Does Your Brokerage Contract Bite?

October 9, 2019

In a recent federal lawsuit, the plaintiff public customer sues a brokerage firm for breach of contract. The contract contains an arbitration clause. Moving along, the customer wants damages on his breach claims but also argues against being forced into arbitration. All of which reminds our publisher Bill Singer of the classic comedy scene in the movie Pink Panther, when Inspector Clouseau looks down at a dog and asks an innkeeper: "Does your dog bite?" After being assured by the innkeeper that his pet doesn't bite, Clouseau bends down to pet it -- only to be bitten. Shocked, Clouseau complains that he was bitten by the man's pet after being told that the animal did not bite. To which the innkeeper protests, "That's not my dog." Does your brokerage contract bite?

2004 NAF

On April 5, 2004, Financial West Investment Group, Inc. ("FWG") opened an annuity account for customer David Kirkwood, and Gary Steciuk was listed as the servicing registered representative on the firm's New Account Form ("NAF"). We know all of this, in part, because the NAF says so, and it was executed by Kirkwood. A few years later, Steciuk left FWG in December 2011 and became registered with Capital Synergy Partners, Inc. ("CSP"), until his July 2014 termination.

2008/2009 Embezzlement via Ostensible Investment Advisor

As alleged in "Stockbroker Indicted For Scheme To Defraud Clients Of More Than $1 Million" (DOJ Release / October 7, 2014)

https://www.justice.gov/usao-md/pr/stockbroker-indicted-scheme-defraud-clients-more-1-million, Steciuk was indicted in the United States District Court for the District of Maryland on charges of mail fraud, securities fraud and money laundering. As alleged in part in the 2014 DOJ Release:

[I]n approximately 2009, Steciuk established a business, College Funding Solutions, ostensibly to provide investment advice to clients interested in investing and saving for college expenses, and opened a business bank account in the name of the business.

The indictment alleges that from January 2008 through August 2014, Steciuk embezzled funds from his clients' investment accounts. These accounts were established and funded with client retirement funds and were maintained by the issuers of the annuities. The indictment alleges that Steciuk used a variety of methods to embezzle the funds. For example, Steciuk allegedly submitted forged forms to change his clients' address at the firm that issued the annuities to a post office box in Hampstead, Maryland, that Steciuk controlled, then directed the firm to send funds from his clients' accounts by check to the post office box. Steciuk then allegedly forged the clients' signatures on the back of the check, which were in the clients' names, and deposited the checks into bank accounts he controlled. In addition, the indictment alleges that: Steciuk created fraudulent and unauthorized loans from the clients' annuities for his benefit; used forged transfer forms and forged checks to make unauthorized withdrawals; and liquidated the annuities in their entirety and stole the proceeds.

The total loss resulting from the fraudulent scheme is alleged to be at least $1,064,501, and the indictment seeks forfeiture of that amount, as well as property in Buffalo Grove, Illinois, Westminster, Maryland and Maui, Hawaii.

2015 Guilty Plea and Imprisonment

On January 7, 2015, Steciuk pled guilty to mail fraud. "Stockbroker Pleads Guilty To Mail Fraud In Scheme To Defraud Clients Of More Than $2.6 Million" (DOJ Release / January 7, 2015)

https://www.justice.gov/usao-md/pr/stockbroker-pleads-guilty-mail-fraud-scheme-defraud-clients-more-26-million. As further alleged in the January 2015 DOJ Release:

[F]rom May 2008 through August 2014, he embezzled funds from his clients' investment accounts. These accounts were established and funded with client retirement funds and were maintained by the issuers of the annuities. Steciuk used a variety of methods to embezzle the funds. For example, Steciuk submitted forged forms to change his clients' address at the firm that issued the annuities to a post office box in Hampstead, Maryland that Steciuk controlled. Steciuk then directed the firm to send funds from his clients' accounts by check to the Maryland post office box. Steciuk forged the clients' signatures on the back of the check, which were in the clients' names, and deposited the checks into bank accounts he controlled. In addition, Steciuk created fraudulent and unauthorized loans from the clients' annuities for his benefit; used forged transfer forms and forged checks to make unauthorized withdrawals; and in some cases, liquidated the annuities in their entirety and stole the proceeds.

Steciuk used the proceeds of the scheme to support a lavish lifestyle, including purchasing multiple homes for himself and others, as well as to support his extramarital affairs.

There were at least 18 victims of the scheme, including Steciuk's step-grandmother and mother-in-law, as well as elderly and vulnerable victims. The total loss resulting from the fraudulent scheme is approximately $2,686,025.07. Steciuk's plea agreement requires him to pay restitution in that amount and to forfeit all money, property, or assets of any kind derived from or acquired as a result of his illegal activities.

On March 27, 2015, Steciuk was sentenced to 105 months in prison plus three years of supervised release; and he was ordered to pay $2,386,025.07 in restitution. "Stockbroker Sentenced to 105 Months in Scheme to Defraud Clients of Over $2.6 Million / Stole Retirement Funds from at Least 18 Victims, Including Family Members and Elderly Individuals" (DOJ Release / March 27, 2015)

https://www.justice.gov/usao-md/pr/stockbroker-sentenced-105-months-scheme-defraud-clients-over-26-million

Oh my! Ya gotta wonder how Kirkwood fared after signing that NAF with Steciuk servicing his account.

2017 Federal Lawsuit

On July 18, 2017, Kirkwood sued FWG and Capital Synergy Partners alleging breach of fiduciary duty through fraud and constructive fraud, breach of contract, and negligent supervision.David Kirkwood, Plaintiff, v. Financial West Investment Group, Inc., d/b/a Financial West Group, and Capital Synergy Partners, Inc. (Memorandum Opinion, United States District Court for the District of Maryland,17-CV-2005)

http://brokeandbroker.com/PDF/KirkwoodDMDMemo191007.pdf

Apparently Steciuk's embezzlement machinery really ground up Kirkwood's investment:

[I]n July 2014, Kirkwood first became aware that Steciuk was engaged in fraudulent activity related to the annuity account. From 2006 until July 2014, Steciuk defrauded Kirkwood by soliciting him to invest more than $400,000 in illegitimate annuities. (Am. Compl. ¶ 11). Rather than investing Kirkwood's funds into legitimate financial instruments, Steciuk instead invested them into his own accounts and used the funds to his benefit, causing Kirkwood ultimately to lose more than $350,000. (Id. at ¶ ¶ 12, 16). . .

at Pages 1 - 2 of the Opinion

The Ostensible Signature on the NAF

On November 17, 2017, the Court dismissed Defendant CSP for lack of personal jurisdiction. Citing the executed NAF, Defendant FWG moved to compel arbitration and to dismiss the pending federal lawsuit. In advancing its motions, FWG argued that [Ed: footnote omitted]:

[T]he basis for Kirkwood's relationship with FWG was the New Account Form, which includes a broad arbitration clause and ostensibly bears Kirkwood's signature. The court denied the motion without prejudice, noting that Kirkwood's forgery allegations goes to the arbitrability of the dispute, but that Kirkwood may be equitably estopped from making this claim if Kirkwood relies on the New Account Form to establish his contractual relationship with FWG. . . .

at Page 2 of the Opinion

Not sure if you caught that, so let me reiterate: Kirkwood asserted that he did not sign the NAF. Pointedly, "Kirkwood denies signing the New Account Form and suggests that Stecuik [sic] forged Kirkwood's signature." at Page 1 of the Opinion.

Having and Eating Cake (or Contract)

FWG argued that the Court cannot consider Kirkwood's challenge to the existence of a binding arbitration agreement because he is equitably estopped from claiming that his signature on the NAF is a forgery. The Court concedes that the doctrine of equitable estoppel precludes it from addressing the forgery "if Kirkwood's claims aginst FWG arise from the contractual relationship established by the New Account Form." at page 5 of the Opinion. In considering that pronouncement, the Court observes that all of Kirkwood's claims against FWG require the existence of a contractual relationship between the parties -- and, as such, it becomes inequitable to allow a party to deny the very existence of a bona fide agreement upon which its claims are predicated.

Based upon the Court's "can't have your cake and eat it too" posture, the parties demonstrated flexibility and incorporated the doctrine into their respective arguments. FWG asserted that the only contract it had with Kirkwood was manifested by the NAF. In contrast, Kirkwood asserted that his breach of contract claim is based on "oral communications that, in exchange for commissions and fees, [FWG] would act in good faith and properly invest his savings." at page 5 of the Opinion.

No Oral Fixation

The Court did not find the existence of any oral contract. Pointedly, the Court notes that Kirkwood's first mention of an oral contract arises in his opposition to FWG's motion to compel arbitration. Further, the Court notes that:

Kirkwood does not state when the alleged contract was formed or with whom he had "oral communications." He also does not specify how much he agreed to pay in fees or the nature of FWG's alleged promise to invest on his behalf. . . .

at Page 6 of the Opinion

Faced with a lack of evidence and a failure of proof of the alleged "oral contract,' the Court finds that:

[T]he only basis for a contractual relationship between Kirkwood and FWG is the New Account Form. Accordingly, the court will not address Kirkwood's forgery allegations, because he is equitably estopped from contesting the arbitration clause of the contract under which he is also claiming a cause of action against FWG. The court, then, has no choice but to grant FWG's motion to compel arbitration.⁸ In so ruling, the court expresses no opinion as to the ultimate merits of Kirkwood's claims, but finds that, on the basis of the evidence presented, the appropriate place to adjudicate these claims is in arbitration.
=====
Footnote 8: It seems that the court's only other choice would be to dismiss Kirkwood's complaint in its entirety, as without an oral agreement or the New Account Form, Kirkwood can show no contractual relationship upon which to base his claims. But the court assumes that Kirkwood would prefer the arbitration forum to no forum at all.

at Page 6 of the Opinion

Bill Singer's Comment

If you think about it, and, trust me, I have, where we ultimately come to rest ain't such a cushy, comfortable place. We got a public customer who alleges that his signature was forged on the very New Account Form that created the customer-broker-brokerage-firm relationship at issue. We got a stockbroker who winds up in federal prison for just shy of nine years after he pled guilty to stealing nearly $3 million dollars from 18 victims, some of whom were elderly and vulnerable. We got Kirkwood who's allegedly lost over $350,000 as a result of Steciuk's criminal fraud. Then we got a federal court wading into this mess.

Is there a viable written contract? If you ask Kirkwood, the answer is "no" because his signature was forged by Steciuk on the NAF. In the absence of an enforceable written contract, Kirkwood argues, he should be free to sue in court rather than forced to honor the mandatory FINRA arbitration provision.

Is there an enforceable oral contract? According to the Court, "no."

No written contract.

No oral contract.

Apparently, we are asked to consider that there was no contractual relationship among customer, broker, and brokerage firms. That's an illogical, logical legal conclusion -- the stuff of so-called "legal fiction." Unfortunately, in the absence of any enforceable contract, Kirkwood can't sue the brokerage firms employing Steciuk because there was no contract to be breached by them -- or so the Court posits but not without clicking its heels and getting us out of Oz and back to Kansas.

After repeating "there's no place like arbitration" several times, the Court grants Defendant FWG's motion to compel FINRA arbitration. In a sense, FWG got hoisted with its own petard. The firm complained that Kirkwood can't sue for breach of a contract if he's also going to argue that he can't be bound to the contract because his signature was forged. In response, the Court says, fine, you're right -- it's inequitable to allow the customer to use the alleged contract as both a sword and shield. Accordingly, the Court sort of feigns disapproval of Kirkwood's forgery argument and insistence upon an oral contract. Next, with a quick wink, the Court forces Kirkwood to accept the legal fiction of an enforceable written contract replete with a mandatory FINRA arbitration provision. How the Court does that is wizardry because the Court has clearly found that there is no oral contract and the Plaintiff persists in arguing that his signature was forged to the purported written contract.

Of course, I'm still thinking that the whole point of the doctrine of equitable estoppel was to prevent a party from achieving an advantage derived from having falsely induced a victim into a circumstance by which he was harmed. After all, Steciuk, an employee of the defendant brokerage firms, defrauded customers and likely forged Kirkwood's signature on the NAF. That would seem to amount to a whole lot of false inducement and injury. Why then doesn't the Court equitably estop FWG from demanding enforcement of the NAF via arbitration? Is Kirkwood to be denied his day in court simply because he was victimized by a thief who also forged his signature onto the NAF? Of course, as it all works out (for now), the Court grants Kirkwood a day in court, but it is not in the federal court, but it is before FINRA, where, you know, it's not so much a day in court as a day in arbitration. So . . . we're back where we started: Does your contract bite?