This Little Piggy(back) Ran All The Way to Arbitration

January 6, 2011

FINRA non-member Claimant Hans-Dieter Neuen ("HDN") entered into an agreement with Equity Concepts, Inc. ("ECI") and Smith, Moore & Co. (Smith Moore) to have clearing services provided for HDN's customers. The agreement provided that ECI and Smith Moore would process transactions of HDN's customers as directed by HDN, provide HDN monthly statements of transactions in its customers' accounts, and pay all commissions from the purchase and sale of securities by HDN's customers to its designated account.

Okaaaaaaay -- those of you industry veterans may recognize the above as what is often called a piggybacked clearing arrangement. If you've been around the Street as long as I have, you also likely know that such arrangements always seem to experience problems.  What starts out as a supposed accomodation often winds up as a finger-pointing, yelling, screaming, and red-in-the-face mess. Read on...

In a FINRA Arbitration Statement of Claim filed in October 2009, Claimant HDN asserted that brokers related to Respondent ECI and Respondent Smith Moore were selling securities and making cold calls under Claimant HDN's name but were not licensed to do. Claimant also alleged that brokers of both Respondents transferred Claimant's customers' accounts to other firms that were direct competitors of Claimant, and failed to provide information about the transferred accounts (effectively preventing Claimant from earning any revenue from his customers). Claimant HDN sought $431,604.50 in damages arising from lost commissions, unjustified account transfers, interference with its customers, and other causes of action. In the Matter of the Arbitration Between Hans-Dieter Neuen, Claimant vs. Equity Concepts, Inc. and Smith, Moore & Co., Respondents (FINRA Arbitration  09-06001, December 31, 2010)/

Respondent ECI generally denied the allegations and asswerted various affirmative defenses, among which was that it was piggybacking a clearing services agreement and had not solicited Claimant's customers to move accounts.

Respondent Smith Moore generally denied the allegations and asserted affirmative defenses, among which was that it was a clearing firm and had acted properly with regard to margin calls in Claimant's personal account. Smith Moore asserted a claim for indemnification and/or contribution against ECI.

The FINRA Arbitration Panel found that Respondents ECI and Smith Moore & Co.jointly and severally liable and ordered them to pay to Claimant $37,315.00 in compensatory damages.