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On Advice

Finra arb panel sends reps a message

Mar 2, 2014 @ 12:01 am

By Bruce Kelly

+ Zoom

A Finra arbitration panel last month hit a former registered representative with a stinging order to pay a client $250,000 in punitive damages, an almost unheard-of award for a client.

The steep punitive damages ordered by the Financial Industry Regulatory Authority Inc. panel against the ex-rep, Charles B. Davis, sends a loud message to the industry that brokers and financial advisers will have to pay heavily for their misconduct.

The investment advice industry should take note.

Although compensatory damages are common, punitive damages are awarded in extraordinary cases, and only when the defendant's conduct is deemed egregious by Finra arbitrators.

Finra arbitration panel awards for punitive damages against broker-dealers and reps have been increasing steadily since the credit crisis, according to the regulator.

Punitive damages awarded in customer claimant cases in 2009 were $10 million, and jumped to $17 million and $27 million, respectively, in 2010 and 2011, according to Finra spokeswoman Michelle Ong.

Punitive-damage awards by Finra arbitration panels fell back to $10 million in 2012 and then jumped last year to $28 million.

It is unclear whether Greg Goldman, the client who sued Mr. Davis and Transamerica Financial Advisors Inc., will ever see a penny of the punitive damages, as awards are difficult to collect.

Transamerica had settled earlier with Mr. Goldman for an undisclosed amount, according to the award.

Mr. Goldman alleged that Transamerica and Mr. Davis breached fiduciary duty, and was guilty of unsuitability and fraud, stemming from investments in two private real estate deals, Wolf Creek Land Co. and Wolf Creek Land Co. II, according to the award.

The amount of money he invested wasn't listed, but Mr. Goldman requested $175,000 in compensatory damages and $300,000 in punitive damages, according to the award. Mr. Davis was also ordered to pay his former client $10,000 in compensatory damages.

Mr. Davis didn't return calls seeking comment.

For a Finra arbitration panel to award such steep punitive damages is extremely uncommon, said Alison Spiers, of counsel at The Federal Firm and Mr. Goldman's attorney.

“I argued hard for it, and getting any Finra award for punitive damages is a surprise,” she said. “It's rare, but if the panel is going to award punitive damages, this is the situation to do it.”

INDUSTRY SUSPENSION

Mr. Davis was suspended from the securities industry by Finra in 2012 for four months because he “engaged in business activities outside the scope of his relationship with Transamerica without giving written notice to the firm,” according to his profile on BrokerCheck.

He “also participated in the life settlements after being prohibited from participating in life settlements,” according to BrokerCheck.

Although his suspension was temporary, Mr. Davis hasn't registered with another broker-dealer.

Punitive-damage awards follow brokers and advisers because they “can't be discharged in bankruptcy,” Ms. Spiers said.

“I was happy with the panel's decision,” she said.

“If Finra is to be taken seriously as a regulator, it needs arbitration panels to make this kind of decision, and this was a conservative arbitration panel,” she said. “It rarely gave awards, and they were usually small.”

The three Finra arbitrators had a strong reaction to the conduct of Mr. Davis, who didn't appear at the hearing, according to the award.

“The basis of the award for punitive damages is Davis' egregious behavior,” according to the award.

The arbitrators threw the Finra rule book at the former broker.

“Specifically, the panel found that Davis engaged in the following activities: breach of fiduciary responsibility, failure to disclose the material facts of the investments, material misrepresentation of investments, conflict of interest, and self-dealing in putting his self-interest before client,” according to the award.

He also had a “failure to cease and desist investment activity after being suspended as a licensed representative, failure to abide by [Finra rules of] standards of commercial honor and principles of trade, and refusal to acknowledge the authority of the financial industry's governing body and its representatives,” according to the award.

PROTECTING INVESTORS

By awarding punitive damages in this case, this arbitration panel sends a message to the investment advice industry.

The panel used its authority to punish Mr. Davis for his behavior. If other arbitrators follow suit and award punitive damages in such egregious cases, the advice industry — and its millions of clients — will be better protected from brokers who do harm and fail to follow the rules.

“It seems that punitive damages have been on the rise post the 2008, 2009 market crash,” said Andrew Stoltmann, a plaintiff's attorney. “Arbitrators have been trying to extract their pound of flesh from the securities industry for almost melting down the global financial marketplace.”

The big question is whether claimants using broker-dealers and reps will collect those damages, Mr. Stoltmann said.

“Have punitive damages in-creased substantially against collectible brokers and broker-dealers?” he asked.

Ms. Ong said that she didn't have numbers regarding punitive-damages awards and whether investors actually collected those awards.

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