by Bill Singer
Wachovia Wins Promissory Note / Bonus Retention Arbitration in Market-Timing Case
October 8, 2010
This one's a bit messy. For starters, it sort of begins, way back when, with a Securities and Exchange Commission (SEC) investigation into the market timing of mutual fund shares. Then the former A.G. Edwards broker who was caught up in that SEC case was fired. Then Wachovia (the successor to A.G. Edwards) comes after him for failure to repay a promissory note/bonus retention. And, for good measure, the broker counterclaims for $1 million and an expungement.
Okay -- ya got all of that? Really??
Now for the facts:
In a Statement of Claim filed in December 2009, Claimant Wachovia Securities, LLC. alleged breach of contract in connection with its former employee Thomas Bridge's failure to repay a balance due under the terms of a September 2007 promissory note and bonus retention agreement. Claimant Wachovia sought repayment of $329,336.17 in principal under the Note plus interest, costs, fees, and other relief. In the Matter of the Arbitration Between Wachovia Securities, LLC, Claimant, vs. Thomas C. Bridge, Respondent (FINRA Arbitration 09-02028, September 30, 2010).
Respondent Bridge denied the allegations made in the Statement of Claim and asserted various affimiative defenses. Additionally, Respondent Bridge asserted a Counterclaim raising causes of action that included fraud, negligence, breach of contract, and defamation. Respondent's Counterclaim sought at least $1 million in compensatory damages, punitive damages; plus interest, fees, and costs. Respondent also sought an expungement/amendment of his Form U5.
SEC Market-Timing Case
Among other things. the causes of action relate to Respondent's temination of employment with Claimant, allegedly based upon an SEC administrative proceeding concerning the market timing of various mutual fund shares in accounts of Respondent and others at A.G. Edwards, to which Claimant is the successor. See below for details.
Respondent Precluded from Giving Evidence/ Raising Defenses
As of December 17, 2009, Respondent was represented by legal counsel but, thereafter, proceeded to represent himself ("pro se").
In May 2010, Claimant filed a Motion for Sanctions requesting that the FINRA Arbitration Panel bar Respondent from presenting any evidence or defenses at the evidentiary hearing based upon Respondent's failure to comply with the Panel's Order dated March 22, 2010 to provide documents to Claimant. Respondent did not file a response.
On or about June 30, 2010, following a telephonic pre-hearing conference with the parties, the Panel issued an Order that granted Claimant's motion. Specifically, the Panel stated that pursuant to Rule 13212(a) of the Code of Arbitration Procedure (the "Code"), Respondent is precluded from presenting evidence at the hearing on the merits, and pursuant to Rule 13212(c) of the Code, Respondent's Counterclaim is dismissed, with prejudice. The Order further stated that the evidentiary hearing would be limited to Claimant's damages only, as liability was no longer an issue.
Panel's Decision
The FINRA Arbitration Panel found Respondent Bridge liable on the claim of breach of contract in connection with the Note and the Agreement, and ordered him to pay to Claimant Wachovia
- $329,336.17 in compensatory damages
- $785 in accrued interest
- $61,147.04 in additional accrued interest
- $34,875.00 in reimbursable attorneys' fee
- $9,695.52 in costs
- $1,000.00 in FINRA filing fees.
Bill Singer's Comment:
You can read the SEC Opinion In the Matter of Thomas C. Bridge et. al. at http://www.sec.gov/litigation/opinions/2008/33-8952.pdf (Securities Exchange Act of 1933 Rel. No. 9068 / Securities Exchange Act of 1934 Rel. No. 60736 / Admin. Proc. File No. 3-12626, September 29, 2009). The SEC's summary of that case states:
Salesperson associated with registered broker-dealer employed a scheme to defraud, engaged in a practice that operated as a fraud, and misrepresented and omitted to state material facts in order to evade trading restrictions imposed by registered investment companies. Salesperson willfully violated antifraud provisions of federal securities laws. Held, it is in the public interest to bar salesperson from association with any broker or dealer with a right to reapply after five years, impose a cease-and-desist order, order disgorgement, plus prejudgment interest, and assess a civil money penalty.
Branch managers failed to exercise reasonable supervision over salespersons with a view towards preventing salespersons' violations of antifraud provisions of the securities laws. Held, it is in the public interest to bar branch managers from association with any broker or dealer in a supervisory capacity, with rights to reapply after five and three years, respectively, and to assess civil money penalties.
The Opinion further notes that:
The law judge found that Bridge, a financial consultant, or "FC," 3/ with A.G. Edwards, and Charles Sacco, 4/ also an A.G. Edwards financial consultant, willfully violated Section 17(a) of the Securities Act of 1933, 5/ Section 10(b) of the Securities Exchange Act of 1934, 6/ and Exchange Act Rule 10b-5 7/ by employing deceptive tactics to evade market-timing restrictions imposed by registered investment companies. 8/
. . .
Bridge participated in a deceptive market-timing scheme over eighteen months that defrauded many mutual funds and investors in those funds. 98/ The Division's expert calculated that, over the period, market-timing trades that Bridge placed diluted the value of affected mutual fund shares by $0.9 million. 99/ Bridge acted with a high degree of scienter, given his admitted desire to enable his client to continue market timing using tactics that he believed would effectively circumvent the Restriction Notices he received. As described above, Bridge fails to recognize the wrongfulness of his conduct and offers no assurances against future violations. Although Bridge does not appear to be currently employed in the securities industry, his relative youth would permit him to reenter the industry at any time, and for some time to come. These factors lead us to conclude that a bar from association with any broker or dealer, with a right to reapply after five years, is necessary to protect the public interest and will serve a remedial purpose.
==========================================================================IN CASE YOU MISSED YESTERDAY AFTERNOON'S SPECIAL BLOG:Major Anthony Nelson Rubs Lamp and Gets His Wish: Over $11 Million Arbitration Victory!Written: October 7, 2010In a FINRA Arbitration Statement of Claim filed in May 2009, Claimants asserted causes of action including breach of fiduciary duty; breach of written contract; fraud; failure to supervise; and violations of federal and state securities laws, statutory and common law, and NASD rules of fair practice and NYSE rules. Although the FINRA decision does not detail the specific securities at issue, we are advised that the allegations involve the purchase of a life insurance policy. At the conclusion of the FINRA hearing, Claimants sought $1,345,015.00 in compensatory damages plus interest, costs, fees, and punitive damages in an amount to be determined. In the Matter of the Arbitration Between Larry Hagman, Individually; Larry Hagman & Maj I. Hagman Rev Trust; Larry Hagman & Maj I. Hagman, TTEE; Larry Hagman IRA CGM IRA Custodian; Larry Hagman Rollover IRA CGM; and The Hagman Insurance Trust UAD 03/21/06, Claimants, vs. Citigroup Global Markets, Inc., Respondent (FINRA Arbitration 09-03251, October 6, 2010).
Respondent Citigroup generally denied the allegations and also requested the expungement of all references to the above captioned arbitration from non-party Lisa De Tanna's registration records maintained by the Central Registration Depository ("CRD").
FINRA Panel Orders Payment of Damages
The FINRA Arbitration Panel found Respondent Citigroup liable ordered it to pay to Claimants
- $1.098,386.00 in compensatory damages; and
- $10,000,000 in punitive damages to be paid directly to the IRS Tax- Exempt 501c(3) charitable organization(s) of Claimants' choice, as permitted in accordance with:
- Mastrobuono V. Shearson Lehman Hutton. Inc.. 514 U.S. 52 (1995 at http://www.law.cornell.edu/supct/html/94-18.ZO.html);
- Hobbs V. Bateman. Eichler. Hill Richards. 164 Cal. App. 3d (Cal. App. 2d Dist. 1985) at http://scholar.google.com/scholar_case?case=46826640791542154&hl=en&as_sdt=2&as_vis=1&oi=scholarr;
- California Welfare & Institutions Code § 15600, et seq.; and
- FINRA Arbitrator's Manual, pg. 31:
[a] party also might have requested punitive damages. Punitive damages are not intended to right a wrong but are intended to punish the wrongdoer and to deter future wrongdoing. Generally, you may award punitive damages if the claimant requests it, and the respondent has engaged in serious misconduct that meets the standards for such an award, as well as any arbitration forum rules on the subject.
The FINRA Panel found Respondent Citigroup liable for and ordered it to pay Claimants'
- $439,354.40 in attorneys' fees, and
- $20,387.00 in costs, including fees of witnesses.
The FINRA Panel denied Respondent's request for the expungement of all references to the above captioned arbitration from non-party Lisa De Tanna's registration records maintained by the Central Registration Depository ("CRD")
Bill Singer's Comment: Claimant Larry Hagman is, indeed, the actor who played the roles of Major Anthony Nelson in the TV show "I Dream of Jeannie" and J.R. Ewing in "Dallas." See these clips: http://www.youtube.com/watch?v=Hrt0dqF_yqU
