Brokerage Firm's Third-Party Complaint Against Its Former CEO Remanded to FINRA Arbitration

April 27, 2021

As with many lawsuits, it's not always easy to figure out just where to start the tale of woe. Sometimes there are numerous pathways that converge on the courthouse steps. For our purposes today, we're going to start at June 21, 2019, when Wealth2k, Inc. filed a lawsuit against Key Investment Services, LLC. alleging breach of a long-term oral licensing agreement for a web-based software solution for retirement income planning called "The Income for Life Model" ("IFLM Solution"). Wealth2k, Inc., Plaintiff, v. Key Investment Services, LLC., Defendant (Opinion and Order, United States District Court for the Northern District of Ohio/ April 23, 2021)  In trying to explain how we wound up at the United States District Court for the Northern District of Ohio ("NDOH"), we're going to start moving backwards in time and then move forward, but it's going to be in fits and starts.

Deeply Discounted IFLM Fee

At some unspecified point in time, Key Investment Services, LLC ("KIS") and Pershing LLC had entered into a confidential agreement whereby KIS' professionals used Pershing's NetX360 Dashboard platform in order to access specialized software, among which was Wealth2k's IFLM. In negotiating an allegedly deeply-discounted monthly licensing fee, Wealth2k apparently took into account KIS' guarantee of a substantial number of software users. As further explained in the NDOH Opinion:

[P]ershing provided a monthly IFLM user count to KIS. KIS added $35 per user to its monthly payment to Pershing for the NetX360 Dashboard. Pershing passed on that payment to Wealth2k, less a transaction fee. 

at Page 2 of the NDOH Opinion

KIS CEO Vosen's Verbal Promise to Wealth2k

On March 1, 2019, KIS instructed Pershing LLC to cease future payments to Wealth2k and to also remove system access for KIS' licensed bankers and financial advisors. What's that all about? Great question -- as best we can fathom from the NDOH Opinion:

[W]ealth2k alleges that it fully performed all of its obligations, and remains ready, willing and able to provide discounted pricing for the IFLM Solution in exchange for at least 1,000 monthly users for the duration of the KIS-Pershing Agreement. Wealth2k informed KIS that Marc Vosen, as KIS's chief executive officer, had verbally promised Wealth2k that KIS would continue to utilize Wealth2k's product for the duration of KIS's relationship with Pershing. Wealth2k asserts claims for Breach of Contract, Promissory Estoppel and Unjust Enrichment/Quantum Meruit against KIS. 

at Page 2 of the NDOH Opinion

Consulting Agreement between Wealth2k CEO Macchia and KIS CEO Vosen

As the lawsuit moved forward and Discovery progressed, we come to January 2, 2020, at which time KIS receives Wealth2k's initial document production and, lo and behold, the Defendant asserted that this was the first it learned about:

a written consulting agreement between David Macchia, founder and chief executive officer of Wealth2k, and Vosen, former chief executive officer of KIS. This consulting agreement was entered into prior to Vosen's retirement and Vosen would directly benefit financially by its terms.

at Pages 2 - 3 of the NDOH Opinion

KIS Adds Vosen to the Caption

In response to the revelations about Vosen's consulting agreement, on July 16, 2020, KIS filed an Amended Answer, a Counterclaim, and a Third Party Complaint -- the latter named Vosen as a Third-Party Defendant and alleged breach of fiduciary duty, fraud, civil conspiracy, and implied immunity: 

KIS alleges that Vosen breached his fiduciary duties to KIS by entering into the undisclosed Consulting Agreement, concealing from KIS the existence of the Consulting Agreement and engaging in self-dealing by virtue of his position as an officer of KIS. 

KIS also claims that the existence of the undisclosed Consulting Agreement was material to KIS's business relationship with Wealth2k, as well as to KIS's fiduciary business relationship with Vosen. Vosen concealed the existence of the Consulting Agreement with the intent to mislead KIS into the continued use of the IFLM Solution, from which Vosen stood to directly benefit financially. This fraudulent concealment damaged KIS. 

KIS further alleges that the conduct of Macchia and Vosen, such as entering into the undisclosed Consulting Agreement and engaging in unilateral business negotiations without KIS's knowledge and against KIS's interests, constitutes a malicious combination of two or more persons. Vosen's fraudulent concealment and breach of fiduciary duties are unlawful acts independent of the conspiracy. Vosen acted knowingly and without reasonable or lawful excuse, all to the detriment of KIS. 

Finally, KIS alleges it is entitled to indemnification from Vosen for any amount KIS may be found liable to pay as damages to Wealth2k in this lawsuit

at Page 3 of the NDOH Opinion

Vosen Wants to Remand to FINRA Arbitration

On September 14, 2020, Third-Party Defendant Vosen filed a Motion to Stay Pending Arbitration or to Dismiss. Vosen argued that KIS is a FINRA member firm/registered brokerage and investment advisor firm; and that he was KIS' FINRA-registered Principal and, in his own right, a FINRA-registered broker. Accordingly, Vosen argued that until such time as a FINRA Arbitration concluded, the NDOH court proceeding must me stayed. In response to the Motion, KIS argued that its claims against Vosen do not constitute a mandatory arbitration under the "industry dispute" category because its claims against Vosen:

do not arise out of the business activities of a "member" or of an "associated person" as intended by FINRA Arbitration Rules. In its Memorandum in Opposition, KIS insists that its claims against Vosen "arise out of his decision to moonlight as a software salesman for one of KIS's vendors and his failure to disclose to KIS his irreconcilable conflict of interest in doing so. Mr. Vosen's improper conduct in this regard has no meaningful nexus to his status as an associated person nor to KIS's status as a FINRA member and, therefore, does not constitute industry "business activity" necessary to subject this dispute to mandatory FINRA arbitration." (ECF DKT #44 at 7). 

at Pages 7 - 8 of the NDOH Opinion

In countering KIS' assertions, Vosen claimed that:

A FINRA-regulated entity is accusing its former CEO of lacking authorization, while serving as CEO, to enter into a contract for a software that provides investment services to clients; and of allegedly failing to disclose, while serving as CEO, the fact that he had entered into a consulting agreement with that same company. . . .

at Page 8 of the NDOH Opinion

KIS Third-Party Complaint Against Vosen Stayed

NDOH granted in part  Third-Party Defendant Vosen's Motion to Stay/Dismiss to the extent that the Court stays the proceeding on KIS' Third-Party Complaint against Vosen pending FINRA arbitration. In expressing its rationale, the Court found that:

KIS emphasizes, in its Third-Party Complaint, that Vosen breached his fiduciary duties owed as chief executive officer and engaged in self-dealing in contravention of his obligations as chief executive officer. It is unlikely that these claims would exist in the absence of the relationship between Vosen, as CEO and registered broker, and KIS, as employer and registered FINRA broker-dealer. 

The Court is unable to find an express provision excluding the subject matter of the KIS-Vosen dispute nor discern any evidence of a purpose to exclude these claims from FINRA arbitration. KIS has not met its burden of demonstrating that arbitration of the Third-Party Complaint against Vosen is inappropriate or unenforceable. Moreover, any doubts regarding arbitrability must be resolved in favor of arbitration over litigation. . . 

at Page 8 of the NDOH Opinion

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