Lingering pain for clients of defunct broker-dealer

For years, brokers have been walking away from paying harmed clients who sued them and won their claims. It’s part of the unrecognized costs of doing business with small, fragile and undercapitalized brokerage firms, many of which sell and deal in expensive, volatile alternative investments.

In 2013, in the aftermath of financial crisis, the amount of unpaid damages in such cases totaled $62.1 million; seven years later, at the end of a historic bull market, the total amount of unpaid damages had fallen precipitously, to $5 million, a sign of improvement but still far from ideal. In 2021, unpaid arbitration awards took a turn for the worse after the market’s pandemic collapse and totaled $17 million, according to Finra.

This column has focused on this painful, embarrassing industry issue for the better part of a decade, and the rule of thumb hasn’t changed: Some small broker-dealers pose a risk for clients.

Clients must take their allegations against brokers and financial advisors, related to fraud, churning, lack of suitability, or what have you, to arbitration under the guidance of the Financial Industry Regulatory Authority Inc.

All investor claims should be paid. If investors play by the rules, the brokerage industry should as well. Finra has been kicking around the idea of creating a fund for investors to cover delinquent firms or advisors but nothing has come from that effort.

Which brings us to the egregious case of Jamie Worden, who was barred from the securities industry in October 2021, when this column first covered him. Worden, who faces eight pending investor complaints, according to his BrokerCheck profile, was the owner and CEO of Worden Capital Management, which was expelled from the securities industry in 2022.

Seven times Worden has “failed to comply with an arbitration award or settlement agreement,” according to his BrokerCheck profile. Translation? He hasn’t ponied up the cash that investors won fairly in Finra’s arbitration forum, although it appears he reaped the benefits of working in the securities industry.

It gets worse.

According to an attorney who just this week won a $2.3 million arbitration award against Worden and his defunct, eponymous firm, last year the former broker plunked down millions for a mansion in Florida near Tampa.

Shouldn’t that cash have been used to pay back investors who had won claims against Worden?

Worden didn’t respond Thursday to a message sent him over LinkedIn, and a call to a mobile phone could not be completed.

“Worden testified in my case that he hasn’t paid any of the awards that have been rendered against him, and the arbitration panel also sanctioned him for lying to them,” said Michael Bixby, a plaintiff’s attorney. “And he destroyed essentially all of the records his firm had or failed to preserve, if you want to take his argument.”

Bixby’s two clients in the matter, Charles Smith and a related limited partnership, filed the statement of claim in January 2022, alleging breach of fiduciary duty, negligence and other issues related to the sale of alternative investment products, including nontraded real estate investment trusts.

Worden represented himself in the claim, according to Finra documents.

“But Worden bought a $4 million mansion in Florida during the pendency of our case, and I suspect he’s made pretty substantial efforts to hide any assets from creditors,” Bixby said. “The house offends the conscience. It shouldn’t be acceptable.”

“Finra is committed to reducing the amount of unpaid arbitration awards,” a spokesperson for the self-regulatory organization wrote in an email.  “Since publishing a report in 2018 on unpaid arbitration awards, Finra has taken a number of steps to address this problem, and has proposed several additional measures that would further mitigate, albeit not eliminate, the issue of unpaid arbitration awards.” 

Proposals are merely wishes yet to be realized. A decade from now, I would wager this column will still be bemoaning the harm that unpaid arbitration awards pose to clients who play by the securities industry rules.