Customer Puts Big Arbitration Hurt on FINRA Firm

In the Matter of the Arbitration Between Steven Beach (Claimant), and Bentley-Lawrence Securities, Inc. (Respondent), Mesirow Financial, Inc. (Respondent), and Mark F. Harper (Respondent) (FINRA Case 08-03378, February 16, 2010), Claimant Beach alleged that without authorization, Respondent Harper liquidated his holdings in various conservative mutual funds and subsequently purchased several individual stocks, including EBay. Nvidia Corporation, and Marvel Technology Group. Claimant alleged that the stock purchases were unauthorized and unsuitable because they were not in accordance with his desire for preservation of capital in the form of fixed income investments. Claimant further alleged that Harper churned his account for the sole purpose of generating fees, and that as a result of Respondents Mesirow and Bentley-Lawrence's failure to properly supervise Harper, Claimant suffered heavy losses.

At the close of the FINRA arbitration hearing, Claimant Beach requested an award in the amount of $166,000.00 in compensatory damages and $220,000 in punitive damages, attorneys' fees of $54,000, and various other interest, costs, and relief.

Defenses

Respondent Bentley-Lawrence Securities, Inc. generally denied the allegations and asserted affirmative defenses including the following:

• Claimant failed to state a claim upon which relief can be granted;
• Claimant was fully aware at the times he purchased and/or sold the securities and mutual funds, which are the subject of this arbitration, of the risks and costs associated with such transactions and voluntarily assumed the risk;
• Claimant's damages, if any, were directly and proximately caused by superseding and/or independent acts and/or admissions of persons or entities other then Bentley-Lawrence which relieves Bentley-Lawrence from liability;
• Claimant's claims are barred by the doctrines of ratification, estoppel, waiver, and laches;
• Claimant's claims are barred by the applicable statutes of limitations; 
• Bentley-Lawrence had adequate supervisory procedures which it reasonably and diligently implemented and followed; and
• Claimants claims are barred for the reason that Claimant exercised active control over his investments.

Respondent Mesirow Financial. Inc. generally denied the allegations and asserted defenses including the following:

• Throughout the history of Claimant's accounts, Mesirow complied with its functionary duties as set forth in the Securities Account Agreement and the applicable rules of the self-regulatory organizations; and
• Mesirow did not have a direct relationship with Claimant, and had no knowledge of any dealings between Claimant and Bentley-Lawrence, Harper, or any other Bentley-Lawrence employee or representative.

Respondent Harper denied the allegations made in the Statement of Claim.

Motions

On or about January 4, 2010, the Panel entered the Stipulated Order of Dismissal Without Prejudice as to claims asserted against Mesirow Financial, Inc.

Claimant filed a Motion to Bar Respondent Harper from Presenting Facts at the Hearing, to which Harper did not file a response and I'm guessing that the Motion was granted by the Panel.

Award

Following the hearing, the FINRA Panel found that Respondents Bentley-Lawrence Securities, Inc. and Harper. were jointly and severally liable for and shall pay to Claimant Beach:

• $166,000.00 in compensatory damages;
• $220,000.00 in punitive damages (the Panel cited to Mastrobuono v. Shearson Lehman Hutton, 514 US 52, 61-62 US 1995, as precedent for sustaining the punitive award); and
• $54,000.00 in attorneys' fees

Bill Singer Comment: Although punitive damages are not unheard of, they still remain a somewhat rare occurrence in FINRA arbitrations; however, one suspects that following the Great Recession and its highly-publicized frauds, that the era of losing brokerage firms simply paying customers' out-of-pocket losses may be ebbing.  The public is mad and clamoring for blood, and with good reason.  All of which will likely pressure arbitrators to add the pound of flesh in addition to the ounce of blood.

The somewhat stunning aspect of this case is that the compensatory damages sought were $166,000 -- which having been awarded by the Panel along with attorneys' fees would normally have suggested a more nominal punitive award.  Clearly, not the case here. Something and/or someone clearly ticked off the FINRA arbitrators because they tacked on nearly 133% in punishment on top of the comps (and let's not forget the $54,000 in attorneys' fees).

One of the dangers of any to-the-mat defense strategy is the wild-card inherent in FINRA arbitrations that a given Panel could ring up the punitive damages cash register for a Claimant customer.  As a lawyer who has represented both public customers and industry parties, I know that quite often, despite my pleading and warnings to the contrary, a respondent decides to play the ultimate game of chicken by rolling the dice before a FINRA panel. Sure, the popular wisdom is that the worst that could happen is you get hit with comps and lawyers' fees (both theirs and yours). "Who the hell ever heard of a FINRA panel awarding punitive damages in this type of case?  C'mon Bill, don't be such a wimp.  Let's go in there and crack some heads."

Alas, every so often someone gets hit with a sucker punch.  And, just as often, that someone is a sucker.  Whatever the case here, Claimant Beach racked up the big bucks.  The industry respondents are clearly licking their considerably bleeding and oozing wounds.