Articles Posted in FINRA

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On April 3, 2024, Lax & Neville LLP won a FINRA arbitration award on behalf of a 75-year-old retiree (“Claimant”) against E1 Asset Management, Inc., Shaun Joseph Grimaldi, and Ron Yehuda Itin (“Respondents”).  Respondents, who all have checkered regulatory histories, capitalized on Claimant’s trust and friendship for a decade to conceal their fraud and exercise complete control over his accounts, by investing in options and risky triple leveraged ETFs, on margin, and relentlessly churning his accounts for the sole purpose of generating $1,604,814 in commissions, interest and fees.  They accomplished this by making more than $341 million in trades, on margin, for an annual turnover rate of 13.2 and an average cost to equity ratio of 12.4%.   Respondents at all times acted with a willful intent to defraud Claimant, breached their fiduciary duties to him, and violated FINRA Rule 2111 (Suitability), SEC Regulation Best Interest (Reg BI), and FINRA Rule 3010 (Supervision).

After considering the pleadings, testimony and evidence presented at the hearing, the FINRA Arbitration Panel rejected Respondents’ defenses and unanimously awarded Claimant $2.6 million, which includes 100% of his fraudulent churning damages totaling $1,604,814, plus $577,610.25 in accrued interest, $420,000 in attorneys’ fees, $5,285.83 in discovery sanctions, and post-award interest. To view this Award, click here.

To discuss this FINRA arbitration award, please contact Barry Lax or Sandra Lahens at (212) 696-1999.

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Today, the Southern District of New York granted Morgan Stanley’s motion to compel arbitration in the class action Shafer, et. al. v. Morgan Stanley, et. al. (Case 1:20-cv-11047-PGG).

Plaintiffs, former Morgan Stanley financial advisors, sued Morgan Stanley asserting that Morgan Stanley violated the Employee Retirement Income Security Act of 1974 (“ERISA”) by not paying Plaintiffs all of their deferred compensation when they resigned from Morgan Stanley, and Morgan Stanley moved to compel arbitration on June 29, 2022.  The Court’s decision forces Plaintiffs and any similarly situated former Morgan Stanley financial advisor to file their claims for unpaid deferred compensation in FINRA Arbitration.

In its opinion, the Court held that Morgan Stanley’s Compensation Incentive Plan and Equity Incentive Plan are ERISA plans and “‘individual account plans,’” which under ERISA “means a pension plan which provides for an individual account for each participant and for benefits based solely upon the amount contributed to the participant’s account….” (Order, p. 44).  The Court’s holding may significantly strengthen FINRA arbitration claims against Morgan Stanley, which primarily depend on the applicability, and Morgan Stanley’s violation, of ERISA.

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On August 21, 2023, a retired artist and teacher of the visually impaired represented by Lax & Neville LLP won a FINRA award against Morgan Stanley for its years-long recommendation that she invest her savings in WisdomTree (WETF), a sponsor of exchange traded funds (“ETFs”) and asset manager.  Over a period of nearly seven years, the customer’s Morgan Stanley advisors, David and Todd Wachsman, solicited numerous purchases of WisdomTree stock even as its price fell and her position became highly concentrated.  WisdomTree stock ultimately made up the vast majority of her networth.  Despite numerous red-flags and internal recognition that the position was highly concentrated and sustaining substantial losses, Morgan Stanley permitted the Wachsmans to recommend additional investments in WisdomTree for years, including selling risky put options that significantly increased her exposure to decline in WisdomTree’s price, decimating her savings.  Morgan Stanley’s primary defense was that, over the lifetime of the account prior to the first WisdomTree purchase a decade ago, Morgan Stanley had made money for the customer, a retiree in her mid-seventies, and was therefore entitled to bet it all on a single-stock strategy.  Additionally, Morgan Stanley took the position that they warned the customer of the risks involved.  However, it still allowed the Wachsmans to recommend that she purchase more WETF, that she sell other securities rather than WETF, and that she hold the overly concentrated position they built in her accounts.

After considering the pleadings, testimony and evidence presented at the hearing, the Arbitration Panel rejected Morgan Stanley’s defense and unanimously awarded the customer $1.8 million, including the entirety of damages caused by Morgan Stanley’s investment in WisdomTree market adjusted to account for Morgan Stanley’s mismanagement of her account during an historic bull market.

The Arbitration Panel also denied the expungement requests made on behalf of the financial advisors, Todd Wachsman and David Wachsman.  To view this Award, Karen Busch v. Morgan Stanley Smith Barney, LLC – FINRA Case No. 21-00203, click here.

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On February 2, 2023, another former Credit Suisse investment adviser represented by Lax & Neville LLP won a FINRA arbitration award against Credit Suisse Securities (USA) LLC for unpaid deferred compensation.  See James D. Garrity v. Credit Suisse Securities (USA) LLC, FINRA No. 20-03957.  Lax & Neville has tried eight arbitrations resulting in awards of more than $32 million to 26 former Credit Suisse advisers.

The claimant, James Garrity, is now among the numerous former Credit Suisse advisors who have successfully brought claims for their portion of the over $200 million of deferred compensation that Credit Suisse refused to pay its advisors when it closed its US private bank in 2015, violating the advisers’ employment agreements and the firm’s own deferred compensation plans. Credit Suisse took the position, as it has with hundreds of other former investment advisers, that Mr. Garrity voluntarily resigned and forfeited his deferred compensation. A three-arbitrator panel awarded Mr. Garrity compensatory damages in the amount of $1,018,624.89 and prejudgment interest in the amount of $363,244.20. The Panel also ordered Credit Suisse to pay $51,000 in FINRA forum fees.

Lax & Neville LLP has won more than $32 million in compensatory damages, interest, costs, and attorneys’ fees on behalf of former Credit Suisse investment advisers. To discuss these FINRA arbitration Awards, please contact Barry R. Lax, Brian J. Neville, Sandra P. Lahens or Robert R. Miller at (212) 696-1999.

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On September 9, 2022, the Superior Court of the State of California entered judgment on a FINRA Arbitration Award against Credit Suisse Securities (USA) LLC, ordering it to pay more than $10 million to seven investment advisors formerly employed in the Los Angeles and San Francisco branches of its now-closed US private bank. This follows the July 8, 2022 decision of the Circuit Court of Cook County, Illinois confirming an award against Credit Suisse and entering a $9.5 million judgment for eight advisors in Chicago.

These fifteen advisors are among the more than three hundred Credit Suisse laid off when it closed its US private bank in 2015.  Credit Suisse purported to “cancel” the more than $200 million in earned and vested deferred compensation it owed its three hundred advisors by claiming each of them voluntarily resigned at the same time Credit Suisse was closing their branches and eliminating their positions.  The FINRA Panels in Los Angeles and Chicago, like eight other FINRA Panels thus far, unanimously found that Credit Suisse terminated the advisors without cause, breached their employment agreements, and violated their respective states’ labor laws, the California Labor Code (“CLC”) and Illinois Wage Payment and Collection Act (“IWPCA”).  The FINRA Panels ordered Credit Suisse to pay the deferred compensation, statutory interest and penalties, and a total of more than $2 million in attorneys’ fees and costs.

Credit Suisse subsequently petitioned to vacate the FINRA Panels’ Awards.  Among other grounds, Credit Suisse contended that the FINRA Panels exceeded their authority when they determined that Credit Suisse had violated the labor law and awarded statutory attorneys’ fees.  The California and Illinois Courts disagreed, denying the petitions to vacate in all respects and confirming the Awards, including the labor law violations and more than $2 million in attorneys’ fees and costs.

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On June 26, 2015, Lax & Neville LLP, a leading national securities arbitration law firm, won a FINRA arbitration award on behalf of two retail investors (the “Retail Investors”), through Ontonimo (OMO) Limited (“Ontonimo”), against BNP Paribas Securities Corp. (“BNPP”) for the sale and marketing of an unsuitable security to the Retail Investors.  A highly sophisticated and experienced three (3) person Arbitration Panel rendered the arbitration award after a ninety-five (95) day arbitration hearing (186 hearing sessions), which is the longest customer FINRA arbitration hearing in the last twenty (20) years and the second longest ever.  The Arbitration Panel awarded the Retail Investors, through Ontonimo, $16.1 million in compensatory damages, inclusive of interest.  This award of compensatory damages represents 100% of the net out-of-pocket loss plus interest and is one of the largest FINRA arbitration awards of compensatory damages in a customer dispute.  Significantly, in addition to that relief, after winning six (6) Motions For Sanctions and five (5) Motions To Compel, the Arbitration Panel awarded $500,000 in sanctions for attorneys’ fees for BNPP’s failure to comply with the Arbitration Panel’s various discovery orders.  This is the largest amount of sanctions awarded in a customer FINRA Arbitration in at least the last ten (10) years.  To view this Award, Ontonimo (OMO) Limited vs. BNP Paribas Securities Corp. – FINRA Case No. 10-04744, click here.

The single investment at issue was a Resetable Strike Equity Option Transaction, which is a highly speculative and leveraged derivative call option.  BNPP recommended that the Retail Investors invest approximately $14.3 million, which is more than 60% of their investable assets, into this one unsuitable security.  Because BNPP had a policy that prohibited the sale of this product to retail customers, BNPP required the Retail Investors to form a corporate entity, Ontonimo, through which the Retail Investors would purchase the investment in order to circumvent BNPP’s own compliance rules.  Further, BNPP required one of the Retail Investors to become a so-called “investment advisor” for Ontonimo by mandating that he execute a sham investment advisory agreement, even though he had no prior professional financial services experience and no securities licenses.  In less than one and one-half years, the Resetable Strike Equity Option Transaction became worthless and the Retail Investors lost their entire $14.3 million investment.  The Retail Investors paid BNPP in excess of $2.3 million in fees and costs for this investment.  BNPP further retained approximately $700,000 of the value of the Resetable Strike Equity Option Transaction after its expiration.

The Arbitration Panel’s message was clear:  The Retail Investors should never have been marketed and sold this unsuitable security.

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On June 22, 2015, the Financial Industry Regulatory Authority, Inc. (“FINRA”) announced that it had reached a near $1 million settlement with Morgan Stanley Wealth Management (“Morgan Stanley”) and Scottrade Inc. (“Scottrade”) for failing to supervise wire transfers.  Brad Bennett, Executive Vice President and Chief of Enforcement at FINRA, commented on the settlements and stated, “Firms must have robust supervisory systems to monitor and protect the movement of customer funds. Morgan Stanley and Scottrade had been alerted to significant gaps in their systems by FINRA staff, yet years went by before either firm implemented sufficient corrective measures.”  A complete copy of the FINRA press release is available here.

Through a Letter of Acceptance Waiver and Consent (“AWC”), Morgan Stanley submitted to censure and agreed to pay a $650,000 to settle charges that from at least June 2009 through November 2014, Morgan Stanley failed to establish, maintain and enforce reasonable supervisory systems and written procedures regarding outgoing wire transfers and branch check disbursements from customer accounts.  Additionally, from approximately June 2009 through September 2011, Morgan Stanley failed to establish and maintain reasonable supervisory systems regarding its third-party service provider’s coding and acceptance of money orders, which were deposited into customer accounts.  The Morgan Stanley AWC may be found here.

Specifically, FINRA alleged that between October 2008 and June 2013, three (3) Morgan Stanley registered representatives, in two (2) branch office locations, collectively converted approximately $494,400 from thirteen (13) Morgan Stanley customer accounts by causing fraudulent wire transfers and branch checks to be sent to third-party accounts.  During this time, Morgan Stanley had no supervisory procedures in place to detect and monitor disbursements from separate accounts to the same third-party account.  Additionally, Morgan Stanley’s system did not address comparing customers’ signatures on outgoing wire transfer request forms with those on file.  Furthermore, Morgan Stanley’s third-party service provider miscoded certain types of customer deposits that would have raised red flags earlier.  Together, FINRA alleged that Morgan Stanley’s supervisory failures constituted violations of NASD Rule 3012, NASD Rule 3010, and FINRA Rule 2010.

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On May 28, 2015, the Financial Industry Regulatory Authority (“FINRA”) released its second proposed rule designed to help investors understand what financial incentives their broker may have to transition between member firms and how those transitions could affect the customer’s investments.  The complete FINRA release regarding the new rule may be found here.  FINRA encouraged all interested parties to comment on the proposal no later than July 13, 2015.

Rule 2272 — “Educational Communication Related to Recruitment Practices and Account Transfers” (the “Proposed New Rule”) would require delivery of a FINRA created educational communication focusing on key considerations for customers contemplating transferring their assets, with their broker, to the recruiting firm.  According to FINRA, a recruiting firm is any member firm that hires or associates with a registered representative who was previously associated with another member firm.  FINRA created the Proposed New Rule because it was concerned that retail customers were not aware of important factors they should consider when making the decision to transfer assets to the transitioning registered representative’s new firm.

FINRA’s educational communication is intended to motivate customers towards making inquiries of the transitioning registered representative and the customer’s current firm, to the extent that the customer considers the content of the educational communication important to his or her decision.  Specifically, FINRA’s educational communication highlights the potential implications of transferring assets to the recruiting firm and suggests questions the customer should ask questions regarding: 1) whether financial incentives received by the representative may create a conflict of interest; 2) assets that may not be directly transferrable to the recruiting firm, and, as a result, the customer may incur costs to liquidate and move those assets or incur inactivity fees by leaving them with the current firm; 3) the potential costs related to transferring assets to the recruiting firm, including the difference in the pricing structure and fees imposed between the customer’s current firm and the recruiting firm; and 4) the differences in products and services between the customer’s current firm and the recruiting firm.

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