Securities Arbitration

FINRA Updates

September 30, 2014 | by Staff Attorney

On September 25, 2014, FINRA published its third quarter “Neutral Corner,” a newsletter designed to give practitioners, investors, and arbitrators updates on FINRA news. In the newsletter, FINRA officially announced the retirement of Linda Feinberg, President of FINRA Dispute Resolution. Ms. Feinberg has worked with FINRA since 1996. In addition, the newsletter highlights increased arbitrator disclosures. As of 2013, FINRA has increased its scrutiny of arbitrator disclosure by conducting internet searches of all arbitrators before having them appointed to panels.

Finally, FINRA highlights its new DR Portal – a web-based program designed to streamline the arbitration process for both attorneys and arbitrators. This is part of FINRA’s initiative to go paperless in the 21st century.

Blackbook Capital Sanctioned For Overcharging Clients

August 28, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned brokerage firm Blackbook Capital LLC (Blackbook) concerning allegations that: 1) between April 2010 and June 2011, Blackbook charged customers $60.50 on each purchase or sale transaction in addition to or in place of a designated commission; 2) between August 2010, and August 2011, Blackbook failed to search its records in response to requests by the Financial Crimes Enforcement Network of the Department of the U.S. Treasury (FinCEN) pursuant to the USA PATRIOT Act of 2001; 3) Blackbook failed to conduct an adequate independent Anti-Money Laundering (AML) test for calendar year 2010; and 4) between July 2009, and August 2011, Blackbook failed to preserve all of its business-related emails in a non-rewriteable, non-erasable format.

Blackbook has been a member of FINRA since March 2003. The firm has three offices with its main office located in New York City. Blackbook employs approximately 35 registered persons and engages in securities transactions for retail customers and investment banking transactions.

Under NASD Conduct Rule 2430 (Charges for Services Performed) charges for services performed, including miscellaneous services such as collection of moneys due for principal, dividends, or interest; exchange or transfer of securities; appraisals, safe-keeping or custody of securities, and other services, shall be reasonable and not unfairly discriminatory between customers. Under Exchange Act Rule 10b-10 (Confirmation of Transactions) broker-dealers are required to disclose specified information in writing to customers at or before the completion of a transaction. Finally, FINRA Rule 2010 (Standards of Commercial Honor and Principles of Trade) requires a member in the conduct of its business to observe high standards of commercial honor and just and equitable principles of trade.

Beware of Brokerage Firms Soliciting 401(k) Rollovers – Part II

June 24, 2014 | by Staff Attorney

This article picks up on our prior post concerning a recent report by Bloomberg concerning allegations that brokerage firms have used unscrupulous tactics in rolling over employee 401(k) plans into IRA accounts.

The article highlighted how Kathleen Tarr (Tarr) and Richard McCollam (McCollam) with Royal Alliance Associates gained access to AT&T Inc. employees. Tarr was also associated with SII Investment, Inc., from July 2010 until November 2012. McCollam began marketing to AT&T employees with 401(k) rollovers and lump-sum pension payments. The telecommunications company has 246,000 workers and ranks among the best 15 percent of U.S. plans in terms of fees, charging expenses as low as .01 percent. At AT&T employees can take a pension monthly payment or a lump sum payment.

According to the article the employees looked to Tarr as 401(k) expert and visited their homes and offices in order to advise them on their retirement plans. Bloomberg found that Tarr encouraged hundreds of departing AT&T employees to roll over their retirement savings into risky high-commission investments that the SEC and FINRA have warned customers against investing substantial unsuitable sums into.

Wells Fargo Advisors Awarded Limited Recovery On Broker Promissory Note

June 18, 2014 | by Staff Attorney

Recently, a Financial Industry Regulatory Authority (FINRA) arbitration panel rendered a decision concerning Wells Fargo Advisors, LLC’s (Wells Fargo) claims against its former broker Steven Grundstedt (Grundstedt) for breach of three promissory notes. FINRA Arbitration Case No. 11-02245. The FINRA arbitration panel held that Grundstedt was entitled to an offset against the outstanding balance of the first promissory note dated July 30, 2008 because Wells Fargo, then Wachovia at the time, breached an implied contract and/or the covenant of good faith and fair dealing in the contracts Grundstedt signed, causing him substantial economic damage.

Wells Fargo claimed that Grundstedt failed to repay three separate forgivable promissory notes. Note 1 was in the principal amount of $320,000 and constituted a “transitional bonus” Grundstedt was rewarded with for moving his book of business from his former employer, Citigroup. Like the other notes in the litigation, the principal portion of Note 1 could be received in a lump sum or could be taken in monthly installments. In either case, the monthly re-payment of principal and interest was to be offset by the forgiveness of an equivalent amount conditioned upon Grundstedt’s continued employment with Wachovia’s.

According to the order, at the time Grundstedt accepted employment with Wachovia, he signed multiple agreements. One of these agreements promised Grundstedt that he would receive “support” from Wachovia including “re-assignment of accounts, walk-ins, prospective customer leads…” among other forms of company support. The panel found that Wachovia initially lived up to its promises but that the situation changed after Wachovia was acquired by Wells Fargo. In the fall of 2009, Wells Fargo consolidated operations, closed branches, and changed payouts and various other things designed with the intent to make the overall business more efficient and profitable.

Ameriprise Slammed With $1.17 Million Decision Concerning Tenants-in-Common (TIC) Investments

June 17, 2014 | by Staff Attorney

A Financial Industry Regulatory Authority (FINRA) arbitration panel recently ordered Ameriprise Financial Services Inc. (Ameriprise) to pay two elderly California investors $1.17 for recommending the investments in Tenants-in-Common (TIC), real estate related investments that eventually failed.

Brokerage firms, such as Ameriprise, having increasingly turned to alternative investment products such as TICs in recent years. The sales of TIC interests grew from approximately $150 million in 2001 to approximately $2 billion by 2004. FINRA has warned brokerage firms to put investors on notice of the risks of these illiquid investment for which no secondary market exists. In addition, subsequent sales of TIC property may occur at a discount to the value of the real property interest causing the investor substantial losses. FINRA has also warned that the fces and expenses charged by the TIC sponsor can outweigh the potential tax benefits associated with the IRS Section 1031 Exchange. FINRA requires that all member brokerage firms have an obligation to comply with all applicable conduct rules when selling TICs. These rules include the obligation to conduct proper due diligence and to ensure that promotional materials used are fair, accurate, and balanced.

In a recent InvestmentNews article, it was reported that in May, a FINRA arbitration panel in San Francisco ruled that Ameriprise had inappropriately advised two retired schoolteachers to invest a total of $1.03 million into three TICs in office complexes and hotels in early 2008. One of the TICs has subsequently failed and the two others have suffered declines in value. According to the investors, the couple lost most of their life savings. The couple invested in TICs known as ARI-Onyx Office Plaza Tenant In Common; Moody Springhill Suites Pittsburgh Tenant in Common; and Moody Marriott TownePlace Suites Portland Scarborough Tenant in Common.

FINRA Determines that Charles Schwab Cannot Bar Clients From Participating in Class Actions

May 9, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) has determined that Charles Schwab & Co. (Charles Schwab) violated the self-regulatory organization’s rules by adding waiver languages to agreements that prohibited customers from participating in any class action cases against the firm. Schwab settled the claims and was fined of $500,000. The firm also agreed to tell all its customers that the requirement is no longer in effect.

In October 2011, Schwab made amendments to the customer account arbitration agreement of over 6.8 million investors after it settled a class action securities case accusing the brokerage firm of misleading thousands of customers about its YieldPlus money market fund. The YieldPlus fund sustained huge losses in 2008 and Schwab paid $235 million to resolve the allegations against the firm.

In the wake of Schwab settlement the firm amended its arbitration agreement to include a waiver provisions mandating that customers consent that any claims against the firm could only be arbitrated individually.

Securities Watchdog is Actually Asleep At the Wheel

May 8, 2014 | by Staff Attorney

People have joked that securities regulators are asleep at the wheel due to the number of frauds that go unpunished for so long. However, a recent Bloomberg BusinessWeek article exposed that the phrase is literally true in some cases.

Every dispute an investor has with their brokerage firm must be arbitrated through the Financial Industry Regulatory Authority (FINRA). FINRA hires and purportedly screens arbitrators who hear customer disputes with the industry. Due to the private nature of arbitration, the general public is often unaware how poorly equipped this system is at times to handle matters entrusted to it. While I have been satisfied with the quality of arbitrators in many cases, I have also had the unfortunate and all too common experiences complained of in the Bloomberg article.

According to the article, FINRA’s arbitration panels has a pool of 6,375 people who are often retired brokers, lawyers, or accountants. Arbitrators are paid about $400 a day when serving on a panel. FINRA provides arbitrators with 14 hours of instruction that can be completed online. Awards rendered by FINRA arbitrators are typically brief, and the decision often provides no reasoning and only a bare outline of the claim and no explanation of how the amount of the award was determined.

Bill Tatro and Mary Helen Caprice Mallett Accused of Selling Unsuitable Private Placements Securities Part I

March 25, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently barred broker William (Bill) Tatro, formerly registered with First Allied Securities, Inc. (First Allied), concerning allegations that he failed to respond to two requests for information by FINRA staff in connection with an investigation into whether he violated federal securities laws or FINRA conduct rules. According to FINRA, Tatro admitted that he received both information requests but did not provide any of the requested information and documents because he claimed that he believed the bankruptcy court had stayed all requests pending the bankruptcy’s resolution. FINRA rejected Tatro’s bankruptcy defense and that Tatro violated FINRA Rules by failing to provide the information and documents FINRA staff requested and determined that Tatro should be permanently barred from associating with any FINRA member firm in any capacity.

FINRA initiated the investigation against Tatro after it received customer complaints and a series of Uniform Termination Notices (Forms U5) filed by Tatro’s former broker-dealer, First Allied. According to FINRA, the amended termination notices disclosed numerous customer complaints alleging fraud and other sales practice violations of more than 80 individuals who might be victims of Tatro’s alleged misconduct. Tatro total career related losses have been estimated to be anywhere from $10 million to $100 million and may potentially involve as many as 1,000 clients. On July 30, 2012, Tatro filed a petition for bankruptcy with the United States Bankruptcy Court for the Western District of New York.

Tatro began his securities career in 1975 and worked at six different broker-dealers before becoming associated with First Allied in November 2003. After Tatro left First Allied he operated Biltmore Wealth Advisors, LLC, an investment advisory firm in Phoenix, Arizona. Tatro also operated Eagle Steward Wealth Management, an investment advisory firm. Tatro’s wife, colleague, and business partner, Mary Helen Caprice Mallett (Mallett) has also advised Tatro clients and has been accused of recommending the same or similar speculative investments that characterizes Tatro’s practice.

Will I Win My FINRA Securities Arbitration Claim?

February 19, 2014 | by Staff Attorney

One of the most common questions I receive as a FINRA securities attorney is whether or not a client is likely to prevail at a FINRA arbitration hearing. My first gut reaction, and the one I tell clients, is honestly I just don’t know. Most clients are puzzled by this answer because after handling hundreds of arbitration claims one would think I would have a better sense and certainty as to the strength of the case. However, the answer to whether the client would win at arbitration is not just a function of the strength of the case.

The better way to phrase the question is: What is the likely outcome of my securities case? That question is more readily answerable. I tell clients that it has been our experience that approximately 80% of all cases filed will be resolved through settlement or other means sometime prior to hearing. Recent data released by FINRA supports that approximately 80% of cases never make it to hearing. According to FINRA, of all arbitrations decided between 2009 and 2013 between 75% and 79% of those claims are resolved either through settlement, withdrawn, or means other than a hearing.

But what of the 20% of cases that do go to hearing? What are the chances of success at the FINRA arbitration hearing? The answer to that question is again usually unknowable at the time it’s first asked. There are so many considerations that go into determining the likelihood of success, many of which are unknown at the outset. Once of the biggest unknowns at the outset is who the arbitrators will be.

FINRA Debates Rule Allowing Matters to Be Referred to Enforcement During Arbitration Cases

February 17, 2014 | by Staff Attorney

A recent InvestmentNews article highlighted a proposed rule change that the Financial Industry Regulatory Authority (FINRA) has proposed to the Securities and Exchange Commission (SEC) that would allow arbitrators to direct cases to FINRA enforcement during the pendency of the case. FINRA enforcement is responsible disciplining brokers and brokerage firms for securities misconduct and fraud. FINRA has the authority to suspend, sanction, fine, or bar individuals and companies from involvement in the securities industry based upon the findings of its investigation.

Under the current rules, arbitrators must wait until the case concludes before submitting a report of concerns to FINRA. But FINRA believes that making arbitrators wait until the end of the arbitration could delay the regulator’s ability to take action against a parties and to collect evidence.

I believe there are pluses and minuses to allowing mid-litigation referral of customer claims to FINRA. On the benefit side, FINRA would receive information faster and be able to protect more investors. Although arbitrations are routinely completed within one year to a year and half after filing, a delay in submitting evidence of misconduct allows wrongful actors to continue to hurt investors. In addition, sometimes counsel representing brokerage firms, on rare occasions, abuse the FINRA process in order to satisfy a demanding client. However, brokerage firms, even in litigation, must conduct themselves fairly under the FINRA rules. The power of an arbitrator to refer instances of repeated or significant abuse of the FINRA process will make firms think twice before simply ignoring panel orders.