In today's featured FINRA intra-industry arbitration, we got a little bit of sumthin' for everyone. We got JP Morgan. We got about $13 million in damages or more than $10 million or not less than $8 million. We got allegations of lying and spoliating evidence. We got motions about an expert witness' expertise. We got motions about sanctions for alleged false testimony. We got that rare finding of perjury with the result of sanctions. We got an award of damages but as to how the arbitrators calculated it and for what, we don't got jack.
Over $10 Million in Damages -- at first
In a FINRA Arbitration Statement of Claim filed in November 2019, associated person Claimant Seested asserted violation of partnership laws, security laws, and industry rules and standards of conduct; breach of fiduciary duty; breach of FINRA Fair Dealing Rule 2010; breach of the Signature Team Agreement; fraud and deceit; breach of the Covenant of Good Faith and Fair Dealing; breach of District of Columbia partnership law; unjust enrichment; interference with advantageous business relationships; and conspiracy to commit the foregoing tortious acts. Initially, Seested sought in excess of $10 million in compensatory damages, punitive damages, costs, fees, and interest.
Lloyd Victor Seested, III, Claimant, v. J.P. Morgan Securities, LLC, Frederick Joseph Schultz, Eric Jordan Teichberg, Kennan Blakely Low, Howard Stuart Rothman, Erica Hicks Landskroener, and Scott Kevin Sturley, Respondents (FINRA Arbitration Award 19-03358) https://www.finra.org/sites/default/files/aao_documents/19-03358.pdf
The Respondents generally denied the allegations and asserted affirmative defenses.
A Few Million in Damages . . . here and there
So . . . what's everyone fighting over? According to the FINRA Arbitration Award: "The causes of action relate to the departure of Claimant's partners to go work for Respondent JP Morgan." As to how Seested came up with that more-than-$10-million in damages, here's what the Award says under "Relief Requested":
In the Statement of Claim, Claimant requested: compensatory damages in an amount to be determined but in excess of $10,000,000.00 (which is one-half of the amount paid by Respondent JP Morgan to the individual Respondents), plus the growth and income that would have been generated on that book of business had Respondents not violated their duties as alleged in the Statement of Claim; imposition of a constructive trust over the commissions earned by all Respondents for breach of fiduciary duty and conspiracy to breach fiduciary duties and an accounting of the commissions earned; pre-judgment and post-judgment interest at the legal rate during the applicable period; costs and fees of this action, including FINRA fees and expert witness fees; punitive damages in an amount to be determined; and such other relief as the Arbitrators deemed appropriate.
In the Statement of Answer, Respondents requested a declaration that Respondents are not liable to Claimant in any respect; a dismissal of the Statement of Claim in its entirety; and such other and further relief as the Panel deemed just and proper.
At the hearing, Claimant requested $12,956,619.37. Claimant suggested a minimal figure of $8,098,158.72, if the Panel assumed no growth in the subject assets under management, rather than 5%.
At first, Claimant Seested wanted in excess of $10 million, which purportedly represents one-half of some amount paid by Respondent JP Morgan to the six individual Respondents. On top of the 50%-rebate-like thing, Seested demands the growth and income that "would have" been generated if the wrongdoing alleged in the Statement of Claim hadn't happened. Moreover, Seested didn't just want the rebate and the what-if damages, he also asked the FINRA arbitrators to impose a constructive trust on Respondents' commissions with interest, and, going a tad further, he wanted to top it all off with punies and fees.
Oh my, that's going to be an interesting hill to climb by way of testimony and evidence. Often, lawsuits seek damages that are speculative -- if not for your tort, I would have made $X. In order to prevail on such damages, however, you have to walk a jury through a lot of what-ifs; or you have to ask arbitrators to connect many dots (some of which may or may not exist); or you have to hope that a judge isn't going to look askance at your many wouldas, couldas, and shouldas.
Upon arriving at the FINRA Arbitration hearing, Seested's legal team apparently got out a calculator and asked the arbitrators to award the not-so-round $12,956,619,37. Having calculated that very detailed amount, it seems that Seested opted to seek what looks like an "in the alternative" amount of damages, and he "suggested" that if the FINRA Arbitration Panel concluded that the AUMs had no growth (rather than a 5% growth), that he might be wiling to take damages in the amount of $8,098,158.72.
The Not-So Expert Expert?
In March 2022, Respondents filed a Motion to Preclude Testimony by Claimant's Expert Witness. Respondents' alleged, in part, that "Claimant had provided no information about Claimant's expert witness." Okay, sure, I can see the point with that argument. You can't call a witness and not tell me who it is or what they're going to testify about and what their qualifications are. On the other hand, just because Respondents claim that Claimant Seested didn't tell them jack about the expert doesn't mean that the allegation is true. It's been known to happen that lawyers will stretch the truth in lawsuits or burnish it or put a spin on things. So I've been told. So I've heard.
Seested argued that the documents/information demanded by Respondents "either did not exist or were not required to be produced . . ." The old two-sides to every story dynamic! Upon considering the merits of the motion and opposition, the Panel denied the request to preclude the expert witness.
False Testimony and Spoliation?
In May 2022, Seested filed a Motion for Sanctions in which he asserted that:
[R]espondent Rothman falsely testified concerning his so-called "Trophy File" and when he took photos of emails; Respondents falsely testified that they "took nothing" with them when they left UBS because, according to them, they were instructed by counsel to take nothing; Respondents spoliated the Salesforce data, which Respondent Sturley testified showed who originated which customers and centers of influence; and Respondents' counsel's alleged orchestration of a ruse to deflect attention from the spoliation of the Salesforce data where counsel falsely represented that the Salesforce data was on UBS' computer system, while knowing his representation was false.
Ah yes, the old spoliation ruse! An enticing gambit and well-played (perhaps). Respondents expressed their outrage with Claimant Seested's assertions by countering that his arguments were false and fabricated. In his May 31, 2022, Reply in Support of his Motion for Sanctions, Seested asserted, among other things, that Respondents' Response to his Motion was a "continuance of the deceitful and dishonest, calculated plan to steal Claimant's 28% equity ownership in the partnership." In lieu of an interim ruling on the sanctions motion, the Panel incorporated it into their final Award.
The FINRA Arbitration Panel found Respondents Schultz, Teichberg, and Rothman jointly and severally liable to and ordered them to pay to Claimant Seested:
$500,000 in compensatory damages;
$20,000 in costs; and
$375 in filing fees.
As to the May 2022 Motion for Sanctions, the Panel offered this resolution:
As to the portion of Claimant's Motion for Sanctions which accused Respondents' counsel of wrongdoing, the Panel did not find that the evidence established such misconduct. As to the portion directed to at least one of the Respondents, the Panel finds that Respondent Rothman engaged in perjury by falsely testifying as to the creation of certain exhibits during the hearing and hereby awards sanctions of $100,000.00 against Respondent Rothman and in favor of Claimant. Accordingly, Respondent Rothman is liable for and shall pay to Claimant the sum of $100,000.00 in sanctions.
Bill Singer's Comment
Notwithstanding all my cute asides, there's not much funny about this dispute. Claimant Seested is pitted against a major FINRA member firm in J. P. Morgan Securities ("JPMS") and his allegations are serious; namely, that his former partners went to work for JPMS and did so in a wrongful manner. It's an old story and Seested is to be complimented for girding for battle and not flinching. As to my problems with the FINRA Arbitration Award, I would note the following:
Claimant named seven Respondents -- Why did the FINRA Arbitration Panel only find three (Schultz, Teichberg, and Rothman) liable?
What role, if any, did JPMS play in the breaches and torts asserted by Claimant?
FINRA Code of Arbitration Procedure for Industry Disputes Rule 13104: Effect of Arbitration on FINRA Regulatory Activities; Arbitrator Referral During or at Conclusion of Case provides in part that:
(e) At the conclusion of an arbitration, any arbitrator may refer to FINRA for investigation any matter or conduct that has come to the arbitrator's attention during and in connection with the arbitration, either from the record of the proceeding or from material or communications related to the arbitration, which the arbitrator has reason to believe may constitute a violation of the rules of FINRA, the federal securities laws, or other applicable rules or laws.
Why is there no such Rule 13104 referral to FINRA for investigation if three arbitrators found that Respondent Rothman engaged in $100,000 worth of perjury?
Given that Claimant sought somewhere between roughly $8 and $13 million in damages AND he appears to have prevailed in some of his claims, what is the basis for the Panel's calculation of only $500,000 in compensatory damages?