FINRA Arbitrators Say Ineffective Fiduciary Did Not Breach Fiduciary Duty
April 17, 2015
In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in September 2013, Clamant Ishii Family Trust asserted breach of fiduciary duty; failure to supervise; negligent misrepresentation; and respondeat superior in connection with Respondents Chan and Sagepoint Financial's alleged failure to purchase securities, among which were Apple, Goldman Sachs, Berkshire Hathaway, Kinder Morgan Energy, Ford and Lennar. In addition to fees, interest, and costs, Claimant sought compensatory and consequential damages for the loss of of opportunity and portfolio value. At the close of the hearing, Claimant sought damages in the range of $47,000 to $93,000. In the Matter of the FINRA Arbitration Between Ishii Family Trust dated 12/2/93, Claimant, vs. Jason Chan and SagePoInt Financial, Inc., Respondents (FINRA Arbitration 13-02750, April 9, 2015).
Respondents Chan and SagePoint generally denied the
allegations and asserted various affirmative defenses.
Explained Decision
Although contested by Respondents, The FINRA Arbitration Panel
granted the Claimant's request for an explained decision:
EXPLAINED DECISION
1. Claimant established the existence of a fiduciary relationship between the Respondents and Claimant.
2. Although Claimant established that Chan's performance as a financial advisor left considerable to be desired, Claimant failed to satisfy the burden of proof that Chan's conduct rose to the level of a breach of his fiduciary duties to Claimant.
3. Claimant failed to satisfy the burden of proof that SagePoInt negligently supervised Chan.
4. Moreover, even If Claimant had met Its burden of proof with respect to the matters referenced In paragraphs 2 and 3, above, the damages sought by Claimant were, In the opinion of the Panel, so speculative as to render It Inappropriate to make an award on the basis of the alleged damages.
5. The Panel further concluded that Chan was sufficiently Ineffective as an advisor and that It was Inappropriate for him to charge Claimant the fees charged for his services. The Panel further concluded, however, that Claimant's trustees are and were knowledgeable and sophisticated (as well as accredited) Investors, fully aware of their right to terminate the Respondents' services. Their failure to do so renders them partially responsible for the problems that they encountered In the continuing relationship.
6. Accordingly, the Panel has concluded that the Respondents should return 50% of all fees collected with respect to the Ishll Advisory Account that was the subject of this proceeding.
Pursuant to the above rationale, the FINRA Arbitration Panel found Respondents jointly and severally liable and ordered them to pay to Claimant $5,978.50 for fees collected
Bill Singer's Comment
In an online BrokerCheck record as of April 17, 2015, Sagepoint characterized the May 22, 2013, initiating customer complaint as alleging:
THE CUSTOMERS, BY THEIR ATTORNEYS, ALLEGE THAT THEY WOULD HAVE MADE SUBSTANTIAL PROFITS IN THEIR ADIVSORY [sic] ACCOUNTS HAD THE ACCOUNTS BEEN INVESTED IN CERTAIN SECURITIES THAT MAY HAVE BEEN DISCUSSED WITH THEIR ADVISOR,BUT WHICH THEY NEVER GAVE ANY INSTRUCTION TO PURCHASE.
The Explained Decision found that beyond the mere considerations of "suitability," a "fiduciary relationship" existed between the Respondents and Claimant. That finding imposed a far higher duty of care upon the Respondents than what would normally exist in a typical broker-dealer/client context. Having essentially lowered the bar of proof by raising the level of the relationship to that of a fiduciary/client, the FINRA Arbitration Panel nonetheless found that Claimant had not satisfied the burden of proof for either breach of fiduciary duty or negligent supervision. Further, the Panel found the Claimant's damage claims to be "speculative" to the extent that it was an "inappropriate" basis upon which to render the requested award.
In contrast to all those negative findings against Claimant, the Panel did find that because Respondent Chan was "sufficiently ineffective as an advisor," that it was "inappropriate for him to charge Claimant the fees . . ."
Ummm . . . lemme see here . . . the arbitrators found that Respondent Chan provided ineffective fiduciary services to Claimant. Consequently, the arbitrators ordered Respondent Chan to refund all the fees he had collected.
Okay . . . but . . . what's the difference between rendering ineffective fiduciary services and breaching fiduciary duty?
I can think of some instances where the level of servicing might not be acceptable but not necessarily rise to the level of a breach. On the other hand, we must take into consideration that the FINRA Arbitrators found Respondent Chan's ineffectiveness to be of such a degree that it warranted an order to refund the fees collected from Claimant's account. Under those circumstances, the Panel might have offered us a bit more explanation as to the nuance of their differentiating between ineffective and breach.