Federal Court Denies Legend Securities President Bankruptcy Discharge of FINRA Customer Arbitration Award

August 10, 2022

It's not that rare a scenario. An investor is victimized by fraud and suffers significant financial losses. The victim seek out a lawyer to sue the brokerage firm, the stockbroker, and anyone else with a pocket. At some point, the investor learns that the brokerage firm and stockbroker filed for bankruptcy -- and maybe the Director of Compliance, the Chief Executive Officer, the President, and the part-time janitor (all of whom were named in the lawsuit). Now what? Can the victimized investor sue a firm or individual who had filed for bankruptcy? The answer is that it depends. Consider a recent case to see how some of these issues actually play out.

2019: FINRA Arbitration

In a FINRA Arbitration Statement of Claim filed in April 2015, public customer Claimant Blake asserted breach of fiduciary duty; churning; fraud; manipulations; misrepresentations and non-disclosures; omission of facts; unauthorized trading; violation of blue sky laws; failure to supervise; negligence; and mark-ups. 
In the Matter of the Arbitration Between Frederick Blake, Claimant, v. Legend Securities, Inc. Anthony Fusco Frank Philip Fusco Brian Keith Decker Daren Frances Dorval Steven John Meyer Bernardo Misseri, Respondents (FINRA Award 15-00802 / June 25, 2019)
https://www.finra.org/sites/default/files/aao_documents/15-00802.pdf

The FINRA Award assert that the "causes of action relate to unauthorized transactions of securities in Claimant's accounts performed in part by associated persons who were not registered in the state of Florida." Respondents generally denied the allegations and asserted affirmative defenses; however, Respondents Legend and A. Fusco did not file an executed Submission Agreement. Respondents Legend, Decker, Dorval, Meyer and Misseri did not appear at the evidentiary hearing. At the close of the FINRA Arbitration Hearing, Claimant Blake requested:

total damages in the amount of $966,708.15 comprised of: compensatory damages for the losses on the securities purchased while at Respondent Legend in the amount of $110,622.95; statutory interest (based on the purchase amounts) pursuant to Florida Statutes section 517.12 in the amount of $141,073.76; attorneys' fees in the amount of $83,890.51; costs in the amount of $1,879.15; and punitive damages (2.5 times losses and statutory interest) in the amount of $629,241.78. 

The FINRA Arbitration Award asserts in part that:

On or about April 28, 2018, Respondent A. Fusco filed for bankruptcy under the United States Bankruptcy Code. In accordance with these filings, all claims against Respondent A. Fusco were stayed. On or about December 20, 2018, Claimant filed with FINRA Office of Dispute Resolution an Order Granting Creditor Frederick Blake's Motion for Relief from Automatic Stay from the United States Bankruptcy Court in the Eastern District of New York, in which the judge lifted the bankruptcy stay as to Claimant's claims against Respondent A. Fusco. Accordingly, Respondent A. Fusco is bound by the determination of the Panel on all issues submitted. 

On or about December 21, 2018, Respondent F. Fusco filed for bankruptcy under the United States Bankruptcy Code. In accordance with these filings, all claims against Respondent F. Fusco are indefinitely stayed. Therefore, the Panel made no determination with respect to the claims against Respondent F. Fusco.

The FINRA Arbitration Panel issued this Award:

1. Respondents Legend, A. Fusco, Decker, Meyer and Misseri are jointly and severally liable for breach of fiduciary duty, churning, fraud, manipulations, misrepresentations and non-disclosures, omission of facts, unauthorized trading, violation of blue sky laws, failure to supervise, negligence, and markups and shall pay to Claimant the sum of $110,622.95 in compensatory damages. 

2. Respondents Legend, A. Fusco, Decker, Meyer and Misseri are jointly and severally liable for and shall pay to Claimant Florida statutory interest on the above-stated sum from 2012 to 2019 in the amount of $141,073.76. 

3. Respondents Legend, A. Fusco, Decker, Meyer and Misseri are jointly and severally liable for and shall pay to Claimant the sum of $83,890.51 in attorneys' fees, pursuant to Chapter 517 of the Florida Securities and Investor Protection Act. 

4. Respondents Legend, A. Fusco, Decker, Meyer and Misseri are jointly and severally liable for and shall pay to Claimant the sum of $1,879.15 in costs. 

5. Respondents Legend, A. Fusco, Decker, Meyer and Misseri are jointly and severally liable for and shall pay to Claimant the sum of $629,241.78 in punitive damages pursuant to Chapter 768 of the Florida Statutes. The Panel found, based on clear and convincing evidence, that Respondents Legend, A. Fusco, Decker, Meyer and Misseri engaged in intentional misconduct and/or were grossly negligent in excessively trading and churning Claimant's account; improperly recording trades as unsolicited as opposed to solicited on account statements; fraudulently misrepresenting or failing to disclose markups and exorbitant commissions; failing to disclose that Respondents Misseri and Decker (who solicited and/or recommended many of the transactions which caused Claimant's losses) were not registered brokers in Florida; and failing to follow Claimant's instructions including instructions to close his accounts. In one instance, in a practice discouraged by FINRA rules and regulations, Respondents Decker and Misseri convinced Claimant to procure a home equity loan and deposit the proceeds with Respondent Legend for investment.

The Panel also found that Respondent Legend and A. Fusco (President of Legend) knowingly participated, condoned, ratified and consented to the conduct of its employees, brokers and agents. The evidence and testimony (including FINRA BrokerCheck®) revealed a disturbing pattern of wrongdoing by Respondent Legend and A. Fusco which has resulted in numerous customer complaints and fines/censures levied by regulators as a result of excessive trading, excessive commissions, failure to follow instructions, knowingly employing unregistered associated persons and brokers and committing fraud in connections with an SEC investigation. In a number of regulatory actions and investigations, Respondent Legend has been cited for its failure to supervise its associated persons and brokers and failure to have an adequate supervisory compliance program in place. Finally, the evidence disclosed that Respondents Legend and A. Fusco have been expelled by FINRA for failure to pay fines and costs. 

6. Respondents Legend, A. Fusco, Decker, Meyer and Misseri are jointly and severally liable for and shall pay to Claimant the amount of $300.00 representing reimbursement of the non-refundable portion of the filing fee previously paid by Claimant to FINRA Office of Dispute Resolution. 

7. Any and all claims for relief not specifically addressed herein, including Respondents Legend, A. Fusco, Decker, Meyer and Misseri's request for attorneys' fees, are denied.

2021: EDNY Confirms FINRA Arbitration Award Against Anthony Fusco

As the FINRA Arbitration Award notes in part, sometime in April 2018, Anthony Fusco filed for bankruptcy, which prompted the FINRA Arbitration Panel to stay all all claims against Fusco. In response to the stay, sometime in December 2018, Blake filed with FINRA Office of Dispute Resolution an EDNY Order lifting Fusco's bankruptcy stay as to Blake's arbitration claims. All of which is prelude to: 





https://brokeandbroker.com/PDF/FuscoDecisionEDNYArbConf210903.pdf

As set forth under the "Introduction" of EDNY's 2021 Decision (the "2021 FINRA Award EDNY Decision"):

Before the Court is the motion for summary judgment of plaintiff Fred Blake, aka Frederick Blake. In his summary judgment motion, Mr. Blake seeks two forms of relief -- an order to confirm an arbitration award issued by the Financial Industry Regulatory Authority Office of Dispute Resolution, and separately, a determination that the debt arising from the arbitration award is non-dischargeable pursuant to Bankruptcy Code Section 523(a)(19). In this decision, the Court addresses the first of these matters - that is, whether the arbitration award should be confirmed. The defendant Anthony Fusco responds that the motion to confirm the arbitration award should be denied because, among other reasons, the arbitration award exhibits a manifest disregard of the law and was tainted by the malfeasance of the arbitration panel.

at Page 1 of the 2021 FINRA Award Decision

EDNY Grants Motion and Confirms FINRA Award Against Fusco


In granting the Motion to Confirm the Arbitration Award, the Court found in part that:

[M]r. Blake's request to confirm the Award is timely, and that Mr. Blake has shown that the Award should be confirmed. The Court also finds and concludes that under the circumstances present here, it is appropriate to consider Mr. Fusco's arguments in opposition to the confirmation of the Award. And finally, the Court finds and concludes that Mr. Fusco has not shown that the Award should not be confirmed. In particular, the Court finds that Mr. Blake has not shown that the Award was procured by corruption, fraud, or undue means, or that there was evident partiality or corruption in the Arbitrators, or that the Arbitrators were guilty of misconduct, or that the Arbitrators exceeded their powers or manifestly disregarded the law in reaching their decision.

at Page 48 - 49 of the 2021 FINRA Award EDNY Decision

2022: EDNY Grants Blake Summary Judgment

Having won confirmation of his FINRA Arbitration Award, Blake proceeded with his effort to collect as against Anthony Fusco. 


(Memorandum Decision on Plaintiff Blake's Motion for Summary Judgment, United States Bankruptcy Court for the Eastern District of New York ("EDNY") / August 4, 2022) (the "2022 Nondischarge EDNY Decision")
https://brokeandbroker.com/PDF/FuscoDecisionEDNY220804.pdf

Exceptions to Federal Bankruptcy Discharge

To recover against Fusco, Blake will need to persuade EDNY that Fusco's debt in the form of the FINRA Award does not fall within Bankruptcy Code Section 523(a)(19)

SIDE BAR11 U.S. Code § 523 - Exceptions to discharge

(a) A discharge under section 727, 1141, 1192 [1] 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt-

. . . 

(19) that-

(A) is for-
(i) the violation of any of the Federal securities laws (as that term is defined in section 3(a)(47) of the Securities Exchange Act of 1934), any of the State securities laws, or any regulation or order issued under such Federal or State securities laws; or

(ii) common law fraud, deceit, or manipulation in connection with the purchase or sale of any security; and

(B) results, before, on, or after the date on which the petition was filed, from-

(i) any judgment, order, consent order, or decree entered in any Federal or State judicial or administrative proceeding;

(ii) any settlement agreement entered into by the debtor; or

(iii) any court or administrative order for any damages, fine, penalty, citation, restitutionary payment, disgorgement payment, attorney fee, cost, or other payment owed by the debtor.

For purposes of this subsection, the term "return" means a return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements). Such term includes a return prepared pursuant to section 6020(a) of the Internal Revenue Code of 1986, or similar State or local law, or a written stipulation to a judgment or a final order entered by a nonbankruptcy tribunal, but does not include a return made pursuant to section 6020(b) of the Internal Revenue Code of 1986, or a similar State or local law.

EDNY Finds Fusco's Debt Is Nondischargeable

In deeming Fusco's debt nondischargeable, EDNY concluded that:

For the reasons stated herein, and based on the entire record, Mr. Blake's motion for summary judgment on his claim that that the debt owed by Mr. Fusco to him is nondischargeable under Bankruptcy Code Section 523(a)(19) is granted. 

Mr. Blake has shown that there is no genuine dispute of material fact as to each of the two necessary elements of his claim. As to the first element, he has shown that there is no genuine dispute of material fact that the debt is for the violation of state securities law, as set forth in Bankruptcy Code Section 523(a)(19)(A)(i). And in the alternative, he has also shown that there is no genuine dispute of material fact that the debt is for common law fraud, deceit, or manipulation in connection with the sale or purchase of securities, as set forth in Bankruptcy Code Section 523(a)(19)(A)(ii). 

As to the second element, Mr. Blake has shown that there is no genuine dispute of material fact that the debt results from an order and judgment entered in a federal judicial proceeding, as set forth in Bankruptcy Code Section 523(a)(19)(B)(i). 

An order and judgment in accordance with this Memorandum Decision shall be entered simultaneously herewith.

at Pages 47 - 48 of the 2022 Nondischarge EDNY Decision

Pointedly, EDNY underscored in pertinent part that:

Here again, the language of the Award makes clear that fraud and manipulations in
connection with trading in Mr. Blake's account "caused the debt." The measure of punitive damages is based on the finding of Mr. Fusco's liability for churning, fraudulent
misrepresentation, and non-disclosures, among other conduct. Award at 4, ¶ 5. And this is sufficient to bring the debt within the second category of nondischargeable debt set forth in Section 523(a)(19)(A)(ii)

at Page 40 of the 2022 Nondischarge EDNY Decision

[F]usco was among those named as a respondent in the arbitration brought by Mr. Blake. He appeared in and defended that proceeding. And in entering the Award against Mr. Fusco and others, the arbitration panel found that Mr. Fusco "knowingly participated" in the misconduct that was alleged. Award at 4, ¶ 5. That is, the panel concluded that Mr. Fusco both had knowledge of the misconduct and participated in it. That misconduct includes, among other things, violations of Florida's blue sky laws - violations of state securities law that brings the debt within the category identified in Section 523(a)(19)(A)(i). It also includes fraud, churning, and misrepresentations in connection with the sale and purchase of securities - amounting to common law securities fraud and manipulation that bring the debt within the category of nondischargeable debt identified in Section 523(a)(19)(A)(ii). Award at 4-5, ¶ 5.

at Page 43 of the 2022 Nondischarge EDNY Decision