davis, and the absence of an arbitration clause in that controlling document compels the dispute to be heard before the courts and not in arbitration.

Accordingly, the Court of Appeal found that Olson and Davis did not agree to arbitrate the claims at issue in the cross-complaint that were determined to have arisen out of the parties' financial planning agreement, which lacked a covenant to arbitrate. The Court of Appeal affirmed the Superior Court's denial of the Motion to Compel Arbitration.