In a recent FINRA Arbitration, the Panel determined that the registered representative Respondent had intentionally lied to the public customer Claimant about investments in Cambridge Capital Group. The lies were found to be particularly egregious because over 80% of Claimant's liquid assets were placed in the Cambridge investment. What should arbitrators do when they are confronted with particularly egregious lies involving the bulk of a client's liquid assets? Read today's blog for some ideas and answers.

FINRA Arbitration

In a FINRA Arbitration Statement of Claim filed in June 2022, public customer Claimant Ilich-Ernst asserted suitability, breach of regulatory requirements, breach of fiduciary duty, negligence and gross negligence, breach of contract, selling away, and fraud.
In the Matter of the Arbitration Between Jasminka Ilich-Ernst, Claimant, v. Gail Milon, Respondent (FINRA Arbitration Award 22-01266)
https://www.finra.org/sites/default/files/aao_documents/22-01266.pdf

The FINRA Arbitration Award states that the "causes of action relate to Claimant’s private investment in Cambridge Capital Group."

Pro Se But No Show

Associated person Respondent Milon, appearing pro se, generally denied the allegations and asserted affirmative defenses; however, she did not appear at the evidentiary hearing. 

Punitive Damages for Lying

The FINRA Arbitration Panel found Respondent Milon liable to and ordered her to pay to Claimant Ilich-Ernst $458,236 in compensatory damages, $145,400 in interest, and $400 in filing fees. Notably, the Panel made this determination:

The Panel determined that Respondent’s actions in intentionally lying to the Claimant about the nature of the investments were particularly egregious because the Respondent knew that the monies being invested represented over 80% of Claimant's liquid assets. The Panel awarded punitive damages to deter similar conduct by Respondent and others. Respondent is liable for and shall pay to Claimant the sum of $458,236.00 in punitive damages pursuant to Rappaport v. Jimmy Bryan Toyota of Fort Lauderdale, Inc., 522 So. 2d 1005, 1006 (Fla.4th DCA 1988) and Cleveland v. Johnson, (2012) 209 Cal.App.4th 1315.

Bill Singer's Comment

Pilin' on the punies

First and foremost, BRAVO to this FINRA Arbitration Panel for taking its job seriously. These arbitrators found Respondent Milon's conduct to be "particularly egregious." When an arbitrator's conscience is shocked by a FINRA member firm's or rep's conduct, then that arbitrator/Panel should award punitive damages. Why? Well, as the arbitrators here so aptly noted: "to deter similar conduct."

Milon: Vice President of Cambridge Capital

Online FINRA BrokerCheck records as of April 10, 2023, disclose that Respondent Milon was first registered in 1987. Under the heading "Other Business Activities" are five disclosures of which four show the role of "VICE PRESIDENT" effective in March 2017 with four different entities each starting with "Cambridge Capital." Under the heading "Customer Dispute-Settled" is a 2018 customer complaint alleging that Milon had "recommended and sold her an investment in real estate located in Jacksonville, Florida" seeking $520,000 in alleged damages and settled in 2019 for $50,000 and $5,000 (two different firms) to which Milon did not contribute.

Pattern of racketeering

In the United States District Court for the Northern District of Florida, an Indictment was filed charging Phillip Timothy Howard with racketeering (RICO). Former Florida Attorney Indicted For Racketeering Relating To Operation Of His Tallahassee Law Firm And Investment Companies (DOJ Release / December 1, 2022)
https://www.justice.gov/usao-ndfl/pr/former-florida-attorney-indicted-racketeering-relating-operation-his-tallahassee-law
As alleged in part in the DOJ Release:

According to the indictment, between in or about December 2015, and in or about January 2018, Howard, a Florida attorney, along with others, was associated with and employed by an Enterprise, that is, his Tallahassee law firm (Howard & Associates, P.A.), and several Tallahassee investment companies (Cambridge Capital Group, LLC; Cambridge Capital Wealth Advisors, LLC; Cambridge Capital Advisors, LLC; Cambridge Capital Funding, Inc., Cambridge Capital Group Equity Option Opportunities, L.P.; and Cambridge Capital Partners, L.P.).  The indictment further alleges that during this time, Howard, along with others, knowingly, willfully, and unlawfully conducted and participated in the conduct of the affairs of the Enterprise, through a pattern of racketeering activity, namely, wire fraud and money laundering. Specifically, the indictment alleges that Howard engaged in such racketeering activity in three ways. 

First, it is alleged that Howard represented former NFL players in a class-action lawsuit who were eligible for settlement payouts from the NFL, and as part of that representation, Howard fraudulently enticed his clients to invest their retirement funds with his investment companies.  However, it is also alleged that Howard failed to disclose and misrepresented to these former NFL player investors the structure of the Enterprise, and the conflicts of interest and the criminal background of persons associated with or employed by the Enterprise.  It is further alleged that Howard failed to disclose and misrepresented the true nature of investment companies' funds and the actual investments made by the former NFL player investors.  The indictment also alleges that despite reassuring investors that their money was secure, Howard never informed them that almost none of investment funds yielded a return and failed to disclose that the investment funds had been commingled with funds used to operate his law firm and to issue payroll for its staff, pay Howard's home mortgages, and otherwise personally enrich Howard.  It is alleged that Howard and others fraudulently obtained and attempted to obtain over $4 million through such conduct.

Second, the indictment alleges that Howard sought third-party lenders that would be willing to lend money to Howard's former NFL clients in advance of their potential NFL concussion settlements as part of the NFL class-action lawsuit, and also to Howard as litigation funding for the NFL class-action lawsuit.  To obtain such funds for himself and his clients, it is alleged that Howard provided false and fraudulent information, including numerous material misrepresentations and omissions, to the lenders. It is alleged that Howard and others fraudulently obtained and attempted to obtain over $10 million from third-party lenders through such conduct.

Third, the indictment alleges that Howard solicited a person to invest in a real estate project located in Jacksonville, Florida, and in doing so, promised the investor certain returns on the investment within a specified period of time.  It is further alleged that after the investor money transferred money to the investment company, Howard and an employee falsely told the investor that additional money was needed in order to close that real estate deal, and that the investor was guaranteed to receive a certain return on that investment within a specified period of time.  In reliance on this false promise, it is alleged that the investor transferred additional proceeds to the investment company.  The indictment alleges that several months later, the investor was falsely told by Howard that the real estate investment funds were secure and would be returned to her.  It is alleged that Howard fraudulently obtained and attempted to obtain over $520,000 from this investor through this conduct.

In a Complaint filed in the United States District Court for the Northern District of Florida https://www.sec.gov/litigation/complaints/2019/comp-pr2019-167.pdf, the SEC charged Cambridge Capital Group Advisors, LLC f/k/a Cambridge Capital Advisors, LLC and its President Phillip Timothy Howard, a former registered investment adviser Don Warner Reinhard with violating the anti-fraud provisions of the federal securities laws. SEC Charges Adviser Firm and Its Principals With Defrauding Retired NFL Players (SEC Release / August 29, 2019)
https://www.sec.gov/news/press-release/2019-167
The SEC seeks permanent injunctions, disgorgement of allegedly ill-gotten gains, prejudgment interest, and financial penalties. As set forth in part in the SEC Release, the Defendants defrauded:

[2]0 investors in two proprietary hedge funds operating out of Howard's law offices.  According to the SEC's complaint, the defendants advertised that the funds would invest in a variety of instruments, but unbeknownst to investors, in fact invested almost exclusively in settlement advance loans to more than 70 of Howard's NFL class-action clients.

As alleged, the defendants represented that Reinhard was an "extremely successful investment manager," but failed to mention that he had served jail time for bankruptcy and tax fraud, and had been barred by the SEC from working for any investment adviser firm.  The SEC further alleges that Howard defrauded investors by borrowing $612,000 in undisclosed personal mortgage loans from the funds, which he never repaid, and that Howard and Reinhard used investor funds to pay themselves fabricated "broker fees" on settlement advance loans to Howard's legal clients.  Howard and Reinhard allegedly raised $4 million from the retired NFL players, about half of whom rolled over their NFL 401(k) accounts to the hedge funds.