[I]nterested by the proposition, Hinojosa flew to Raymond James' Tampa office in December 2007 where she met with a Raymond James executive at the behest of Biscayne Capital. See Hinojosa Decl. ¶ 11; Declaration of Robb Combs [ECF No. 94-2] at Exhibit B ("I really feel that what [sic] a visit to the Raymond James HQ will tip her over to come work with us on a fully committed basis. She is really enthusiastic about RJ, but we are still trying to 'reel her in,' so any help you could provide, will be greatly appreciated.").Hinojosa was given a tour of Raymond James' offices, where she saw a sign that read "Biscayne Capital" on the wall. See Hinojosa Decl. ¶ 13; Hinojosa Dep. 116:11-119:1. On the tour, she was told that Raymond James was committed to the long-term success of Biscayne Capital and that she could work with Biscayne Capital within the Raymond James platform. See Hinojosa Decl. ¶ 13. Specifically, her job would be to identify potential investors in Latin America for the financial products sold through Raymond James. Id. at ¶ 14. As an added incentive, Raymond James would provide Hinojosa's clients with accounts. Id
[F]irst, Chatburn was a registered broker with RJFS from March 2008 through August 2008. See Declaration of Melissa A. Kelly [ECF No. 28-2] at Exhibit A. Moreover, the RJFS Independent Associate Agreement with Chatburn, signed February 28, 2008 ("Chatburn Agreement"), defines Chatburn's title as "Branch Manager or Representative in Charge" of the RJFS Miami office. See Chatburn Agreement [ECF No. 63]. This aligns with Defendants' understanding that Chatburn was Raymond James' Branch Manager between 2008 and 2012. See Hinojosa Decl. ¶ 23; Hinojosa Dep. 156:14-163:1; Good Decl. ¶ 21. Chatburn went as far as to distribute business cards stating as much inside Raymond James-branded folders. See Declaration of Edwin Alberto Torres Mino [ECF No. 92-1] ¶¶ 6, 8; Hinojosa Decl. at Exhibit E; Hinojosa Dep. 98:3-8.Between 2008 and 2015, Chatburn visited Ecuador "progressively" to meet with Defendants. Hinojosa Decl. ¶ 24; Hinojosa Dep. 167:12-168:17. During these trips, Chatburn succeeded in selling Defendants more products, always touting the imprimatur of Raymond James. Hinojosa Decl. at ¶ 24; Hinojosa Dep. at 145:3-156:13; 159:24-162:17. In fact one of the Defendants, Douglas Ray Good, confirmed that Chatburn solicited various Raymond James products to him, both individually and in his capacity as a member of the Andes Petroleum savings plan committee. Good Decl. ¶ 12. Chatburn advised Good that he could order trades for him and place the trades directly through Good's RJA account. Chatburn even went so far as to provide Good with a proprietary Raymond James Equity Research report. Id. at ¶ 29. Again, all the record evidence indicates that Chatburn always referred to "Raymond James" in the global sense and never distinguished between the Raymond James entities. Id. at ¶¶ 7, 10-16, 23-29.Although Chatburn continued to hold himself out as a Raymond James advisor for years, the truth is that he was terminated on August 15, 2008. See Form U5, Expert Report of Thomas Franko [ECF No. 97-1] at Exhibit 3. Importantly, neither Chatburn or anyone from Raymond James (or RJFS or RJA) ever notified Defendants that Chatburn, who was still holding himself out to be a Raymond James advisor, had left RJFS. Id. at ¶ 31; Hinojosa Dep. 159:24-162:17. Indeed, on numerous occasions in 2008 and 2009-after Chatburn was no longer a registered broker with RJFS-Chatburn continued to hold himself out to Good and the Andes Petroleum savings plan committee as being associated with "Raymond James." Good Decl. ¶¶ 12-16, 23-29. Trusting in Chatburn, Good and his wife continued to invest through their RJA accounts. Id. at ¶¶ 17, 20, 30, 32. Unfortunately for Defendants, Chatburn and Biscayne Capital ran into legal trouble around 2016. See SEC Order [ECF No. 31-4]; Chatburn's Factual Proffer in Support of Guilty Plea [ECF No. 31-3].
Bill Singer's Comment:
After nearly 40 years on the Street, which included stints as a regulator with two different organizations, even I'm overwhelmed by the dates, titles, and purported affiliations of Chatburn as set out by the Court. So . . . no, it's not you, and it's not me; Chatburn's dates of affiliation with Raymond James and his various and assorted references to his various and assorted affiliatons (real and imagined) are so complicated as to be virtually incomprehensible.Going by the SDFL Opinion, it seems that "Chatburn was a registered broker with RJFS from March 2008 through August 2008." Wow, that's like, what, a whole five months!On the other hand, the Opinion also alleges that there was an "understanding" by some that Chatburn was "Raymond James' Branch Manager between 2008 and 2012." So that August 2008 termination of registration is either a fact, a mistake, or something like a moving target. Making things even murkier, the Opinion alleges that as late as 2015, Chatburn was "touting the imprimatur of Raymond James." Ah yes, the old imprimatur toutin' gambit!Without hesitancy, the SDFL Opinion asserts that although "Chatburn continued to hold himself out as a Raymond James advisor for years, the truth is that he was terminated on August 15, 2008." Unfortunately, the Opinion warns us that "neither Chatburn or anyone from Raymond James (or RJFS or RJA) ever notified Defendants that Chatburn, who was still holding himself out to be a Raymond James advisor, had left RJFS." Making matters worse, the Opinion alleges that "after Chatburn was no longer a registered broker with RJFS -- Chatburn continued to hold himself out to Good and the Andes Petroleum savings plan committee as being associated with "Raymond James.""To be clear, Chatburn was registered with RJFS for five months ending August 2008. After that date, his perceived RJFS affiliation was just that -- perceived.
Much of the confusion in this case seems to center around what it means to be "Raymond James." RJFS maintains that it and RJA are wholly separate entities under the same parent company, Raymond James Financial, Inc. See, e.g., Deposition of Melissa Kelly [ECF No. 77-1] 128:23-129:2. RJFS' corporate representative testified that RJA and RJFS share a campus, share resources when possible, and ultimately report to the same General Counsel for compliance matters. See id. at 137:13-140:24. RJA and RJFS also share a database of client records and information that allows employees of either entity to search the parent company's records. Id. at 48:1-50:24. As part of Chatburn's Agreement, RJFS makes clear that it contracts on behalf of itself and RJA, and Chatburn was authorized to sell RJA products, a process known as "selling away." See, e.g., Chatburn Agreement at § 1(e), § 4. Given the interrelatedness of these similarly-named entities, one can understand how referring to any of them as "Raymond James," as Chatburn constantly did, could cause confusion.
Bill Singer's Comment: I sort of chuckled when I read that "Much of the confusion in this case seems to center around what it means to be "Raymond James." Ya just don't see that phrase all that much! Making things a tad more comical is this: "Given the interrelatedness of these similarly-named entities, one can understand how referring to any of them as "Raymond James," as Chatburn constantly did, could cause confusion."
[A]lthough Defendants do not have an arbitration agreement with RJFS, the Arbitrators found that RJFS was a proper party to the Arbitration under the FINRA Code of Arbitration Procedure ("FINRA Code"). Id. at ¶ 154. In the Arbitration, Defendants allege that both RJA and RJFS are liable for "aiding and abetting in the fraud perpetuated by the Biscayne Individuals [(which includes Chatburn and others)], and the entities they controlled, gross negligence, negligence, breach of fiduciary duty, and for failure to supervise its agents." Defendants' Supplement [ECF No. 92] at 10.
SIDE BAR: The FINRA 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.FINRA Rule 12200: Arbitration Under an Arbitration Agreement or the Rules of FINRAParties 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; andThe 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.
As discussed at the Hearing, the FINRA Code does not define "customer," except to state that a "customer shall not include a broker or dealer." Sagepoint Fin., Inc. v. Small, No. 15-CV0571 DLI RML, 2015 WL 2354330, at *4 (E.D.N.Y. May 15, 2015) (citing FINRA, RULE 12100(k)). "[T]he Rule provides no further guidance as to the definition of a customer[.]" Viyella, 2020 WL 977481, at *5. This exceedingly broad definition was slightly clarified by the Second Circuit in Citigroup Global Markets, Inc. v. Abbar, 761 F.3d 268, 275 (2d Cir. 2014). There, the Second Circuit held that a "customer" for purposes of Rule 12200 is one who, while not a broker or dealer, either "(1) purchases a good or service from a FINRA member, or (2) has an account with a FINRA member." Id.Here, the undisputed facts easily satisfy even the Second Circuit's definition of "customer." Chatburn solicited Defendants to sign custodial agreements with RJA while he was a registered financial advisor for RJFS. See Hinojosa Decl. ¶¶ 22-24. Moreover, Defendant Edwin Alberto Torres Mino, as well as Good, confirmed that Chatburn directly solicited and promoted Raymond James products and services to them. See Mino Decl. ¶¶ 4-8; Good Decl. ¶¶ 4-32. Both had various communications with Chatburn, during which time Chatburn held himself out to be a representative of "Raymond James" in the global sense. Id. In fact, on numerous occasions in 2008 and 2009-after Chatburn was allegedly no longer a registered broker with RJFS-Chatburn continued to hold himself out to Good and the Andes Petroleum savings plan committee as being associated with "Raymond James." Good Decl. ¶¶ 12-16, 23-29. Through it all, Good continued to purchase through his RJA account. Id. at ¶¶ 17, 20, 30, 32. Moreover, Courts have found that a "selling away" relationship where the associated person of a FINRA member sells the financial products of an affiliated company to an investor is sufficient to establish a customer relationship. See Viyella, 2020 WL 977481 at *5; King, 386 F.3d at 1370; Bornstein, 390 F.3d at 1344. Consequently, the Court finds that Defendants were Chatburn's "customers" for purposes of Rule 12200.
It is undisputed that Chatburn was a registered financial advisor for RJFS from March 18, 2008 through August 15, 2008. See Form U5, Expert Report of Thomas Franko at Exhibit 3. RJFS maintains that Chatburn qualifies as its "associated person" only during this particular period of time. . . .Moreover, the relevant question at this juncture is whether a person formerly associated with a FINRA member can still be deemed an "associated person" for purposes of triggering arbitration under Rule 12200. The Court answers this question in the affirmative, and the plain language of the FINRA Code, once again, favors Defendants' interpretation. Notably, FINRA Rule 12100(u) specifically defines "associated member" as "a person formerly associated with a member." FINRA, RULE 12100(u) (emphasis added); see also Metlife Sec., Inc. v. Pizzano, No. 09-CV-4459 (DMC-MF), 2010 WL 2545170, at *4 (D.N.J. June 18, 2010) ("Undeniably, Lucchetto, a former "registered agent of Plaintiff, terminated two months prior to the alleged misconduct, is a person formerly associated with a member and, therefore, for purposes of the Code, Lucchetto qualifies as a person associated with a member."). . . .
[R]JFS, who seeks injunctive relief, has not set forth sufficient evidence to meet its burden and cannot establish a substantial likelihood of success on the merits of its claim in order to avoid FINRA arbitration of this dispute. Consequently, the Court need not reach the other necessary elements for a preliminary injunction. . . .
1. These proceedings arise out of the failure of Biscayne Capital International, LLC ("BCI"), formerly a U.S. registered investment adviser, to disclose facts giving rise to multiple conflicts of interest and other material information under the Investment Advisers Act of 1940 (the "Advisers Act") in connection with the recommendation and sale of securities issued by private offshore investment companies under common beneficial ownership with BCI (hereinafter "Proprietary Products") to non-U.S. clients between August 2010 and March 2012 (the "Relevant Period"). Three BCI principals - Roberto G. Cortes ("Roberto Cortes"), Ernesto H. Weisson ("Weisson") and Juan C. Cortes ("Juan Cortes") (collectively "the Primary BCI Principals" ) - formed entities that issued the Proprietary Products primarily for the purpose of financing South Bay Holdings, LLC ("South Bay"), a Florida-based residential real estate developer, which itself was beneficially owned by Roberto Cortes and Weisson. In turn, South Bay was the majority beneficial owner of BCI during the Relevant Period.2. BCI failed to disclose, among other things, the Primary BCI Principals' beneficial ownership interest and role in the creation of the Proprietary Products issuers. Further, BCI failed to disclose additional material information under the Advisers Act concerning South Bay's financial condition, including that, both preceding and during the Relevant Period, South Bay failed to generate enough revenue or operating cash flow to meet maturing debt, or sustain operations absent obtaining the additional financing generated by the sale of Proprietary Products, and was required to renegotiate several past-due financial obligations. By doing so, BCI willfully violated Sections 206(1) and 206(2) of the Investment Advisers Act of 1940.3. Roberto Cortes, Weisson, and Juan Cortes created BCI and several affiliated nonU.S. financial services entities, all operating under the Biscayne Capital name, and marketed the Proprietary Products through their financial advisors, five of whom, including Frank Chatburn, they knew were employed by both BCI and the affiliated non-U.S. financial services entities.4. Roberto Cortes, Weisson and Juan Cortes each willfully aided and abetted and caused BCI's violations of Section 206(2) of the Advisers Act by failing to prohibit the sales of the Proprietary Products through the U.S.-based BCI or, in the alternative, by failing to train BCI investment adviser representatives to make adequate disclosures under the Advisers Act concerning the conflicts of interest and South Bay's financial condition, when recommending Proprietary Products to BCI clients.5. Frank Chatburn ("Chatburn"), who was both an investment adviser representative for BCI as well as an investment adviser for the non-U.S. financial services entities, willfully aided and abetted and caused BCI's violations of Section 206(1) and 206(2) of the Advisers Act by recommending and selling approximately $3.49 million in Proprietary Products to 29 non-U.S. BCI clients without making adequate disclosures under the Advisers Act. He failed to conduct a "fundamental analysis" of the Proprietary Products in contravention of representations in BCI's Form ADV; and failed to conduct an investigation or inquiry into, inter alia, the ownership or operation of Proprietary Product issuers or into South Bay's financial condition notwithstanding red flags concerning these entities. Chatburn also failed to disclose that he had a personal conflict of interest when recommending the Proprietary Products to BCI clients based on his beneficial ownership interest in BCI and the non-U.S. Biscayne Capital financial services entities as well as undisclosed compensation he received in connection with his recommendation and sale of the Proprietary Products to BCI clients.6. Additionally, BCI willfully failed, and Juan Cortes willfully aided and abetted and caused BCI's failure, to design and implement policies and procedures reasonably designed to prevent violations of the Advisers Act. BCI also willfully made, and Roberto Cortes and Juan Cortes willfully aided and abetted and caused BCI to make, material misrepresentations in Form ADV. Additionally, during the Relevant Period, BCI, Roberto Cortes, and Juan Cortes each failed reasonably to supervise Chatburn.
11. Frank R. Chatburn ("Chatburn"), age 37, a dual United States and Ecuadorian citizen residing in Miami, Florida, was a beneficial owner of BCI as well as an investment adviser representative of BCI during the Relevant Period. He also is a beneficial owner and financial adviser for the affiliated non-U.S. financial services entities. Chatburn is Roberto Cortes' cousin.
C. Respondent Frank R. Chatburn cease and desist from committing or causing any violations and any future violations of Sections 206(1) and 206(2) of the Advisers Act.D. Respondent Frank R. Chatburn be, and hereby is:
barred from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization; andprohibited from serving or acting as an employee, officer, director, member of an advisory board, investment adviser or depositor of, or principal underwriter for, a registered investment company or affiliated person of such investment adviser, depositor, or principal underwriter,
with the right to apply for reentry after four (4) years to the appropriate self-regulatory organization, or if there is none, to the Commission.. . .K. Any reapplication for association by Respondents Frank R. Chatburn, Roberto G. Cortes, Juan Carlos Cortes, and Ernesto H. Weisson will be subject to the applicable laws and regulations governing the reentry process, and reentry may be conditioned upon a number of factors, including, but not limited to, the satisfaction of any or all of the following: (a) any disgorgement ordered against the Respondent, whether or not the Commission has fully or partially waived payment of such disgorgement; (b) any arbitration award related to the conduct that served as the basis for the Commission order; (c) any self-regulatory organization arbitration award to a customer, whether or not related to the conduct that served as the basis for the Commission order; and (d) any restitution order by a self-regulatory organization, whether or not related to the conduct that served as the basis for the Commission order.. . .
M. Respondent Frank R. Chatburn shall, within ten (10) days of the entry of this Order, pay disgorgement of $78,924 and prejudgment interest of $8,052 to the Securities and Exchange Commission for transfer to the general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If timely payment is not made, additional interest shall accrue pursuant to SEC Rule of Practice 600.. . .O. Respondent Frank R. Chatburn shall, within ten (10) days of the entry of this Order, pay a civil money penalty in the amount of $100,000 to the Securities and Exchange Commission for transfer to the general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C. § 3717.