FINRA Arbitration: Veni, Vidi but a split Vici.

March 14, 2011

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in July 2009, Claimant Carter sought in excess of $1 million in compensatory damages plus fees and costs arising from investment losses sustained in The Silverwing Fund, LLC and The Greenwing Fund, LLC. Respondents generally denied the allegations and asserted various affirmative defenses. In the Matter of the FINRA Arbitration Between Emmett E. Carter, Jr. individually, and on behalf of the Emmet E. Carter, Jr. Individual Retirement Account, Claimant, versus James R. Holdman, Leslie M. Hausse, Scott D. Johnson, NWT Financial Group, LLC, and Penson Financial Services, Inc., Respondents (FINRA Arbitration 09-04093, March 8, 2011). 

On or about October 29, 2010, Claimant notified FINRA that he had dismissed his claims with prejudice against Respondent Johnson and Respondent Hausse. 

Respondent Holdman did not appear at the evidentiary hearing. 

Majority Rule

The FINRA Arbitration Panel decided that Respondents NWT, Penson and Holdman are jointly and severally liable and ordered to pay to Claimant: 

  • $851,368.74 in compensatory damages plus interest; and
  • $17,798.50 in expert fees

And that folks is, as they say, as simple a set of facts as can be offered to explain the he-said, she-said, and the panel-said evolution of a FINRA arbitration.  

The Dissent

However - ah, yes, there's a however here - we have a very eloquent dissent, made all the more interesting because it is rendered by the Chairperson of the FINRA Arbitration Panel, who is a Public Arbitrator.  Notwithstanding the Chairperson's compelling commentary, it did not alter the outcome - which found three respondents liable for just a shade under $1 million.  Nonetheless, given the rarity of dissenting opinions in FINRA arbitration, the eloquence of this one, and the factual insights provided, I've decided to present it to you. 

To begin with, the Chairperson dissents from both the majority's Opinion and its Award.  In setting forth his rationale, the Chairperson sets forth as undisputed that Claimant Carter:

  • elected to take early retirement at the age of 56 from ExxonMobil;
  • had approximatley $1,008,544 in life savings at that time;
  • sought professional guidance as to the administration of his funds and securities, all of which had been subject to the attention of ExxonMobil;
  • had only passive experience with stocks, bonds and securities ( "Exxon did it all");
  • attended at least one post-employment seminar conducted by a brokerage firm, but was more taken with the informal presentation of Respondent Holdman (the two men shared parental responsibilities in Little League baseball);
  • accepted Respondent Holdman's brokerage qualifications; 
  • was advised that the execution of many forms (described by the Chairperson as a "plethora") was necessary and required by law;
  • surrendered his fortune to Holdman; and
  • told Holdman to lose nothing and buy only conservative investments.

Finally, the dissent states that Respondent Holdman had established two hedge funds, of which Silverwing was more conservative than Greenwing. All but $100,000 of Carter's money was invested into the Silverwing fund. 

Signed But Not Read?

Oddly, Claimant Carter apparently testified that he did, in fact, sign the documents at issue; however,  he denied reading them.  On top of that bizarre set of facts, the customer asserted that he opted to rely upon (as characterized by the dissent)  the "pithy if not superticial explanation by his broker Holdman."  

In considering the Claimant's arguments that he was not fully and properly warned about the risks of investing in the Silverwing and Greenwing funds, the Chairperson noted that the funds' disclosure documents "set forth in detail the treacherous water one sailed in" when investing in those products. The dissent was not buying the Claimant's explanation that he merely undertook a mechanical action when signing the plethora of documents, including the initialing of each page.  To the contrary, the dissent viewed those acts as significant because they constituted an acknowledgment that Claimant Carter accepted the terms of the contracts and letters he signed. 


Although you might think that the Chairperson was defending Respondent Holdman's conduct, that would not be correct. Bluntly, we are told in the dissent that:  

Carter was not unadvised, misadvised yes, but not unadvised. Holdman covered Carter up with monthly statements of Carter's account that were mere fiction. The markets may be sliding downward as all financial data reflected, but not for the Carter account. It held its own and advanced in the worst of times, at least until the day that Carter was advised that his account was closed. Holdman's funds were virtually valueless and Carter lost all but about 10% of his original investment.  

The dissent tells us that Carter asserted that had he been informed by Penson and NWT as to the actual falling value of his investments, he would have closed his accounts immediately. However, neither of those firms were charged with such a duty and, to the contrary, the underlying documents signed by Carter pointedly failed to place such an obligation upon those firms. Further, Penson's reports to Carter reflected the negligible value of $1 per unit. 

It appears that the customer in this case was given inflated prices by Holdman and somehow relied upon Penson's and NWT's reports to sustain his confidence in Holdman's quotes - notwithstanding the consistent and persistent "flat line" of value provided by Penson and NWT.  Carter claims that he didn't understand the Penson report or Penson's request for a valuation. 

Gallia est omnis divisa in partes tres

Puzzled by Claimant's contradictory explanations, an incredulous Chairperson concluded that: 

[T]he damages begin with Carter's less than cavalier attention to detail. When considering a division of responsibility, we note that signatures on legal documents are not mere ornaments. Defenses based on "I signed it, but didn't read it and don't understand what I signed." rarely carry the day.  

After giving due consideration to the ineluctable decline that Carter's account would have suffered under any circumstances, the gross maximum award should be no greater than $700,000. Like Gaul, the responsibility for payment of the award in this case should be divided into three parts.  

A-Carter and James R. Holdman are responsible for 1/3d of the sum of $700,000 or $233,333.  

B-NWT and Holdman are responsible for 1/3rd of $466,667 or $155,557.  

C-Penson and Holdman are responsible for 2/3rds of 466,667 or $311,111 . .  .  

Parting Shot

The Chairperson gets in one final, dismissive fillip: 

While this is a tragic situation, it is a greater injustice to award something close to $1,000,000 in a matter that deserves, at best, a much lower award.