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Mutual Funds and Annuity Disputes Fuel Customers FINRA Arbitration
November 20, 2015
As my documented history of commentary discloses, I am no fan of mandatory arbitration -- be that the kind which is foisted upon public customers or upon industry participants. Hopefully, the growing swell of antagonism to Wall Street's brand of alternative-dispute-resolution will one day eradicate the industry's version of arbitration. To be clear, I am NOT an opponent of arbitration. During my career on Wall Street, I have served as a member of arbitration panels and as Chair of same; also, I have argued arbitration cases on behalf of claimants and respondents, and as legal counsel to industry members and public customers. When arbitrations are fairly administered, they offer a bona fide alternative to resolving disputes that may provide a fairer airing of grievances than courts. Notwithstanding, I detest the so-called "alternative" that is fostered by denying public customers the ability to open brokerage accounts without "agreeing" to be bound by the arbitration rules of an industry-sponsored arbitration forum. Similarly, I will continue to wage the battle on behalf of Wall Street's men and women who are compelled to litigate their intra-industry disputes before an arbitration forum that is effectively funded by employer/member firms, who also have the sole franchise to approve the rules of the arbitration forum.
Beyond all my disagreements with Wall Street's brand of arbitration, I have long complained about the lack of quality control attendant to the release of FINRA Arbitration Decisions. As I see it, if you're going to force customers and industry participants into an industry mandated and sponsored arbitration forum, you have to ensure that the published and public Decisions emanating from those cases offer meaningful explanations about what was disputed and the rationale by which the arbitration was decided. Sometimes the lapse in "content and context" are the fault of the arbitrators drafting a given Decision; but, more often than not, such shortfalls seem fostered by a lack of quality control. Ultimately, you just don't get the sense that someone at FINRA is reading (and proofreading) the arbitration forum's Decisions before they are being publicly posted.
No . . . I am not suggesting that arbitrators should be subjected to any pressure or second-guessing by anyone engaged in quality control; what I am suggesting is that there be minimally enforced standards as to content that should be included in Decisions in order to make the document intelligible. Similarly, I am suggesting that arbitrators be required to provide their rationale for reaching whatever outcome they did. After reading a FINRA Arbitration Decision, I don't think it is asking too much to come away with an understanding of who sued whom, what were the allegations and defenses, how did the Panel rule, and what was the rationale for the findings and awards. Consider this recent FINRA customer arbitration:
Case In Point
In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in March 2014, public customer Claimants Peterson and Saffell represented themselves in pro se capacities and asserted against Respondents Kusch and Madison Avenue Securities causes of action including, negligence, unsuitability, breach of fiduciary duty, and fraud. The allegations arose in connection with Respondent Kusch's alleged churning of Claimants' American Funds mutual fund accounts. Further, Claimants alleged that Respondent Kusch had recommended that Claimants transfer their 401(k) accounts in fixed annuities, but that his recommendation was made without a proper explanation of what is characterized as "restrictions on annuities." Further, Claimants asserted that Respondent Madison Avenue Securities had failed to supervise its registered person Respondent Kusch.
At the close of the FINRA Arbitration hearing, Claimant Peterson requested $185,991.00 in damages plus expenses and Claimant Saffell requested $111,254.00 in damages plus expenses. In the Matter of the FINRA Arbitration Between Cynthia A. Peterson and Alice J. Saffell, Claimants, vs. Jack R. Kusch and Madison Avenue Securities, Inc., Respondents (FINRA Arbitration 14-00987, November 16, 2015).
Respondents generally denied the allegations and asserted various affirmative defenses. Also, Respondents sought the expungement of this matter from their Central Registration Depository records ("CRD") and $140,786.50 in attorneys' fees; $11,547.63 in expenses, and $23,695 in expert fees.
A Moving Experience
The FINRA Arbitration Decision notes some interesting motion practice, albeit (sadly) in a manner that doesn't offer us a whole lot of content and context by way of background. As such, we are pretty much left to infer and imply what may have happened.
At some point, Respondents moved to exclude Claimants from doing something, which seems to have something to do with calling witnesses and offering into evidence various exhibits. Beyond that explanation, don't ask me. I dunno nuthin' more. The arbitrators didn't spell it out. Sorry.
We are informed that the arbitrators partially granted and partially denied the Respondents' Motion to Exclude. Yeah, I know, big help that tidbit of information was. In any event, the arbitrators limited Claimants to calling as witnesses only themselves and Respondent Kusch. Who else did they want to call? I have no idea. Why were other witnesses precluded? Dunno.
The Decision also informs us that after the Claimants had completed the presentation of their case, Respondents moved for a directed verdict replete with sanctions. What the hell was that about? Again, dunno -- don't ask me, I have no idea because the arbitrators didn't flesh this issue out. What we are told is that the Panel partially granted and partially denied Respondents' Motion for Directed Verdict. The partial grant of a directed verdict eliminated Claimants' churning, document forgery, and punitive damages claims. Why? Puhleeease don't ask me. Again, I haven't a clue!
And The Award Goes To . . .
The FINRA Arbitration Panel found Respondent Jack R. Kusch liable and ordered him to pay to:
- Claimant Peterson: $9,000.00 in compensatory damages; and
- Claimant Saffell: $6,000.00 in compensatory damages.
Further, the Panel denied Respondents Kusch's and Madison Avenue Securities' requests for expungement.
Bill Singer's Comment
How or why did the Panel rule in Claimants' favor? Hey, your guess is as good as mine because the Decision is pretty much useless when it comes to the rationale for the awards. The Claimants were seeking a combined total of nearly $300,000 in compensatory damages but won only $15,000. You might like to know why and how the arbitrators reached that number. I would like to know. Alas, life and FINRA arbitration is filled with disappointment.
SPOILER ALERT
Before reading further, try to explain to yourself (or, if you're not comfortable talking to yourself, pick another person) what was actually at issue in the above arbitration. What were the specifics of the customers' complaints? How much, if any, money was claimed to have been lost rather than the damages sought?
The Spoiler
In contrast to what I deem a lack of content and context in the FINRA Arbitration Decision, online FINRA BrokerCheck records as of November 20, 2015, explain that the "Allegations" in this arbitration consisted of:
CLIENTS [CUSTOMERS[ FILED A JOINT ARBITRATION REGARDING THEIR INDIVIDUAL ACCOUNTS, [CUSTOMER] HAD AMERICAN MUTUAL FUNDS AND A FIXED INDEX ANNUITY. SHE CLAIMED THAT SHE LOST $7197 IN POTENTIAL EARNINGS BECAUSE HER MUTUAL FUNDS WERE MOVED TO THE MONEY MARKET. [CUSTOMER] SENT A WRITTEN COMPLAINT TO MADISON AVENUES [sic] SECURITIES AND TO THE ANNUITY CARRIER, BOTH OF WHICH WERE DENIED. [CUSTOMER] ALSO SENT A LETTER OF COMPLAINT TO FINRA AND TO THE TX DEPARTMENT OF INSURANCE. [OTHER [sic] [OTHER CUSTOMER NAMED] SENT A LETTER OF COMPLAINT TO MADISON AVENUE SECURITIES REQUESTING REIMBURSEMENT FOR $167 FOR THE LOSS OF GROWTH. [OTHER CUSTOMER NAMED] ALSO SENT A LETTER OF COMPLAINT TO THE ANNUITY CARRIER, WHICH WAS DENIED. THIS ARBITRATION IS REQUESTING REIMBURSEMENT FOR ALL INVESTMENTS AND CONTRACTS. MADISON AVENUE SECURITIES IS REQUESTING FINRA DISMISS THE ARBITRATION AS FRIVOLOUS, IN THAT THE ORIGINAL REQUEST FOR PAYMENTS TOTALED $7364 AND NOW THEY ARE ASKING FOR $315,894.