Competitively Different Cambridge Loses Culturally Unique FINRA Block Trade Arbitration

November 19, 2018

Visit the website for the Cambridge Investment Group https://www.cir2.com/Public/About-Cambridge/, and you come across, in part, this "About Cambridge" summary:

Cambridge Investment Group, Inc. is a privately-controlled financial solutions firm focused on serving independent financial advisors and their investing clients. Cambridge is also a national corporation with a registered investment advisor as well as an industry leading independent broker-dealer.

Cambridge's national reach includes: Cambridge Investment Research Advisors, Inc. -- a large corporate RIA; and Cambridge Investment Research, Inc. -- an independent broker-dealer, member FINRA/SIPC, that is among the largest privately-controlled independent broker-dealers in the country. Overall, Cambridge supports several thousand independent financial professionals nationwide who serve their hundreds of thousands of clients as registered representatives and investment advisor representatives, choosing to use either Cambridge's firm Registered Investment Adviser or their own.

Our purpose is to make a difference in the lives of our advisors, their clients, and our associates. We will do this by continuously improving and refining our competitive differentiation, unique culture, customizable experience, and superior quality. . .

As with so many players on Wall Street, Cambridge is a somewhat complex organization with lots of moving parts. You have the Cambridge Investment Group, Inc., a "privately-controlled financial solutions firm." Then you have the registered investment advisor Cambridge Investment Research Advisors, Inc. On top of that, you have the FINRA member brokerage firm Cambridge Investment Research, Inc. As Cambridge proudly proclaims, it is "among the largest" private brokerage firms and provides support to "several thousand independent financial professionals." Moreover, this is a shop whose "purpose is to make a difference in the lives of our advisors, their clients, and our associates," through, among other things, a "competitive differentiation" and a "unique culture." That all sounds impressive but I'm not sure what competitive differentiation means. On the other hand, if I'm gonna hang my securities-industry registration somewhere, I would just as soon do it at a shop where there's a unique culture because brokerage firms with a mundane culture or pedestrian culture are such drags to work at and not for me.

And with that introduction, let's immerse ourselves in the competitively differentiated, unique culture of one of FINRA's largest privately-held member firms.

Case In Point

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in October 2017, FINRA member firm Claimant Cambridge Investment Research, Inc. asserted breach of contract and indemnification in connection with former associated person Respondent Gable's alleged obligation under his Registered Representative Agreement to

reimburse and indemnify Claimant in connection with payments to Respondent's clients after Claimant's review of Respondent's block-trading activities.

Ultimately, Claimant Cambridge sought $326,837.23 in compensatory damages; between $50,000.00 and $60,000.00 in attorneys' fees; $5,500.00 and $6,000.00 in costs and expense; $10,000.00 in sanctions; interest; and forum fees. In the Matter of the FINRA Arbitration Between Cambridge Investment Research, Inc., Claimant, vs. Kermit G. Gable, Jr., Respondent (FINRA Arbitration 17-02630, November 12, 2018) http://www.finra.org/sites/default/files/aao_documents/17-02630.pdf

Respondent Gable was represented by counsel until roughly August 15, 2018; and, thereafter, represented himself pro se. Respondent Gable generally denied the allegations; asserted affirmative defenses; and sought

$6,956.61 in attorneys' fees;
$70,000.00 in personal fees (350 hours at $200.00 per hour);
$238.00 in transportation costs, including fuel, tolls, and supplies; and
$25,000.00 in punitive damages.

The FINRA Arbitration Decision discloses that the hearings were held October 22 - 25, 2018, so it would appear that Respondent Gable represented himself during the evidentiary hearings.

Award

The FINRA Arbitration Panel denied Claimant Cambridge's claims.

The Panel found Claimant Cambridge liable to and ordered it to pay to Respondent Gable $43,750.00 in equitable relief plus 5% per annum interest; $6,956.61 in attorneys' fees pursuant to the terms of the Registered Representative Agreement.

Something is happening but you don't know what it is
Do you, Mr. Jones?

Bill Singer's Comment

Holy crap! I never saw that outcome coming. I mean, geez, Claimant Cambridge came to the gunfight with a team of hired-gun lawyers; whereas, Respondent Gable carried a rusty knife when he stepped into the street at High Noon. Frankly, I was certain that Gable was going to get hit with at least $400,000 in damages, costs, and fees. All of which goes to show you the limits of competitive differentiation and unique culture.

Unfortunately, the FINRA Arbitration Decision fails to provide content and context necessary to convey a meaningful understanding of the underlying "block trading activities." No matter how many times you read the Decision, you can't figure out exactly what Gable did or didn't do with the block trading at issue. We don't know when the trades took place. We don't know how many trades. We don't know how many accounts. We don't know how much, if anything, Cambridge paid to any impacted customers. About all we know is that Cambridge blamed it all on Gable's block trading and demanded $326,837.23 in compensatory damages . . . but compensation for what exactly?

Someone in FINRA management should have read a draft of the proposed Decision and gone back to the arbitrators and asked for a re-write. Ya gotta put some explanation in here about how many bucks the Cambridge paid after its purported review of Gable's block trading activities. Also, while you're revising your draft, howsabout a brief explanation at to what aspect of Gable's block trading was reviewed by his former employer. Oh, and toss a few facts in there about how many customers were involved and whether Gable personally benefited from the questioned trading. Just one more thing, put in some rationale about why you denied all of the Claimant's claim but awarded over $50,000 to the Respondent.

Wholly unsatisfied with the FINRA Arbitration Decision's lack of content and context, and out of my deep sense of obligation and commitment to the legion of BrokeAndBroker.com Blog readers, I began my hunt for facts.

According to FINRA's online BrokerCheck records as of November 19, 2018, I found that Respondent Gable was first registered in 1992 and that from February 2012 to December 2016, he was registered with Claimant Cambridge.
https://files.brokercheck.finra.org/individual/individual_2202745.pdf

Under the BrokerCheck heading "Employment Separation After Allegations," it is disclosed that Cambridge had permitted Gable to resign on November 29, 2016, based upon allegations that:

RR permitted to resign due to improper trading in client advisory accounts.

Further, BrokerCheck disclosed that in response to the firm's statement, Gable apparently submitted his "Broker Statement":

Disagreement with RIA concerning trade allocations between two family related accounts.

Permitted to Resign? You mean that whatever Cambridge uncovered and whatever prompted its apparent payments of a few hundred thousand bucks wasn't even bad enough to warrant the firm's firing of Gable? And, what the hell . . . "two family related accounts." Ya gotta be kiddin' me, right? This is about two -- count 'em -- two account and they're both Gable's family members? Did any family member complain to Cambridge? Did any family member threaten to sue Cambridge?

Something is happening but you don't know what it is
Do you, Mr. Jones?

Under the BrokerCheck heading "Regulatory -- Final" we find that Gable was suspended by the Texas State Securities Board for 150 days on April 10, 2017. This disclosure prompted me to leave FINRA's BrokerCheck site and amble over to the Texas State Securities Board's.

In the Matter of the Investment Adviser Representative Registration of Kermit Gordon Gable Jr (Disciplinary Order, Texas State Securities Board, Order No. REG17-SUS-03 (April 10, 2017) http://brokeandbroker.com/PDF/GableTSSBOrder.pdf, the TSSB Order states, in pertinent part:

Participation in Block Trading

7. In connection with providing investment advisory services to clients of Cambridge Advisors and Respondent, Respondent entered buy and sell orders of securities in a block trading account.

8. A block trading account allows investment advisers to place an aggregate order of securities for multiple clients as one transaction. Once the block trad is filled, the adviser must allocate the trades to the individual accounts that participated in the block trade.

9. During the relevant time-period reviewed by the staff of the Texas State Securities Board, Respondent entered a significant number of trades in the block trading account as part of an active trading strategy. Certain of these trades were allocated to two (2) client accounts. However, Respondent also allocated trades to his own account.

10. The trade allocations were not evenly distributed to the account of the clients and the account fo Respondent. For example:
a. Respondent allocated certain trades only to the accounts of the clients, but not the account of Respondent;
b. Respondent allocated certain trades to the account of only one client and the account of Respondent; and
c. Respondent allocated certain trades to only his account.

11. In recognition of the conflicts of interest created by investment adviser representatives participating in block trades along with clients, Cambridge Advisor's ADV Part 2A states that investment adviser representatives that choose to participate in block trades must do so in accordance with certain specific parameters.

12. These requirement include the preparation of a written statement prior to entering the block trade that specifies the participating client accounts and how the adviser intends to allocate the order among the clients.

13. Respondent did not prepare a written statement identifying the account that would participate in each trade prior to entering the trade in the block trading account.

Something is happening but you don't know what it is
Do you, Mr. Jones?

I mean, seriously? As among a FINRA intra-industry Arbitration Decision, FINRA's highly-promoted BrokerCheck, and the TSSB's Disciplinary Order we can't get a single, goddamn statement as to:

how many trades were wrongfully entered in the block trading account;
the dollar amount of any wrongfully entered trades;
when the so-called "relevant period" of reviewed trading began and ended;
whether either of the two clients (it appears that there were only two) complained or sued Cambridge; and
how much Cambridge paid out to any of Gable's clients.

You'd sort of think -- sort of expect -- that as among FINRA's BrokerCheck and a FINRA Arbitration Decision and a TSSB Disciplinary Order that the above five points would have been covered but they're weren't and we're left in the dark. Adding to all that confusion is the fact that the TSSB Disciplinary Order states that Gable applied for investment adviser representative registration with Texas on December 22, 2016, and that TSSB granted his registration on April 10, 2017, but then immediately suspended him for 150 days. Notably absent from the TSSB Disciplinary Order was the imposition of any fines or other monetary sanctions. Similarly absent from the picture is any FINRA regulatory action, which implies that all the fuss about the block trading may not have been all that big a deal. Which might also explain why Texas granted Gable's IAR registration. Which might also explain why three FINRA arbitrators told Cambridge to take a hike. Which doesn't even remotely begin to explain what the hell is going on here.