by Bill Singer
Multi-Million Dollar FINRA Arbitration Award For Selling Away / Outside Business Activities
October 5, 2010
Scott Gordon was a registered agent of Lincoln Financial Advisors Corporation from 1997 until his September 2006 termination. During his tenure, Gordon served in various roles, ranging from registered representative, Salt Lake City Managing Principal, Regional CEO, and Managing Director. From October 2005 until September 2006, he had no managment/supervisory responsibilities.
In 2005, Gordon became interested in software development company Healthright, Inc. and in July 2005 he became the company's CEO. In October 2005, Gordon used a footer on his Lincoln Financial e-mail account referring to himself as Chairman/CEO of Healthright, and further displayed that company's address and phone number.
In August 2005, Gordon submitted an Outside Business Activities ("OBA") Disclosure about his activites at Healthright to Lincoln Financial, which neither approved nor denied the OBA.
Raising Funds for Healthright Partners
In order to raise funds for the development of Healthright, Inc., Gordon and three associates caused Discovery Alliance, LLC and Healthright Partners to be organized pursuant to a plan whereby Discovery would be the general partner of Healthright Partners. It was then the expectation that Claimant Healthright Parnters and Discovery Alliance, LLC would raise funds through a Private Placement that would allow investment in Healthright Inc. Accordingly, Discovery met with various investors and Gordon was an active participant in most such meetings, where he allegedly made misstatements and/or material omissions during his presentations.
By March 2006, some 25 investors had place $3.325 million with Healthright Partners, including Gilford who loaned $300,000 to Healthright Inc.
Claimant Gilford Discovers Signs of Fraud
In May 2006, Gilford became a member of Healthright, Inc.'s Board of Directors and Gordon ceased to be CEO of that firm. In June 2006,Gilford discovered the misstatemetns and omissions that had previously been made by Gordon, including managment and operations irregularities. Worse, in July 2006, Dr. John Morgan, the developer of the Healthright software programs, died. Thereafter, Healthright, Inc. failed.
By September 2006, Claimant Gilford sent a written complaint to Lincoln Financial Advisors, which fired Gordon in September 2006. In May 2006, Gordon was barred by FINRA.
FINRA Arbitration.
In a Statement of Claim filed against REspondent Lincoln Financial Advisors Corporation in May 2009, Claimants Healthright Partners [ NOTE: Claimant Healthright Partners is not Healthright, Inc.] and Grant R. Gilford sought compensatory damages of not less than $3.675,000 plus interest, treble damages, costs and attorneys' fee, and not less than $10,000 in punitive damages. The Claim alleged failure to supervise; negligence; breach of fiduciary duty; violations of the Utah Uniform Securities Act; and violations of FINRA's Conduct Rule, including that of "Selling Away." At the close of the FINRA arbitration hearing, the Claimants requested the following damages under Utah Securities law:
- If the Panel found that Respondent Lincoln Financial Advisors Corporation was not reckless, damages in the amount of $7,563,879.00.
- If the Panel found recklessness, then Claimants sought treble damages of their $3,625 million for the sum of $10,875,000 plus interest, attorneys fee, and costs for a net award of $17,208,379.
In the Matter of the Arbitration between Healthright Partners, Grant R. Gilford, Claimants, vs. Lincoln Financial Advisors Corporation, Respondent (FINRA Arbitration 09-02961, September 27, 2010).
The FINRA Panel Rules
The FINRA Arbitration Panel determined that Gordon was selling away and made material misstatements and/or omissions concerning Healthright, Inc., in connections with the sale of its securities. The Panel found Respondent Lincoln Financial "negligent" for not preventing Gordon's activities with Healthright, Inc. for more tha a year despite having ample notice of his OBA.
The Panel determined that under Utah law that the arbitration was not filed until after two years from the dates that Claimants knew or should have known of their claims and, as such, those claims are time barred under the Utah Securities Act.
Respondent Lincoln was ordered to pay
- Claimant Gilford $300,000 plus $66,162 in accrued interest and to pay interest until the award is fully paid; and
- Claimant Healthright Partners $3,325,000 plus $733,302 in accrued interest and to pay interest thereafter until the award is fully paid.
Bill Singer's Comment: If Claimants had timely filed their FINRA Statement of Claim within the year statute that applied to their allegations under the Utah Securities Act, the Panel may have awarded the enhanced damages pursuant to that state's "recklessness" standards. However, since the Panel determined that such claims were not timely filed, the Panel limited its award to the proven compensatory damages and attendant interest.
To learn more about Outside Business Activities, visit: http://www.rrbdlaw.com/enforcement-actions/index.php?cid=4