Selling Away. Failure to Supervise. Punitive Damages. Discovery Sanctions. All in one FINRA Arbitration

June 29, 2011

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in June 2010, Claimants asserted various causes of action including breach of contract, fraud, and negligence pertaining to their investments Tenant-in-Common securities of:
  • DBSI Offices at Brookhollow, and
  • Garlock & Company Museum Parc Garage.

Claimants sought at least $954,500 in damages, punitive damages, attorneys, fees, and other relief. At the close of the FINRA hearing, Claimants requested $1,188,462.00 in rescissionary damages or $764,775.00 in statutory damages. In the Matter of the FINRA Arbitration Between Lloyd Wiborg and Jane S. Wiborg, Individually and as Trustees of the Jane S. Wiborg Trust dtd 7/28/86 Amendment and Complete Restatement dtd 4/17/96, Claimants, vs. Pacific West Securities, Inc., Respondent (FINRA Arbitration 10-02818, June 27, 2011).

Respondent Pacific West Securities denied the allegations.

Discovery Sanctions

On May 23, 2011, Claimants moved to sanction Respondent for failing to timely produce discovery and for failing to produce witness lists and many documents.  While such sniping is a common occurrence in litigation, it's a bit unusual for a FINRA Arbitration Panel to actually do something about it.  The typical Panel response is to note the non-compliance, chide the recalcitrant party, and maybe impose a somewhat modest fine.  Such was not the case here.

In this FINRA arbitration, the Claimants persuaded the Panel that Respondent Pacific West's failure to timely produce all the requested documents during discovery was not a mere inconvenience but an obstacle that made it very difficult for the Claimants to put on their case. The Panel viewed Respondent's foot-dragging as presenting a problem concerning how the untimely produced discovery evidence  could be fairly entered into the hearing record in a manner that would allow both sides to present their cases in a competent and fair manner.  The challenge for the Panel was how to fashion a remedy that did not punish the Claimants for Respondent's delays.

Given that the burden of proof rests on the Claimants, the FINRA Hearing Panel recognized the Respondent had gained a tactical edge by precluding Claimants' timely review of the requested materials. Consequently, in response to Claimants's May 23rd Motion for Sanctions,  the FINRA Arbitration Panel ruled that:

  • Respondent Pacific West Securities would be allowed to distribute what amounted to five binders of evidence to the Claimants and Respondent could also use the materials, provided that Respondent paid sanctions in the amount of $80,000.00 in the form of a cashier's check to Claimants' counsel's law firm Goodman & Nekvasil, no later than 9:00am on May 24, 2011.
  • If the payment was not received by the designated time, the $80,000.00 sanction would stand and Respondent would only be able to call witnesses and refer to Claimants' evidence.

Apparently, Respondent made the payment and the binders of materials were allowed into evidence, although the Panel observed that the documents were "not organized in any usable fashion and required Respondent's counsel to always find the place in all binders with the help of Claimants' counsel."  Ah yes, the ever helpful Claimants' counsel assisting his adversary!   Worse, the Panel noted that the late production coupled with the haphazard collation resulted in delays during the entire hearing.


The FINRA Arbitration Panel found Respondent Pacific West Securities liable and ordered it to pay to Claimant Wiborg Trust:

  • $300,000.00 in compensatory damages;
  • $50,000.00 in punitive damages for flagrant violations of securities laws and appropriate supervision of brokers and branch offices after having been put on notice of possible violations of selling away; and
  • $26,658.00 for costs including witness fees, hearing exhibits, FINRA filing fees, miscellaneous costs, airfare, and lodging.

Characterizing Respondent Pacific West as guilty of a "terrible lack of supervision," the Panel offered the following rationale for the imposition of punitive damages:

Citing the case of In Pusatari v. E.F. Hutton (180 Cal.App.3d 247. 253, 225 Cal.Rptr. 526, 529 (1986)), the FINRA Arbitrators noted the precedent of a court awarding punitive damages against a broker-dealer for actions of its registered representative. The court said failure to dismiss an employee after the commission of oppressive acts is evidence of ratification if the managing agent had knowledge of, or opportunity to learn of, the misconduct and fails to investigate.

In applying those factors and considerations to the FINRA arbitration case before it, the Panel noted that

Respondent Pacific West had on two occasions caught the registered representative Toni Sutherland selling away the same kind of products and, except for a slap on the hand fine of $1,500.00, still never followed up on her activities nor did they ever conduct an on sight audit of her office, and in fact allowed 2 years to go by before the first on-sight supervisor came to her office. During this period, the representative Toni Sutherland sold the Claimants two investments that definitely did not fit the parameters that they had established on the account applications. Respondent Pacific West hired Ms. Sutherland knowing of her very weak past performance in other firms. In fact, she had worked for 5 firms in 6 years.

Pacific West failed to supervise Ms. Sutherland in several ways. She was assigned a "straw-man" supervisor Mr. Philip A. Pezelo who acted not only as the supervisor of approximately 30 representatives but at the same time was the President of Pacific West with all the responsibilities and duties that go along with that position. His replacement followed in Mr. Pezelo's footsteps and also never carried out an inspection. This is probably why no on sight visits were made and basically no supervision of Ms. Sutherland carried out. Because of her lack of supervision, she was able to hire a convicted felon that had just gotten out of prison to actually have contact with the walk in customers and acted as her aide and spoke to clients and went to meetings with her. He was unlicensed.

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