An Inexplicable FINRA Customer Arbitration. Cases of Note Now Online!

May 19, 2010

On May 12, 2009, Claimants Annette and Donald Smith filed a Statement of Claim with FINRA seeking $70,000 compensatory damages, interest, attorneys' fees, costs, and other appropriate relief as a result of breach of conduct, breach of fiduciary duty, and unauthorized conduct involving their investments in the common shares of  Cummins Engine, RIG (Transocean Ltd.) and Sigma-Aldrich. Respondents RBC Capital Markets and Alan A. Cook, II, generally denied the allegations and asserted various affirmative defenses. In the Matter of the Arbitration Between Annette Smith, individually and on behalf of Annette Smith individual Retirement Account; Donald L. Smith, individually and on behalf of Donald L. Smith SEP and Individual Retirement Account, Claimants, vs. RBC Capital Markets Corporation and Alan A. Cook, II,  Respondents (FINRA Arbitration 09-02687, May 11, 2010)


A Little Foot Dragging?


On February 26, 2010, the FINRA Arbitrator required that within (10) ten days of receiving the Order, Respondents were to produce certain specified documents, including:

(a) certain documents that they previously agreed to produce;

(b) documents they are obligated to disclose under the Code and Discovery Guide; and

(c) information previously requested and not responded to. 

On April 9, 2010, Claimants moved pursuant to Rule 12212 of the Code of Arbitration Procedure (the "Code") to impose monetary and non-monetary sanctions on Respondents for their failure to comply with the Arbitrator's February 26th Order., 2010. Respondents did not produce critical documents until April 9, 2010, five days before the commencement of the hearing.


A Little Punishment


The Arbitrator granted Claimants' Motion for Sanctions and ordered that Respondents, jointly and severally, shall pay to the Claimants $1,000 in monetary sanctions.


And the Award Goes To . . .


As to the substantive issues in the Arbitration, the Arbitrator found that 

    1. Respondents are jointly and severally liable for and shall pay to Claimants compensatory damages In the amount of $11,672.41.
    2. Respondents are jointly and severally liable for and shall pay to Claimants interest in the amount of $1,623.27. The Arbitrator calculated interest at 9% per annum accruing from October 10,2008 until April 27,2010.
    3. Respondents are jointly and severally liable for and shall pay to Claimants sanctions in the amount of $1,000.00.
    4. Alan Cook's request for expungement is denied.

Bill Singer's Comment:  As with so many FINRA arbitrations, we have the outcome but not necessarily the answers. Why did the Claimants' only win about a fifth or so of their requested damages? One answer is that Claimants' overstated their losses and the Panel awarded their actual damages. Another answer is that the Claimants' failed to fully prove their case. Frankly, there are any number of possible additional explanations -- you are free to guess as you will.  Which is sort of the problem with these FINRA arbitrations.


In this case, public customer claimants sued two industry respondents.  The FINRA panel sanctions the Respondents for $1,000 for apparently not discharging their obligations to timely produce requested discovery materials. Moreover, the Panel rejected a request to expunge the individual broker's record concerning this arbitration. You would think that given the foot-dragging production by the Respondents and the Panel's apparent conclusion that Claimants prevailed on the issue of liability, that this would have been a clean sweep for the public customers. Inexplicably, the Panel only awarded (with the discovery sanction) about $15,000 as against some $70,000 sought.


We should not finish reading a FINRA customer arbitrations decision and find ourselves using words such as "inexplicably." This may well be a very, very fair decision. It's just that we need more of an explanation. 




Regulatory lawyer Bill Singer has analyzed and posted the latest crop of FINRA disciplinary cases.  

  • Broker Ramsey served as a registered representative for an elderly customer who executed a power of attorney, giving Ramsey broad authority over her financial affairs. Ramsey used the power of attorney to obtain approximately $482,000 in withdrawals from an annuity, which, after taxes were deducted, totaled approximately $373,750. Checks for $373,750 were issued in the customer's name and sent to Ramsey's office. Ramsey converted some of the funds for his personal use and borrowed $275,000 from the customer.  In total, he owes the elderly customer approximately $500,000.  See what sanctions were imposed upon him

  • Broker Chrusciel's firm verbally warned Chrusciel that he was not permitted to use inventory accounts for personal trading and distributed a written memorandum to all employees telling them that this practice was prohibited, but Chrusciel ignored the warning and, to avoid detection, stopped using his own accounts and began allocating trades to accounts his relatives held. For some reason, one warning wasn't enough. Chrusciel's firm warned him in writing to stop using firm inventory accounts for personal trading or he would be terminated.  See what sanctions were imposed upon him  

  • While contemplating his resignation from his member firm to work at another member firm, Broker Current altered customer telephone records at his member firm without authorization in order to slow down other registered representatives who he believed would be assigned to call his customers after he resigned. You think this is an oddball violation?  Think again. See what sanctions were imposed upon him   

  • Broker Goode failed to execute a customer's instructions to liquidate positions in the customer's account, and the value of securities in the account declined precipitously with the customer incurring losses exceeding more than $1 million dollars. See what sanctions were imposed upon him   

  • ONE OF THE ALL-TIME MOST BIZARRE FINRA CASES: Associated Person Pierce conspired with others to steal $16,000 from a casino by engaging in a scheme with a blackjack dealer to cheat. See what sanctions were imposed upon him