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No-Show FINRA Member Firm Loses Customer Arbitration But Where is FINRA When It Comes To Collecting on the Award?
November 2, 2021
Yet again, another FINRA member firm is a no-show at a public customer arbitration hearing. Yet again, the customer wins. Yet again, the firm seems to have dissolved. Yet again, FINRA, Wall Street's much-promoted self-regulatory-organization, seems to respond to the customer's predicament with a shrug. Not only do Wall Street's customers often wonder where the hell FINRA was when all of the alleged fraud was underway in their accounts, but, after they prevail against a member firm in court or arbitration, those same customers wonder where the hell FINRA is when it comes to getting their Awards paid.
Case in Point
In a FINRA Arbitration Statement of Claim filed in February 2020, public customer Claimant Rader asserted violations of federal
securities laws, violation of the Georgia Securities Act, breach of contract, breach of fiduciary
duty, common law fraud, and negligence and gross negligence. Claimant Rader sought $100,001.00 and rescission,
benefit of the bargain damages, lost opportunity costs, model portfolio damages, prejudgment
interest, costs, reasonable attorneys' fees, punitive damages. At the FINRA Arbitration Hearing, Claimant sought $120,354.47 in compensatory damages, $3,341.93 in
hearing costs, $42,124.06 attorneys' fees, punitive damages, and all FINRA
administration/forum fees be assessed against Respondent. In the Matter of the Arbitration Between James H. Rader, Jr., Claimant, v. Capital Financial Services, Inc., Respondent (FINRA Arbitration Award 20-00604)
https://www.finra.org/sites/default/files/aao_documents/20-00604.pdf The FINRA Arbitration Award asserts that:
A Matter of AppearancesThe causes of action related to allegations that Respondent, through its agent, recommended that Claimant invest in GPB Holdings II, LP and Shopoff Commercial Growth and Income Fund III, LP, private placement offerings which were high-risk, illiquid investments and unsuitable for Claimant.
Initially, the FINRA Arbitration Award states that:
Respondent Capital Financial Services, Inc. ("Respondent") was represented by Gordon Dihle, Esq., Corporate Legal, LLC until on or about October 5, 2021, after which time it was not represented.
Although Respondent Capital Financial was represented by counsel following the February 2020 filing of the Statement of Claim by Claimant Rader, sometime in early October 2021, said counsel was no longer said counsel. Notwithstanding the coming-and-going law firm, the FINRA Arbitration Award states that "[u]nless specifically admitted in the Statement of Answer, Respondent denied the allegations made in the Statement of Claim and asserted various affirmative defenses." Ultimately, Respondent did not appear at the evidentiary hearing.
Award
The FINRA Arbitration Panel found Respondent Capital Financial Services liable to and ordered it to pay to Claimant Rader $88,760 in compensatory damages, $88,760 in punitive damages, $14,668 in attorneys' fees, $1,916.13 in costs, and $300 in reimbursed filing fees. $4,500 in hearing fees were solely assessed against Respondent. The arbitrators offered this rationale:
Claimant retired and was required to remove his retirement funds from his employer's custodianship. He had no previous investment experience. Seeking preservation o/f capital and a modest return, he placed those and other funds with Respondent's agent ("Broker"), who put some of them into two private placements for which Claimant clearly was financially unqualified, based on the accurate assets and income information he provided to Broker. One security is now worthless and the other cannot be sold through any securities firm. Respondent is out of business and, after a long series of motions on various issues, including Respondent's lack of full response to discovery obligations, its counsel withdrew just before the hearing and Respondent did not appear to contest the claims. The hearing proceeded pursuant to Rule 12603 of the Code. Based on the sworn testimony and other evidence presented at the hearing, and after review of the full record, the Panel finds that these securities were unsuitable for Claimant and were illegally sold to him, constituting a major infraction of FINRA Rule 2111 on suitability. Further, the Panel finds that Respondent failed to have procedures in place to prevent such flagrant violations of the securities laws and rules, acted with reckless disregard for its client's interests, and caused Claimant unnecessary trouble and expense. Further, the Panel finds clear and convincing evidence of willful misconduct by Respondent and conscious indifference to the consequences of its actions.
Bill Singer's Comment
As of November 2, 2021, online FINRA BrokerCheck records for Capital Financial Services, Inc. disclose under the heading "Firm Operation" that: "This firm is no longer registered. The firm's registration was from 01/19/1981 to 10/01/2020." at page 9 of the BrokerCheck record.
Under the BrokerCheck heading "Registration Withdrawal Information," it is disclosed that on July 21, 2020, Capital Financial Services "terminated or withdrew" its registration at a time when it owned money/securities to five customers in an amount of $25,500, however, under "Payment arrangement," it is disclosed that:
ALTHOUGH THE FIRM DISPUTES ALL CUSTOMER CLAIMS, IN ADDITION TO ITS NET CAPITAL OF $50,249 AT JUNE 30, 2020, THE FIRM HAS ALSO ACCRUED $20,056 OF CONTINGENT LIABILITIES AND HAS AN ESCROW RESERVE ACCOUNT OF $5,497 (BOTH FOR THE SETTLEMENT OF CUSTOMER CLAIMS).
at Page 2 of the BrokerCheck record
Under the "Regulatory - Final" heading of BrokerCheck, it is disclosed in part that FINRA cancelled the firm's registration as of October 1, 2020 for "failure to pay outstanding fees" due to FINRA in the amount of $21,925.
On October 15, 2020, FINRA suspended Capital Financial Services's membership for failing to comply with an arbitration award or settlement agreement.
So . . . we got a FINRA member firm that FINRA suspended and/or has cancelled the firm's registration. We got a FINRA member firm that didn't bother to show up for Claimant Rader's evidentiary arbitration hearings. How then is Claimant Rader to get paid on his FINRA Arbitration Award?
On the positive, side, Claimant Rader is ably represented by veteran lawyer Kalju Nekvasil, Esq., of Goodman & Nekvasil, P.A. https://rightsforinvestors.com/about-us/#KALJU -- as experienced and savvy an investor's lawyer as exists in the industry. Notwithstanding Kal's impressive credentials and track record, getting blood out of a stone is always a challenge. Which, yet again, prompts my oft-voiced diatribe about FINRA's hypocrisy when it comes to standing behind arbitration awards rendered against its member firms. It is inexcusable that Wall Street as an industry and FINRA as a broker-dealer community tolerates unpaid securities arbitration awards. As I noted for the umpteenth time in "FINRA, Claptrap, Fraud, Mental Frames, And Subjective Construals" (BrokeAndBroker.com Blog / September 23, 2021) at http://www.brokeandbroker.com/6074/finra-mental-frames/ :
[I] urge FINRA to create a Wall Street Anti-Fraud Fund, a proposal that I have made for some two decades and which continues to fall on deaf ears. Wall Street should have an "Anti-Fraud Fund" for the benefit of defrauded public customers who have proven the liability of a FINRA member firm but are unable to fully collect their compensatory damages, costs, and fees because of that firm's insolvency. I do not favor extending such a guaranty into punitive damages or "unreasonable" attorneys' fee and other charges. Fervently, I believe that the securities industry has the wherewithal and the moral/ethical obligation to put its money where its dirty mouth has been. There may be legitimate debate as to how best to fund the anti-fraud fund, but that only goes to the mechanics of doing the right thing. . . .
Time and time again, I have raised my Antifraud Fund proposal but to no avail. In "The FINRA Dissident Community: A History" (BrokeAndBroker.com Blog / August 23, 2019)
http://www.brokeandbroker.com/4765/bill-singer-finra-dissident/, I cited a 2009 article that I had published "Becoming Part of the Solution" (July 28, 2009), in which, among other suggestions for reforming Wall Street, I noted:
http://www.brokeandbroker.com/4765/bill-singer-finra-dissident/, I cited a 2009 article that I had published "Becoming Part of the Solution" (July 28, 2009), in which, among other suggestions for reforming Wall Street, I noted:
End Mandatory Customer and Industry Arbitration
- Permit voluntary arbitration
- Eliminate industry-sponsored arbitration forums as sole option
Create a Fund for Full Payment to Defrauded Investors
- Impose fee on all trades
- Impose annual renewal fee on firms and financial services providers
- Initially allocate all regulatory fines to this Fund (until fully funded)
- Require proof of prevailing decision in court or arbitration
- Limit fund compensation to compensatory damages and reasonable fees/expenses
- Require proof of insolvency of respondent or defendant
Implement Bounty Program for Whistleblowers and Tipsters
- Model after Qui Tam or False Claims Acts
- Offer a percentage (sliding scale of between 10% to 33%) of funds recovered
Clearly my 2009 proposals were ahead of the times. Sadly, only my whistleblower bounty idea took hold -- but only on the federal level with the SEC and CFTC because FINRA still refuses to directly pay a bounty to whistleblowers. On the other hand, although it may take time for the industry and FINRA to catch up to me, I'm still going to agitate for reform. In response to "Special Notice: Engagement Initiative / FINRA Requests Comment on Potential Enhancement to Certain Engagement Programs / Comment Period Expires May 5, 2017." I submitted a Comment on May 30, 2017 submission to FINRA
http://brokeandbroker.com/PDF/170530FINRAComment.pdf, in which I noted, in part on Page 11 that:
I urge FINRA to reinvent itself as a "private sector regulatory organization" ("PSRO") and to expand and enhance its mission from one for the broker-dealer industry towards one for the larger private sector served by the financial services community. In furtherance of that change, the PSRO would serve in a holding-company role that oversees each of three regulatory divisions dedicated to Small member firms (smallest 25% of broker-dealers), Mid-sized member firms (50% of broker-dealers measured from midpoint), and Large member firms (largest 25% of broker-dealers). Pursuant to that restructuring, each division would draft a rulebook responsive to the unique needs of its constituency. The PSRO would fully enfranchise associated persons, and provide for the proportionate representation for such stakeholders as public customers, issuers, and regulators. Without question, a PSRO Board seat should be set aside for an investors' advocacy group such as PIABA.As part of reimagining the SRO into a more expansive PSRO, all industry registration and continuing education should be undertaken directly by an applicant through the PSRO holding company and not through the member firms. FINRA should establish an Anti-Fraud Fund whereby all defrauded public customers would obtain restitution in the event that member firms or associated persons fail to timely honor any awards for compensatory damages, costs, and fees. Finally, I would abolish mandatory arbitration for customers and associated persons.
About a year after I submitted my above 2017 FINRA comment, I noted in"$5 Million Awarded In FINRA Customer Arbitration. Now Let's Beat The Dead Horse" (BrokeAndBroker.com Blog, August 17, 2018) http://www.brokeandbroker.com/4140/finra-windsor-arbitration/
The BrokeAndBroker.com Blog's publisher, Bill Singer, has long advocated for the creation of an Anti-Fraud Fund on Wall Street to serve as a back-stop for defrauded public investors who obtain awards of compensatory damages against insolvent industry firms and registered representatives. Bill does not favor extending such a guaranty into punitive damages or "unreasonable" attorneys' fee and other charges, but he does believe that the securities industry has the wherewithal and the moral/ethical obligation to put its money where its dirty mouth has been. While there may be legitimate debate as to how best to fund the anti-fraud fund, that only goes to the mechanics of doing the right thing. In the case of the Financial Industry Regulatory Authority, we have a self-regulatory-organization that needs to get behind this pro-consumer effort and with haste. . . . FINRA's regulatory mandate is set out in FINRA Rule 2010: Standards of Commercial Honor and Principles of Trade: "A member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade." Today's BrokeAndBroker.com Blog asks whether the self-regulatory-organization itself will observe high standards of commercial honor and just and equitable principles of trade when it comes to seeing that justice is done for defrauded public investors.
As I stated years ago and will continue to urge, without question, a seat on FINRA's Board of Governors should be set aside for an investors' advocacy group such as PIABA. As such, I renew my call that FINRA set aside one seat on its lackluster Board of Governors for a representative from PIABA. Given all the nonsensical and dubious appointments that have been made to that Board over the years, the public investor should at least have one zealous advocate at the table.