Arbitration

Broker-Dealer National Planning to Pay $6.2M FINRA Arbitration Award to Two Minnesota Investors Over REITs

Published on: December 3, 2013 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Regulatory Authority panel says that National Planning Corp. must pay a $6.2 million REIT arbitration award to Minnesota investors Stacy and Ronnie Erickson. The Erickson and trusts on their behalf accused the independent brokerage firm and its ex-brokers Christopher R. Olson of negligence, breach of fiduciary duty, misrepresentations, and industry rule violations involving real estate investment trusts.

According to the FINRA award, which doesn’t name the REITs that the Ericksons invested in, the claimants also invested in real estate investments in Waterway Holdings Group, which Olson and a Preferred Resource Group Inc. employee owned. Olson has since filed for bankruptcy and all claims against him have been halted. (Olson was allowed to resign from NPC after he failed to disclose his external business activities or the involvement of his clients in these undertakings. After he quit he registered with Berthel Fisher & Co. Financial Services Inc.)

The Ericksons say that in addition to becoming the victims of broker fraud, they had to fulfill outstanding loans on mortgages on the real estate investments to avoid foreclosure. They contend that Olson manipulated them into taking on significant debt, paying millions of dollars that they cannot get back, and annuitizing, liquidating, and structuring their investment assets that were for their retirement to pay back the “staggering” debt that resulted from the real estate investment recommendations.

Lawyers, Investor Advocates Want to Know More About SEC Supervision Of FINRA’s Arbitrator Selections

Published on: December 2, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The Public Investors Arbitration Bar Association (PIABA) is working with consumer rights group Public Citizen to get the US Securities and Exchange Commission to release documents about its oversight of the Financial Industry Regulatory Authority’s selection of the arbitrators who preside over disputes between broker-dealers and investors. According to PIABA President Jason Doss, because customers are “forced” into only having securities arbitration as a resolution venue when they sign documents to set up brokerage accounts (in the event of future disputes), they should be allowed to know how FINRA decides who hears the arbitration cases.

PIABA is a lawyers’ group that represents investors with securities arbitration claims. Contending that this is an issue of “transparency,” the attorneys have been trying to gain access to these documents for the last few years.

The group’s efforts started in 2010 with a Freedom of Information Act query to the SEC asking for documents that address how the regulator inspects FINRA’s process for selecting arbitrators and looking into their backgrounds. However, even though FOIA grants the public access to federal agency records, it has exemptions. (The exemption exists to protect sensitive matters, such as customer’s private financial data.)

FINRA Considers Making Broker-Dealers Carry Insurance Covering Arbitration Payments

Published on: October 4, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority intends to weigh whether to mandate that brokerage firms have insurance covering payments for possible arbitration awards issued to investors. The SRO is aware that there has been frustration among claimants who have not received their awards.

It can be a problem when a brokerage firm closes its doors without paying legal claims and awards it owes customers. Making broker-dealers carry insurance could lower the amount of awards that go unpaid. Unfortunately, some firms have such a small financial cushion that they can be forced to close shop over just one arbitration award.

According to SNL Financial, which conducted an analysis for The Wall Street Journal, over 940 firms reported having a net capital of under $50,000 in financial reports from as recent as July. FINRA says that 11% of all arbitration awards issued in 2011 have yet to be paid-that’s $51 million. This is 4% increase from what was unpaid from 2009 and 2010.

FINRA Arbitration Panel Awards Ex-Wedbush Securities Broker $4.2M Against the Firm

Published on: October 4, 2013 | by Shepherd Smith Edwards & Kantas, LLP

In a case preceding the credit crisis, a Financial Industry Regulatory Authority panel has awarded Michael Farah, an ex-star broker at Wedbush Securities Inc, a $4.2M arbitration award against the brokerage firm. Farah had accused the broker-dealer of making misrepresentations and omissions related to the collateralized-mortgage-obligation investments he recommended to clients, which he contends resulted in him losing not just customers but also yearly income.

He was the firm’s leading producer for a long time, working there from 1995 to 2005. Farah filed his securities claim against Wedbush Securities, formerly known as Wedbush Morgan Securities Inc., in 2005 and then submitted an amended case last year.

Farah sold millions of dollars in CMOs. He claimed that he was told that the securities were bond replacements. However, he contends that the plunging of CMOs price in early 2003 was not in line with what the bond desk had informed him about the securities’ volatility.

FINRA Arbitration Panel Orders Citigroup to Pay Senior Investor Couple $3.1M for Alleged Broker Fraud Related to “Selling Away” Practice

Published on: September 17, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Citigroup Inc. (C) now has to pay Dr. Nasirdin Madhany and Zeenat Madhany $3.1 million over claims that the financial firm failed to properly supervise a broker, which caused the couple to sustain over $1 million losses. The broker is accused of directing them to invest in real estate developments that later went sour.

In 2010, the couple filed a FINRA arbitration case alleging fraud, negligence, and other wrongdoings related to over $1 million in real estate investments they made between ’04-and ’07. The Madhanys, who are senior investors, were customers of then-Citigroup worker Scott Andrew King, who referred them to politician Lawton “Bud” Chiles III. The latter was looking for investors for a number of real estate projects. King, who allegedly had a conflict of interest (that he did not disclose) from buying two condominiums from Chiles at a discount, is said to have connected the couple and the politician without Citigroup’s knowledge.

The Madhanys invested in two real estate projects, which began to have problems in 2007 when the US housing market failed and that is when the couple lost their money. Also, they, along with other investors, had signed personal loan guarantee related to a $12 million loan on one of the projects. When the loan defaulted in 2009, Wachovia sued all of them. Last year, a court submitted a $10 million judgment against the investors, with each person possibly liable for the whole amount.

FINRA Enhances Its Arbitrator Vetting Policy

Published on: August 26, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority is refining its new policy for looking into its arbitrators. The move is seen as even more essential in the wake of a court’s decision to dismiss an arbitration ruling that was decided on in part by someone who was indicted during a case against financial firm Goldman Sachs (GS).

Among the steps to be implemented is the use of Google to run searches on arbitrators right before they are appointed to a FINRA arbitration case. The SRO is also preparing to run annual background checks on its 6,500 arbitrators even after being checked when they applied for the arbitrator position.

The industry-funded watchdog’s actions are coming into effect at the same time as lawmakers are upping the pressure to put a stop to broker-dealers making investors arbitrate disputes-an agreement they consent to when they agree to work with the brokerage firm. This causes customers to forfeit their right to go to court over the disagreement. Meantime, consumer groups have been pressing the SEC to place restrictions on the arbitration agreement practice, and a new bill introduced by US Rep. Keith Ellison (D-MN) would modify the Dodd-Frank Wall Street Reform and Consumer Protection Act so that these mandatory agreements are banned.

FINRA NEWS: Goldman Sachs Appeals Vacating of Securities Award, Non-Customers of Brokerage Firm Can’t Compel Arbitration, & Three Governors Named To FINRA Board

Published on: August 21, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Goldman Sachs Wants Third Circuit To Look at Vacated Arbitration Award

Goldman Sachs (GS) wants the U.S. Court of Appeals for the Third Circuit to look at a decision by a lower court to vacate a FINRA securities award issued by a panel member that included arbitrator Demetrio Timban, who was indicted on criminal matters and suspended. The securities case is Goldman Sachs & Co. v. Athena Venture Partners LP and involves an investor accusing the firm of making misrepresentations. The U.S. District Court for the Eastern District of Pennsylvania remanded the award, which favored the financial firm.

The district court said FINRA didn’t give the parties three arbitrators who were qualified and said the respondent’s rights were prejudiced. Judge J. Curtis Joyner said that therefore, a “final and definite award” was not issued. Following the scandal involving Timban, FINRA said it now would perform yearly background checks of arbitrators and other reviews before they are given a case.

Mandatory Securities Arbitration vs. Court? The Debate Rages Past the Quarter-Century Mark

Published on: July 4, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Should investors have the option to resolve their securities claims not just in arbitration but also in court? Recently, Senator Al Franken (D-Minn) voiced his opinion that offering investors both options would be fairer. His comment came weeks after SEC Commissioner Luis Aguilar publicly spoke out against mandatory arbitration, noting that letting investors choose between the court system or Financial Industry Regulatory Authority arbitration would give them better protections. Right now, investors have to agree to resolve any disputes that arise with a brokerage firm or investment adviser through arbitration rather than litigation before their working relationship can go forward.

However, as Claimant Investors’ Attorney William Shepherd noted, the debate of whether to go to the court or arbitration is a debate that has going on for some time now: “This dispute began in 1987 when the U.S. Supreme Court first decided that, because arbitration had become ‘fair,’ investors could no longer choose court if an arbitration agreement had been signed.”

Is it fair to let investors choose between having their claims heard in arbitration or by the judicial system? We definitely need a legal process that lets investors get redress efficiently and with the least amount of struggle.

FINRA Delays Audit Trail Plan, Proposes Arbitration Rule Changes, Asks for Firm’s Social Media Use Data, Warns About Cybersecurity Breaches

Published on: June 28, 2013 | by Shepherd Smith Edwards & Kantas, LLP

FINRA Wants Broker-Firms to Provide More Data About Social Media Use

The Financial Industry Regulatory Authority has sent target examination letters to broker dealer members regarding their use of social media. The SRO warned that electronic and written communication may be subject to spot checks and it wants to know how the firms are using social media, what platforms they employ, and the names of the people that post on these sites. FINRA is also interested in each firm’s written supervisory procedures about this type of online communication that were in effect between February 4 and May 4, as well as what steps were taken to make sure that compliance was in effect.

SEC Seeks Comments on Proposed FINRA Arbitration Changes

“Ask and It Shall Be Received”: Securities Brokers Can Wipe Complaints and Even Legal Claims Off Their Public Records

Published on: June 20, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The New York Times is reporting that on May 24, a Financial Industry Regulatory Authority panel of arbitrators granted Wells Fargo (WFC) broker Michele Kief ‘s request that it recommend that the securities complaint, in which the bank settled for $125,000 allegations of fraud and negligence related to her actions, be deleted from her record. They also agreed that it be noted that the investments at issue were “suitable and safe. “There at least eight other client disputes on BrokerCheck against Kief. BrokerCheck is FINRA’s regulatory database.

Just two months before, FINRA arbitrators also consented to recommend the deletion of a securities arbitration complaint against ex-Charles Schwab (SCHW) executive Kimon P. Daifotis. This was the eighth such recommendation against Daifotis, who ran the Schwab Yield Plus fund that led investors to lose hundreds of millions of dollars.

“As FINRA publishes, advertises and encourages investors to check a broker’s record to gain information about their broker or a prospective broker, FINRA arbitrators often wipe that record clean.” Says William S, Shepherd, a securities attorney who represents investors in cases against brokers. “Everyone would like to wipe our credit record clean, maybe we just need to ask. Also, there is no educational requirement to become a securities broker, not even a high school degree. The only requirements are a 4-month apprenticeship and passing a multi-state state and a FINRA examination. Yet, securities brokers manage millions, some even hundreds of millions, of investors’ money. Their average six-figure income brokers places them in the highest percentiles of earnings in the U.S, along with other licensed professionals. Public disclosures are, and should be, important for those who often turn over their retirement accounts and even entire life savings to be handled by those who call to extoll their expertise.”