An Unsympathetic Federal Court Sustains Unexplained FINRA Arbitration Award
December 27, 2023
And as one year fades away and a new one looms over the horizon, we come upon yet another mandatory FINRA arbitration that was adjudicated pursuant to an unexplained award. Mandatory arbitration or not, explained decision or not, it's hard to muster much, if any, sympathy for the losing industry respondent in a 2022 FINRA Arbitration that recently wound up before a federal appellate court.
2020 FINRA Arbitration Statement of Claim
In a FINRA Arbitration Statement of Claim filed in July 2020, public customer Claimant Compton asserted violation of Indiana's Corrupt Business Influence Act - Operating An Enterprise Through A Pattern Of Racketeering; violation of Indiana Corrupt Business Influence Act - Use Of Racketeering Proceeds to Operate an Enterprise; violation of the Racketeer Influenced and Corrupt Organization Act - Operating An Enterprise Through A Pattern Of Racketeering; Civil Recovery Under Indiana's Crime Victim Statute; breach of fiduciary duty; fraud; and negligent supervision and ratification.
In the Matter of the Arbitration Between Janice J. Compton, Claimant, v. Merrill Lynch Pierce Fenner & Smith Inc. and Thomas Joseph Buck, Respondents (FINRA Arbitration Award 20-02468 / May 6, 2022)
https://www.finra.org/sites/default/files/aao_documents/20-02468.pdf
The FINRA Arbitration Award characterizes the causes of action as relating to "overtrading of long-term securities and overcharging of commissions by Respondent Buck in Claimant's MLPFS accounts, and the alleged lack of supervision by Respondent MLPFS." Respondents generally denied the allegations and asserted affirmative defenses. In December 2021, Claimant Compton dismissed with prejudice her claims against Respondent Merrill Lynch. The Panel found remaining Respondent Buck liable to and ordered him to pay to Claimant Compton:
- $770,269 in compensatory damages
- $5,812,948 in "well-managed damages"
As explained in the Award: "which represents 80% of the overall loss value of the accounts requested by Claimant, at the rate of 8% per annum from March 25, 2018, through and including March 25, 2022. The total interest awarded is $1,860,144.00. Please note that the Panel is not awarding the well-managed damages amount of $5,812,948.80. It is only basing its interest calculations on the amount of well-managed damages." - $2,310,806 in treble damages
- $2,585,232 in attorneys fees, and
- $375 in filing fees
Appeal to Federal Courts
In the United States District Court for the Western District of Tennessee, Buck filed a Motion to Vacate the FINRA Arbitration Award, which Compton opposed and filed a Petition to Confirm the Award. Following the denial of Buck's motion and the granting of Compton's, Buck appealed to the Sixth Circuit and Compton moved for sanctions attendant to her assertion that Buck's appeal was frivolous.
Thomas Joseph Buck, Plaintiff/Appellant/Cross-Appellee, v. Janice J. Compton, Defendant/Appellee/Cross-Appellant (Opinion, United States Court of Appeals for the Sixth Circuit, 23-5092/23-5095 / December 20, 2023)
https://www.govinfo.gov/content/pkg/USCOURTS-ca6-23-05092/pdf/USCOURTS-ca6-23-05092-0.pdf
6Cir offers some interesting context to the lawsuit not disclosed in the FINRA Arbitration Award:
Buck’s fraud against Compton. Thomas Buck and Janice Compton were longtime friends when Compton asked Buck—then a financial advisor at Merrill Lynch Fedder & Smith, Inc.—for help investing her money. From 2009 through 2015, Buck managed Compton’s money in Merrill Lynch accounts.
During this time, Buck traded Compton’s accounts excessively, generating commission income for himself on both purchases and sales, and entered trades without first obtaining Compton’s authorization. While managing Compton’s accounts, Buck placed over 1,100 trades, generating about $1.4 million in fraudulent commissions for Buck and Merrill Lynch. He also kept Compton’s money in commission-based accounts despite knowing that she would have saved money by using accounts that charged only a management fee. This fraudulent management caused Compton’s accounts to underperform the market by about $7 million.
Buck’s fraudulent activity stopped in 2015 when Merrill Lynch fired him following an internal investigation. After he was fired, Buck surrendered his securities license to the Financial Industry Regulatory Authority (FINRA).
Two years later, the U.S. Attorney’s Office for the Southern District of Indiana, charged Buck with securities fraud under 18 U.S.C. § 1348 via an information. Although the information did not mention Compton by name, it alleged that Buck engaged in a scheme to defraud “certain clients” through his investment advising. The information described Buck’s fraud against several specific clients—identified as Clients A, B, and C—by way of “example.” Buck pleaded guilty to securities fraud and, as part of his plea agreement, acknowledged that his criminal conduct involved ten or more victims. The government’s sentencing memorandum identified Compton as a victim—Client D—and discussed Compton’s victim-impact statement, which the district court considered at sentencing. The court found that Buck’s fraud harmed Compton, and ultimately sentenced Buck to 40 months in prison.
at Pages 2 - 3 of the 6Cir Opinion
See:
- Former Merrill Lynch financial advisor charged in federal court with securities fraud (DOJ Release / October 31, 2017)
https://www.justice.gov/usao-sdin/pr/former-merrill-lynch-financial-advisor-charged-federal-court-securities-fraud-0
READ the Information https://www.justice.gov/media/919586/dl?inline
READ the Guilty Plea https://www.justice.gov/media/919461/dl?inline - Broker Settles Charges of Increasing Personal Income With Excessive Commissions And Fees (SEC Release / October 31, 2017)
https://www.sec.gov/litigation/litreleases/lr-23974
READ the SEC Complaint https://www.sec.gov/files/litigation/complaints/2017/comp23974.pdf
The Torpedo of an Unexplained Decision
Ultimately, 6Cir denied Buck's Motion to Vacate, granted Compton's Motion to Confirm, Denied Compton's Motion for Sanctions, and Remanded for consideration of Compton's requests for both pre- and post-judgment interest. An interesting aspect of 6Cir's Opinion is that FINRA's default protocol of providing only "unexplained" decisions reared its ugly head yet again -- although many will likely have little sympathy for Buck's predicament:
Further, the lack of an explained decision sinks Buck’s argument. Without evidence of the arbitrators’ reasoning, it is at least “conceivable” that the arbitrators arrived at this interest decision in a way that awarded interest on a monetary amount to which Compton was already entitled through her claims against Buck and his employer. Hale, 2023 WL 2972572, at *4 (quoting Jaros, 70 F.3d at 421). For instance, the arbitrators might have based their interest award partially on Compton’s damages paid by Merrill Lynch and the SEC. Because of the $6.4 million in payments from those other parties, Buck essentially got a free ride by not having to pay all of Compton’s compensatory damages. The arbitrators might have realized that Compton had been deprived of the use of that money for several years and could have reasonably required Buck to pay interest on $5,812,958.80 of that amount to fully compensate Compton.
at page 16 of the 6Cir Opinion
All Assumptions. No Proof
Further compounding Buck's difficulties mustering forceful arguments on behalf of his appeal, 6Cir further admonishes that:
These factors do not favor review here. First, the question before us is not purely legal. Whether arbitrators manifestly disregarded the law concerns facts of if and how the arbitrators considered and allegedly refused to heed the treble damages statutes. To prove that the arbitrators consciously chose not to follow those statutes, Buck has only the parties’ filings and the barebones language of the unexplained award. He lacks a transcript or an explained decision to support his assumptions about how the arbitrators calculated damages.
at Page 13 of the 6Cir Opinion
Bill Singer's Comment
FINRA imposes mandatory arbitration upon public customers and industry employees; and then forces those parties to litigate before an industry-sponsored forum where the default mode is to provide unexplained arbitration awards. Other than that, it's a wonderful system. But this is an old lament and a festering problem; and, frankly, FINRA just doesn't give a crap because its large member firms prefer that arbitrations (industry and customer) largely occur in the dark and within a tightly sealed pro-industry vacuum.
Mandatory arbitration or not, explained decision or not, it's hard to muster much, if any, sympathy for Buck given his criminal conviction and attendant 40-month prison sentence. On the other hand, I still find it disgraceful that FINRA maintains a policy of not requiring an explained arbitration decision as its default protocol. For some sense of the dimensions of this problem consider:
JP Morgan Securities Ordered To Pay $1.4 Million In Damages In Unexplained Arbitration (BrokeAndBroker.com Blog / September 21, 2023)
https://www.brokeandbroker.com/7166/jpms-finra-unexplained/
Federal Court Can't Find Any Basis For FINRA Arbitration Decision In HSBC Managing Director Case (BrokeAndBroker.com Blog / February 10, 2022)
https://www.brokeandbroker.com/6280/finra-gross-expungement/
UPDATE: No Rationale And No Explanation In FINRA Arbitration Decision (BrokeAndBroker.com Blog / July 20, 2020)
https://www.brokeandbroker.com/5331/finra-reserved-decision/
The BrokeAndBroker.com Blog Unexplained Decision Archive:
https://www.brokeandbroker.com/index.php?a=topic&topic=explained-decision