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FINRA Arbitration Panel Finds TD Ameritrade Grossly Negligent With Form U5
August 15, 2022
A panel of three FINRA arbitrators found TD Ameritrade's management to have been grossly negligent and failing to use due diligence. Okay, sure, the victimized associated person won damages but there just doesn't seem to be any regulatory consequences for TD Ameritrade. That gap in Wall Street's regulatory scheme always seems to favor the big boys to the detriment of the small fry. Time and time again this same quirk in FINRA's oversight pops us but the self-regulatory-organization just doesn't respond -- or, perhaps, just doesn't give a damn.
Case In Point
In a FINRA Arbitration Statement of Claim filed in June 2020, associated person Claimant Izak asserted the Form U5 filed by Respondent TD Ameritrade was defamatory. Claimant sought damages, interest, costs, and an Expungement. In the Matter of the Arbitration Between Elena Izak, Claimant, v. TD Ameritrade, Inc., Respondent (FINRA Arbitration Award 20-02025)
https://www.finra.org/sites/default/files/aao_documents/20-02025.pdf
Respondent TD Ameritrade generally denied the allegations and asserted affirmative defenses.
The FINRA Arbitration Panel found Respondent TD Ameritrade liable and ordered the firm to pay to Claimant Izak $40,000 in compensatory damages plus interest; and $40,000 in punitive damages; and $15,000 in attorneys fees. The Panel recommended the expungement of the Form U5 based upon the defamatory nature of the disclosures. Although the Panel did not alter the "Reason for Termination," the arbitrators ruled that the "Termination Explanation" should be deleted and replaced with:
A FINRA Arbitration Panel determined that TD Ameritrade's management was grossly negligent in not specifying any details in the language that it put on the Form U5, and in failing to use due diligence in the preparation and filing of the Form U5. The FINRA Arbitration Panel further determined that the core values of TD Ameritrade on the date of Ms. Izak's discharge were overly broad, and the Arbitration Panel could not determine what core values, if any, Ms. Izak violated.
By way of rationale, the FINRA Arbitration Panel published this explanation under "Findings":
The Panel finds that Respondent was grossly negligent in showing no specificity in the Termination Explanation language on the Form U5 , and in failing to use due diligence in the preparation and filing of Form U5, knowing that the Form U5 would be available to prospective employers of the Claimant. Therefore, the Panel finds defamation per se. The lack of due diligence by Respondent caused Claimant not to receive due process in the investigation leading to her discharge and the filing of the Form U5. Respondent gave Claimant access to the Calabria telephone system. However, Respondent failed to provide Claimant with appropriate training, communication or policy indicating that the activities for which she was discharged were prohibited. The Panel finds that Respondent's defense of privilege is not applicable because; (1) the filing of the Form U5 is not petitioning a court or tribunal for the redress of grievances; and (2) the regulatory obligation to file a Form U5 does not shield the Respondent from liability when the Respondent has non-defamatory options in fulfilling their regulatory requirements. . . .
Bill Singer's Comment
Why didn't the FINRA Arbitration Panel avail itself of FINRA Code of Arbitration Procedure for Industry Disputes Rule 13104: Effect of Arbitration on FINRA Regulatory Activities; Arbitrator Referral During or at Conclusion of Case
https://www.finra.org/rules-guidance/rulebooks/finra-rules/13104, which provides in part that:
(e) At the conclusion of an arbitration, any arbitrator may refer to FINRA for investigation any matter or conduct that has come to the arbitrator's attention during and in connection with the arbitration, either from the record of the proceeding or from material or communications related to the arbitration, which the arbitrator has reason to believe may constitute a violation of the rules of FINRA, the federal securities laws, or other applicable rules or laws.
By way of a brief refresher course for the FINRA Arbitrators, FINRA Dispute Resolution Services, and FINRA:
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.
Why is there no Rule 13104 referral to FINRA for investigation if three arbitrators found that Respondent TD Ameritrade was
grossly negligent in showing no specificity in the Termination Explanation language on the Form U5 , and in failing to use due diligence in the preparation and filing of Form U5, knowing that the Form U5 would be available to prospective employers of the Claimant.
Why is there no Rule 13104 referral to FINRA for investigation if three arbitrators found that:
The lack of due diligence by Respondent caused Claimant not to receive due process in the investigation leading to her discharge and the filing of the Form U5. Respondent gave Claimant access to the Calabria telephone system. However, Respondent failed to provide Claimant with appropriate training, communication or policy indicating that the activities for which she was discharged were prohibited.
Do the arbitrators think that $40,000 punitive damages award against a FINRA member firm somehow doesn't quite tick off the FINRA Rule 2010 box about a member's failure to observe "high standards of commercial honor?"
Do the arbitrators think that TD Ameritrade's misconduct didn't quite rise to the level of being inconsistent with FINRA Rule 2020's mandate of "just and equitable principles of trade?"