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FINRA Arbitrators Deny Success Fee Damages to Underwriter
March 2, 2020
Some folks just don't know when to quit; and, at times, we admire their dogged perseverance. Other times, we should be mindful of W.C. Fields' admonition that "If at first you don't succeed, try, try again. Then quit. No use being a damn fool about it." In a recent FINRA Arbitration, an underwriter sued to recover a success fee. Trouble is, it seems that another underwriter actually moved the IPO ball over the goal line. Is this a case of perseverance or foolishness? See how the Arbitration Panel ruled.
Case In Point
In a FINRA Arbitration Statement of Claim filed in January 2018, FINRA member firm Bonwick Capital Partners asserted intentional interference with contractual relations, unjust enrichment, money had and received, accounting, and good faith and fair dealing. Claimant sought $589,654.58 in compensatory damages; interest, warrants, and a formal accounting. In the Matter of the Arbitration Between Bonwick Capital Partners, LLC, Complainant, v. Boustead Securities, LLC and Network 1 Financial Services, Inc., Respondents (FINRA Arbitration Decision 18-00314 )
https://www.finra.org/sites/default/files/aao_documents/18-00314.pdf
https://www.finra.org/sites/default/files/aao_documents/18-00314.pdf
FINRA member firm Respondents Boustead Securities and Network 1 generally denied the allegations and asserted various affirmative defenses.
Shineco IPO and Burnham's MD
In late 2015, the Managing Director of Burnham Financial was approached by issuer/underwriter's legal counsel to assume the underwriting of the Shineco IPO.
The Team Moves to Bonwick
In January 2016, the Managing Director (who is never named by name in the FINRA Arbitration Decision) and his team at Burnham relocated to Claimant Bonwick Capital. At the time of the team's move to Bonwick, Shineco had not entered into an executed underwriting agreement with Burnham and no employment agreement for the team was finalized with Bonwick (the Managing Director purportedly was responsible for the payment of compensation to his team from his IPO commissions).
The Bonwick-Shineco $8 Million-Mini Underwriting Agreement
On January 11, 2016, and as amended on January 24, 2016, Shineco as Issuer and Claimant Bonwick Underwriter executed an Underwriting Agreement (neither Respondent Boustead Securities or Network 1 were parties thereto). The Underwriting Agreement provided for the payment of a so-called success fee; or, if Bonwick did not timely place the deal for a minimum of $8 million, the fee would be paid in the event that Bonwick introduced Shineco to another underwriter, who would complete the IPO within one year of the termination of the Underwriting Agreement (which was purportedly July 11, 2016).
The Bonwick-Network 1 Co-Underwriting Agreement
Although Claimant Bonwick entered into a Co-Underwriting Agreement with Respondent Network 1, they raised only slightly above $6 million, which which failed to satisfy the minimum for the $8 million Underwriting Agreement.
Bonwick Suspended by FINRA
On July 13, 2016, FINRA suspended Claimant Bonwick, at which time the member firm was prohibited from engaging in any investement-related work.
The Shineco-Network 1 Sole Underwriter Agreement
In response to the notice of FINRA's suspension, the Shineco IPO's legal counsel sought to have Respondent Network 1 serve as Sole Underwriter, which was secured via executed agreement dated July 22, 2016. Upon learning of Claimant Bonwick's FINRA suspension, the Managing Director relocated his team to Monarch Bay, which subsequently became Respondent Boustead Securities. Thereafter, on July 27, 2016, Respondent Network 1 entered into a Selected Dealer Agreement for the Shineco IPO with Monarch Bay.
$6 Million Ain't $8 Million
On July 27, 2016, the SEC responded to a June 30, 2016 Post-Effective Amendment seeking to lower the minimum for the deal from $8 million to $6 million. In rejecting the revision to the deal, the SEC found that the under-minimum raise constituted a "material change." Further, the SEC inquired as to whether all investors' funds were timely returned after the July 1, 2016, effective date had expired without the requisite minimum raise. Given Claimant Bonwick's FINRA suspension, Shineco and its Escrow Agent provided assurances that monies raised by Bonwick as Underwriter could be returned to investors.
By August 2016, Shineco's legal counsel, Monarch Bay, and Respondent Network 1 had all finalized the IPO on the revised basis of a $6 million minimum -- at the time, Shineco had exclusively raised over $7.7 million. At this point in time, virtually all the IPO work performed by Claimant Bonwick was handled by the Managing Director and his team, and, similarly, the majority of the revised-IPO work performed by Monarch Bay was handled by the Managing Director and his team.
Shineco IPO Closes
Upon the IPO's closing on September 23, 2016, Respondents Boustead Securities and Network 1 were compensated in accordance with their Selected Dealer Agreement, and the various lawyers, auditors, and printers, were paid their fees and expenses. In accordance with industry practice, Claimant Bonwick was not paid any success fee as contemplated under its Underwriting Agreement. Claimant Bonwick's FINRA membership was reinstated on October 13, 2015, but the firm subsequently withdrew its membership.
FINRA Arbitration Panel Award
The FINRA Arbitration Panel granted the parties' joint request for an explained Decision. The Panel denied Claimant Bonwick's claims, and offered, in part, this superb rationale:
2. In the instant case, Intentional Interference with Contractual Relations would require that Respondents induced Shineco to breach its contract with Claimant. The record shows that the contract between Shineco and Claimant ended prior to the Shineco IPO deal counsels' approach to Network 1 to undertake sole underwriting duties for the IPO.3. As there was no contract in effect between Shineco and Claimant and the approach was made by deal counsel and not by either Respondent, this count for Intentional Interference with Contractual Relations fails.4. Unjust Enrichment requires payment made to one not entitled to receive such payment and at the expense of another. There is no question that Respondents did receive payments from the Shineco IPO. Such payment were pursuant to the only in effect Underwriting Agreement which was between Shineco and Respondent Network 1 and the Selected Dealer Agreement between Respondent Network 1 and Monarch Bay.5. It cannot be considered against equity and good conscience for Respondents to receive payment according to their contracts. Similarly if Claimant had raised sufficient monies to complete the Shineco IPO on July 11, 2016, they would have been entitled to what was provided in their contract and not owe anything to the previous underwriters. Thus, this claim fails.6. The claim for Money Had and Received is interesting as it is seldom seen in this circumstance. It requires that the Respondents would have received monies belonging to the Claimant. Again, it is without question that Respondents received monies from the Shineco IPO. However, for the same reasons outlined above relating to Unjust Enrichment, this claim fails.7. Accounting is actually a discovery issue and not a cause of action for which monetary relief can be given. It is a means to determine proof as to actual causes of action. With the documents provided during this arbitration, particularly the escrow disbursement memos (one returning all escrow deposits from the failed raise and the disbursement of fees and expenses from the finalized successful IPO) fully answers the issues requested for an accounting.8. Since a full accounting was made and such a demand is not something where relief can be granted beyond the provision of the information, this claim fails.9. The final cause of action is for Good Faith and Fair Dealing. There was no contract in effect between the parties at the relevant times that may provide the requirement of Good Faith and Fair Dealing.10. Even if such a standard of Good Faith and Fair Dealing existed, the evidence does not support a finding that Respondents violated an obligation of good faith and fair dealing to Claimant for the reasons stated above under Unjust Enrichment. Thus, this cause of action also fails.11. None of these claims directly relate to payment under the Underwriting Agreement as that Agreement was solely between Claimant and Shineco. We make no conclusions as to what, if anything, may be due to Claimant from Shineco under the Agreement. That is beyond our scope of authority.12. Since we have found that Claimant fails on all claims, we do not need to address any of the affirmative defenses or responses made to such defenses as they are moot.
Bill Singer's Comment
Compliments to the FINRA Arbitration Panel for its double-duty. First, it presented a fairly tortured fact pattern with patience and clarity. Second, the rationale tackled the thorny facts with skill and produced a compelling argument for dismissal.