Investors who are seeking restitution for losses caused by a broker or brokerage firms negligence or fraud are generally unable to go to Court. They must arbitrate their claims under FINRA rules with FINRA arbitrators. While FINRA’s process was generally conceded to be “rough justice” any attorneys who regularly appear before these panels have more than their share of “horror stories”.
Dan Solin, the author of “The Smartest Investment Book You Ever Read”, a veteran arbitrator trial attorney and investment author has posted in his blog the following story:
Bill Meekam (not his real name) took early retirement at age 55 after working many years for a large manufacturer. Bill was a sheet metal worker with a high school education. His wife worked at the same company, in a variety of clerical jobs. Both had 401(k) plans at the company.
Bill met his future broker (let’s call him Buzz) at a seminar sponsored by his company. Buzz was persistent. He called Bill at work and met with Bill and his wife at his impressive office.
Buzz explained the benefits of rolling over all of the money in their 401(k) plans ($400,000) and investing with him. He told them he could make them “millionaires” over time. Bill’s plan for early retirement was enthusiastically endorsed by his employer. In fact, the 401(k) plan administrator at the company participated in three way calls with Buzz, Bill and his wife.
Buzz invested all the retirement money entrusted to him in a portfolio of 100% stocks. When Bill and his wife expressed concern they were losing money, they were brushed off by Buzz who said: “Let me do the worrying, this is why I keep a drawer full of TUMS.”
After losing a substantial portion of their retirement portfolio, Bill and his wife fired Buzz. They consulted a lawyer and were told they had agreed to mandatory arbitration of all disputes with their broker. The arbitration process is administered and controlled by FINRA, an industry trade association, which holds itself out as “the largest independent regulator for all securities firms doing business in the United States.”
At the arbitration, a shocking thing happened. The broker testified (under oath) that he had advised Bill and his wife to invest much more conservatively and to take less income, but they refused. He supported this testimony with memos he sent to them in which he gave precisely this advice. He also produced a document in which Bill and his wife indicated they had a very high tolerance for risk and wanted to speculate. It was devastating.
There was just one problem: Bill never received the memos and the signature on the risk tolerance document was forged.
Bill’s lawyer retained a firm of forensic document examiners. The firm concluded the memos were not authored on the dates they bore and the signatures on the risk tolerance document were not “authentic.” They submitted a report of their findings to the arbitration tribunal.
Confronted with this shocking evidence, counsel for the broker did something quite extraordinary. He wrote the panel and stated: “My client [the broker] is prepared to acknowledge that testimony he gave ….was not truthful and he desires to make this clear to all parties and the Panel.”
In any Court of law, an admission of perjury, forgery and obstruction of justice would, at the least, mean that all defenses would be stricken and judgment would be entered in the full amount claimed, plus interest, attorneys’ fees and, most likely punitive damages. Most judges would also refer the matter for criminal prosecution.
So what did this FINRA arbitration panel do? They awarded a fraction of the losses incurred by Bill and his wife. No attorneys’ fees. No punitive damages. Not even reimbursement for the cost of the forensic document examiner! After payment of expenses, Bill and his wife netted less than 15% of the amount claimed.
What happened to the broker? He was fired by his firm, but quickly obtained employment with another major brokerage firm where he continues to “serve” investors. FINRA took no action against him.
On its web site, FINRA claims it “…protects the most important investor in the world. You.”
William Galvin, the Secretary of the Commonwealth of Massachusetts has a different take. He testified that FINRA’s mandatory arbitration system is “an industry sponsored damage-containment and control program masquerading as juridical proceeding.”
Who do you believe?