An irreverent Wall Street Blog
Customer Seeks $2 Million In Puerto Rico Bond Arbitration
October 12, 2018
If you've been
following Puerto Rico's financial crisis, you know
that the Commonwealth's bonds are worth about the paper that they were printed
on, but for the fact that there are liens on the paper and pending judgments on the ink. Some
folks knew that they were investing in junk, however, and paid pennies for what
they hoped would be dollars in returns. They knew the risks. They accepted it in consideration of the pay-off. Other folks bought what they were sold
in the form of tax-advantaged debt from the purportedly venerable Commonwealth: turned out to be dollars invested into what may pay pennies. In
today's featured FINRA arbitration, we got an unhappy customer who is seeking
at least $2 million in damages from her Puerto Rico bond investments. It sort
of seems like a slam dunk win. Then again, wasn't that how the bonds were
marketed?
Case In
Point
In a Financial Industry Regulatory Authority
("FINRA") Arbitration Statement of Claim filed in June 2017, public
customer Claimant Leviton asserted breaches of contract and fiduciary duty,
violation of FINRA Rules, and negligence. Claimant sought not less than $2
million in compensatory damages, attorneys' fees, costs, and expenses. In the Matter of the FINRA Arbitration Between Rose
Leviton, Claimant, vs. Janney Montgomery Scott LLC, Stifel, Nicolaus &
Co., Inc., and David Neal Cohen, Respondents (FINRA Arbitration 17-01478,
October 3, 2018).
Respondents generally denied the allegations and asserted
various affirmative defenses. Respondent Cohen sought the expungement of the
matter from his Central Registration Depository records ("CRD"),
which Claimant contested.
Award
The FINRA Arbitration Panel denied Claimant's
claims.
The Panel recommended the expungement of the matter from
Respondent Cohen's CRD based upon a FINRA Rule 2080 finding that the claim,
allegation, or information is factually impossible or clearly erroneous and
false; and the registered person was not involved in the alleged
investment-related sales practice violation, forgery, theft, misappropriation,
or conversion of funds. In recommending expungement, the Panel offered this
rationale:
Bill Singer's CommentThe Claimant's account was non-discretionary and claimant authorized or consented to each and every sale/buy. The percentage of Puerto Rico bonds in Claimant's account was not excessive, taking into account all findings, including total balance in account, that entire account made a profit, and that some of the bonds were insured.The Panel found Claimant's credibility to be lacking as follows: (1) Claimant's investment practices were basically the same before, during and after the period in question; (2) Claimant's claim of inexperience or naivete was disproven by her activities, i.e., she initiated some investments, including at least one IPO; she was day trading in a separate account, unbeknownst to Respondent David Neal Cohen, during part of the period in question; she informed Respondent David Neal Cohen of a desire to invest in Chinese stocks unfamiliar to Respondent David Neal Cohen; her net worth was Approximately $15 million including real estate holdings.The Panel also found Respondent David Neal Cohen's expert testimony to be more thorough and convincing than Claimant's testimony. Taking into consideration the broker's unblemished 35-year CRD record, the Panel found grounds for expungement.
An interesting aspect of the FINRA Arbitration Decision
was its finding that Claimant Leviton was not the inexperienced investor that
she apparently tried to present to the arbitrators. Notably, she was
characterized in the Decision as "day trading in a separate account,
unbeknownst to Respondent David Neal Cohen." As to Claimant's willingness
to take on risk, the Decision relates that she had expressed an interest to
Cohen in investing in Chinese stocks that were unfamiliar to the stockbroker.
Add into that mix the fact that Leviton had a net worth of some $15 million,
and it's not a cocktail that will likely persuade many impartial arbitrators
that they are dealing with a vulnerable, unsophisticated, and impressionable
customer. Worse for Leviton, the arbitrators recognized that her account showed a net profit and some of the bonds were insured. Even worse for Leviton, the arbitrators weighed her credibility against Respondent Cohen's
"unblemished 35-year CRD record."
What then are we to make of the appropriateness of an
investment such as Puerto Rico bonds? More to the point, let's just agree for
argument's sake that there was a point in time when the bonds were reasonable
investments presenting known risks and offering a calculated benefit. Let's
also agree that at some point in time, as the Commonwealth's financial status became
better known, repayment of principal and ongoing interest was doubtful. Let's also acknowledge that speculative investments -- wildly, off-the-chart-risk -- may still present a reasonable investment opportunity for an investor who does her due diligence, is fully aware of the enormous risks, and knowingly chooses to invest in an
uber-speculative piece of junk. Sometimes that gambit works. Most of the time, however, when you pay pennies on the dollar, you lose the pennies.
Is it the role of Wall Street or its regulators to
eliminate opportunities to invest in "excessive" risk? Should Wall Street offer
investors an insurance policy against speculative losses? The quick
answer is "No," but the more thoughtful answer is that it sort of
depends on what Wall Street thinks are the ethical principles upon which its
client relationships should be based. When was the last time you saw a regulator at a casino crap table checking the financials of those who wanted to throw the dice? Yes, I know, that's different. Gambling is not investing. Except when it is.
Is it okay for Wall Street to sit back
and watch its customers commit economic suicide? I don't think so. Which prompts
me to ask, yet again, why Wall Street doesn't have an Anti-Fraud Fund to
compensate investors who were proven defrauded by insolvent broker-dealers or
their associated persons. And while you're pondering that ethical challenge, consider the ongoing debate
among proponents and detractors of the "Best Interest,"
"Suitability," and "Fiduciary" standards. For those of you wondering, I am a libertarian who is suspicious of big government and its clumsy interventions into our bedrooms and boardrooms. On the other hand, after some four decades on Wall Street, I know it is an industry rife with fraud and lacking in effective regulation. Investors must be protected. It is in the industry's best interest to police the markets and sales practices. In providing such protections, we must be careful not to quench the fires of entrepreneurship and risk-taking.
Free markets thrive on risk.Free markets can only survive if they are fair.Fair markets require intelligent regulation.
Today's FINRA arbitration is a useful tool. It warns
public customers that their backgrounds and investment histories may well
influence a decision on awarding them damages. For those in the industry,
today's case shows that all is not lost and that industry respondents can
prevail in a FINRA customer arbitration. As to the costs of winning or losing
those arbitrations, well, that's another lesson to be gleaned from today's
case. Given that an independent panel of three FINRA arbitrators denied all of
the public customer's claims and recommended an expungement for the victimized
stockbroker, how much do you think FINRA managed to rake in for conducting this
piece of dubious litigation? Go ahead . . . guess. And when you come up with
your guesstimate, apportion it as you think fair among the Claimant and three
Respondents. Okay, pencils down. Books closed. And the answer
is:
Total
Charges and Fees: $40,450:
Claimant Leviton: $2,000 Initial Claim Filing Fee; $9,325 Hearing Session FeesJanney Montgomery Scott LLC: $3,025.00 Member Surcharge; $6,175.00 Member Process FeeStifel, Nicolaus & Co., Inc.: $3,025.00 Member Surcharge; $6,175.00 Member Process Fee; $1,400 Postponement FeeJanney Montgomery Scott LLC, Stifel, Nicolaus & Co., and David Neal Cohen: $9,325 Hearing Session Fees (joint and several)