FINRA Arbitration Sanctions Frivolous Motion and Awards Punitive Damages

In the Matter of the Arbitration Between Trini L.Thomas, Sr. (Claimant) and Betty Thomas (Claimant) vs. Wofal Oju Offem (Respondent), Todd A. Havemeister (Respondent), Ronald Eiger (Respondent), Donald A. Wojnowski, Jr. (Respondent), Eduardo Manual Cabrera (Respondent), Jesup & Lamont Securities Corp. (Respondent), and Empire Financial Group, Inc. (Respondent) (FINRA Arb. 09-02695, March 22, 2010), Claimants alleged that Respondents solicited their purchase for an initial public offering of a company known as "Tissue Connect," but that their investment was diverted into 15% Convertible Promissory Notes issued by CSMG Technologies, Inc. [Note: These Promissory Notes are alternately referred to as Convertible Bridge Note due June 30, 2007, issued by Consortium Service Management Group, Inc., issued in connection with an IPO of "Live Tissue Connect."]. In furtherance of their claims, Claimants alleged: Misrepresentation; Violation of Florida Statute §517 (Securities Transactions); Breach of Fiduciary Duty; and, Failure to Supervise. Claimants sought in excess of $100,000 in compensatory damages, plus interest, attorneys' fees, rescission, punitive damages, costs. Respondents generally denied the allegations and asserted various affirmative defenses.

A Moving Experience

Claimants filed a Motion for Sanction asserting, among other things that

• Respondents failed to comply with a Discovery Order issued by the Arbitrator;
• Claimants attempted to reach an amicable resolution by sending a letter to Respondents;
• Respondents' failure to produce documents has prejudiced Claimants in preparing for the evidentiary hearing; and
• Respondents failure to comply with the related discovery Order was a flagrant disregard for the arbitration process.

On February 18, 2010, the Arbitrator conducted a pre-hearing conference with the parties and heard oral arguments on the Motion. Respondents sought the denial of the motion and asserted that they had produced all requested responsive documents in their possession and that Respondents had not objected to.

On February 22, 2010, the Arbitrator issued an Order that granted Claimants' Motion for Sanction.

The Order stated that

• if Respondents offer evidence as to an issue for which they did not produce relevant documents or information that were required to be produced by reason of the Uniform Discovery Guide, by Claimants' Motion to Compel Production, and by the Order issued by the Arbitrator thereafter, then the Arbitrator will sustain an objection to the introduction of such evidence; and
• Respondents would not be allowed to present evidence regarding the exemption from registration of securities with the State of Florida because of federal exemptions.

The Verdict

At the conclusion of the Hearing, the Arbitrator ruled that Respondents Offem, Havemeister, Eiger,Wojnowski, Cabrera, JLSC, and Empire are liable on all of the claims asserted by Claimants, as follows

• as to misrepresentation, Respondents are in violation of Florida Statute §517.301 (Fraudulent transactions; falsification or concealment of facts);
• as to violation of Florida Statute §517, Respondents sold unregistered securities in violation of §517.07 (Registration of securities);
• as to breach of fiduciary duty, Respondents violated FINRA Rule 2310 (Suitability), and breached their fiduciary duty by not using due diligence and by selling to Claimants unsuitable securities; and,
• as to failure to supervise, Respondents breached FINRA Rule 3010 (Supervision) by the failure to properly supervise.

Compensatory Damages

Accordingly, the Arbitrator ordered Respondents Offem, Havemeister, Eiger, Wojnowski, Cabrera, JLSC, and Empire to pay Claimants compensatory damages in the amount of $100,000.00, plus interest at the Florida statutory rate, accruing from August 4, 2006 until the award is paid in full.

Once the award has been paid in full, Claimants are directed to transfer to Respondents the Convertible Bridge Note due June 30, 2007, issued by Consortium Service Management Group, Inc., issued in connection with an IPO of "Live Tissue Connect." The security is to be assigned to all Respondents equally.

Punitive Damages

The Arbitrator also found Respondents Offem, Havemeister, Eiger, Wojnowski, Cabrera, JLSC, and Empire liable, jointly and severally, to Claimants for punitive damages in the amount of $40,000.00.

Intentional Misconduct and Gross Negligence

Based on clear and convincing evidence, the Arbitrator found that Respondents Offem, Havemeister, Eiger, Wojnowski, Cabrera, JLSC, and Empire were guilty of intentional misconduct, gross negligence, and failure to supervise. They misrepresented to Claimants that they were depositing funds in escrow, to be released when the IPO for Tissue Connect came on the market, at which time Claimants would be able to buy shares at half price. Claimants were guaranteed that they would double their money in six months to a year.

The Arbitrator found that instead of complying with the above representations, Claimants' investment was converted to a loan to Tissue Connect, for which Claimants were given a convertible note (which was described by the Arbitrator as a "very risky.").  Further, the Arbitrator found that Claimants were not told that a sales commission was being paid immediately, were not shown the auditor's report that showed the company to be in financial risk, and were not told that the securities were unregistered.  Moreover, the Claimants were told falsely that the product had been approved by the FDA.

The authority for the award of punitive damages is Florida Statute §768.72, which requires a showing of "clear and convincing evidence . . . of intentional misconduct or gross negligence . . ."

Bill Singer's Comment:  Given the extraordinary nature of this award, I have reprinted the relevant Section below in its entirety:

768.72  Pleading in civil actions; claim for punitive damages.--

(1)  In any civil action, no claim for punitive damages shall be permitted unless there is a reasonable showing by evidence in the record or proffered by the claimant which would provide a reasonable basis for recovery of such damages. The claimant may move to amend her or his complaint to assert a claim for punitive damages as allowed by the rules of civil procedure. The rules of civil procedure shall be liberally construed so as to allow the claimant discovery of evidence which appears reasonably calculated to lead to admissible evidence on the issue of punitive damages. No discovery of financial worth shall proceed until after the pleading concerning punitive damages is permitted.

(2)  A defendant may be held liable for punitive damages only if the trier of fact, based on clear and convincing evidence, finds that the defendant was personally guilty of intentional misconduct or gross negligence. As used in this section, the term:

(a)  "Intentional misconduct" means that the defendant had actual knowledge of the wrongfulness of the conduct and the high probability that injury or damage to the claimant would result and, despite that knowledge, intentionally pursued that course of conduct, resulting in injury or damage.

(b)  "Gross negligence" means that the defendant's conduct was so reckless or wanting in care that it constituted a conscious disregard or indifference to the life, safety, or rights of persons exposed to such conduct.

(3)  In the case of an employer, principal, corporation, or other legal entity, punitive damages may be imposed for the conduct of an employee or agent only if the conduct of the employee or agent meets the criteria specified in subsection (2) and:

(a)  The employer, principal, corporation, or other legal entity actively and knowingly participated in such conduct;

(b)  The officers, directors, or managers of the employer, principal, corporation, or other legal entity knowingly condoned, ratified, or consented to such conduct; or

(c)  The employer, principal, corporation, or other legal entity engaged in conduct that constituted gross negligence and that contributed to the loss, damages, or injury suffered by the claimant.

(4)  The provisions of this section shall be applied to all causes of action arising after the effective date of this act.

Respondents Offem, Havemeister, Eiger, Wojnowski, Cabrera, JLSC, and Empire are liable, jointly and severally, and shall reimburse Claimants the sum of $225.00, representing the non-refundable portion of the claim filing fee paid by Claimants to FINRA Dispute Resolution.

Attorneys' Fees

Claimants are the prevailing parties with respect to Claimants' cause of action for violation of Florida Statute Ch. 517. Accordingly, Respondents Offem, Havemeister, Eiger, Wojnowski, Cabrera, JLSC, and Empire are liable, jointiy and severally, to Claimants for their attorneys' fees, the amount of which shall be determined by a court of competent jurisdiction.

Bad Faith Sanction

As a sanction for their August 3, 2009, bad faith filing of a frivolous motion to dismiss, and as governed by FINRA Rule 12504 of the Code of Arbitration Procedure for Customer Disputes, Respondents JLSC, Wojnowski and Cabrera are liable, jointly and severally, to Claimants for Claimants' attorneys' fees in connection with that Motion, the amount of which shall be determined by a court of competent jurisdiction. Additionally, Respondents JLSC, Wojnowski and Cabrera shall be assessed all hearing session fees in connection with the pre-hearing telephonic conference conducted by the Arbitrator on October 16, 2009, in connection with this Motion.

As an additional sanction, Respondents Offem, Havemeister, Eiger, Wojnowski, Cabrera, JLSC, and Empire were found  liable jointly and severally to Claimants for Claimants' attorneys' fees in connection with Claimants' motion for sanctions, the amount of which shall be determined by a court of competent jurisdiction. Additionally, Respondents Offem, Havemeister, Eiger, Wojnowski, Cabrera, JLSC, and Empire shall be assessed all hearing session fees in connection with the pre-hearing telophonic conference conducted by the Arbitrator on February 18, 2010, in connection with this motion.

Bill Singer Comment: Inappropriate motions to dismiss filed prior to the conclusion of a party's case in chief, including prehearing motions, are discouraged in arbitration because they are viewed as an abusive practice that improperly interferes with a party's right to a hearing. As such, FINRA's arbitration rules significantly limit motions to dismiss filed prior to the conclusion of a party's case-in-chief. Under the rules, the panel cannot act upon a motion to dismiss a party or claim, unless the panel determines that:

1. the non-moving party previously released the claim(s) in dispute by a signed settlement agreement and/or written release; 
2. the moving party was not associated with the account(s), security(ies), or conduct at issue; or 
3. the claim does not meet the criteria of the eligibility rule.

If a FINRA arbitration panel denies a Rule 12504(a) motion, the panel must assess forum fees against the party who filed the motion. If the panel deems a Rule 12504(a) motion frivolous, it must also award reasonable costs and attorneys' fees to the party who opposed the motion.

Conclusion

My compliments to Public Arbitrator Paul E. Flora for providing a cogent fact pattern, a road-map through what appears to have been testy proceedings, and his rationale for his findings and decisions.  It's rare to find a FINRA Arbitration Decision that is so intelligible and compelling.  Nice job!

Bill Singer Comment: For an interesting variation on a theme, consider this recent article detailing Jesup & Lamont's ongoing battles with FINRA: FINRA's Battle with Jesup Is Heating Up (by Dan Jamieson of InvestmentNews, March 7, 2010):

[I]n an unusual twist in the case, the hearing panel ordered Finra to produce internal documents related to Empire, which the regulator refused to do, citing legal privilege.

Last week, a federal court in Texas denied Jesup's motion to compel production of the documents. Finra told the court that Jesup had tried, and failed, in two other legal proceedings, to force the release of Finra records. . . .