Deadbeat brokers and firms are a persistent problem with the arbitration system managed by the Financial Industry Regulatory Authority Inc.
When investors believe they are wronged by a broker or firm and have lost money, they file a claim through the arbitration system. Investors are forced into the arbitration system under a contract most broker-dealers require them to sign when they become customers. An individual, in most instances, cannot file a civil claim against a broker-dealer in court.
There's a big problem with this system. Winning a claim in arbitration doesn't mean an investor can count on actually receiving the money awarded by the arbitration panel hearing the claim. If a firm goes belly up, it can escape paying an investor's claim.
The same for an individual broker. When he declares bankruptcy, the investors get in line with all the other creditors banging on the broker's door for money owed on everything from credit card bills, to loans from an ex-wife, to payments on his luxury yacht.
The securities industry has long enjoyed the privilege of using arbitration to settle claims. Industry rules do not require broker-dealers or their customers to enter into arbitration agreements, but they have been standard since a 1987 Supreme Court decision upholding their enforceability.
Arbitrators rarely give explanations for their decisions to rule in favor of or against a firm, making the arbitration panels opaque in an industry that claims it strives for transparency.
It's true that the Finra arbitration system works effectively in many cases. Broker-dealers pay the majority of money awarded to investors who sue using Finra arbitration. In 2017, Finra panels made decisions that awarded $84 million. Of that amount, $21 million, or $25%, was not paid.
Unpaid arbitration awards are an ugly stain on the securities industry. Brokers and firms from 2013 to 2017 failed to pay $167 million in arbitration awards to customers that Finra hearing panels had approved.
The securities industry wants to have it both ways. Brokerage firms should not be able to have contracts that require arbitration for its customers and then turn its back on those same customers when they win a claim against a deadbeat firm or broker.
Rafael Golan, a broker in Delray Beach, Fla., is the latest example of the securities industry's inability to solve the pressing problem of unpaid arbitration awards. Since 2007, Mr. Golan has been registered with a firm named Crystal Bay Securities, which he also owns, according to the firm's BrokerCheck profile.
In December, Mr. Golan and Crystal Bay Securities lost an arbitration award that alleged, among other charges, the exploitation of a vulnerable, disabled adult. The claim stemmed from the client buying real estate investment trusts from Mr. Golan.
A Finra arbitration panel awarded Mr. Golan's client close to $300,000, including attorney's fee and $25,000 in punitive damages, on Dec. 10. A month later, Mr. Golan filed for Chapter 11 in federal bankruptcy court in southern Florida.
According to his BrokerCheck report, Mr. Golan has at least two more pending arbitration claims against him. And the broker-dealer he operated, Crystal Bay Securities, is in the process of shutting down, according to its BrokerCheck profile.
Mr. Golan did not return calls to his office this week to comment.
Mr. Golan offered to settle the $300,000 arbitration award for "pennies on the dollar," said Walter J. Matthews, the claimant's attorney.
"I have an arbitration case pending trial next week against Mr. Golan that is automatically stayed because of the bankruptcy," said Scott Silver, a plaintiff's attorney. "My clients are near 90, and he put all their assets, $250,000, in nontraded REITs and other illiquid junk. It's true elder abuse because you can't recommend to the clients that they sell and start over," he said.
Making matters worse, the Wall Street Journal wrote about Mr. Golan in 2014 in an article about troubled brokers, putting him in the spotlight of securities regulators, Mr. Silver added. "It amazed me that this guy was allowed to run his own broker-dealer."
Mr. Golan is just one example of a broker in an arbitration system that fails some clients.
Finra appears to be making an effort to bring more attention to the problem of unpaid arbitration awards.
"Finra is fully committed to reducing the incidence of unpaid awards and judgments in the financial services industry," said Richard W. Berry, executive vice president, Finra Dispute Resolution, who spoke at an industry forum last month about the issue. Finra is in talks with a number of groups, including staff at the Securities and Exchange Commission, about the issue, he said.
Finra suspends individuals and firms from the broker-dealer industry for non-payment of awards, Mr. Berry noted, and has proposed a series of rules to further address unpaid awards, including rules to prevent parties from avoiding payment of awards through asset transfers.
Sen. Elizabeth Warren, (D-Mass.), a candidate for president in 2020, has introduced legislation to create a fund for unpaid awards that would be funded by Finra fines.
These recent steps are positive but fall far short.
Wall Street is awash in cash. Securities industry pretax profits totaled $13.7 billion in the first half of 2018, or 11% higher than a year earlier, according to the New York State Comptroller.
Good for Wall Street. But where is the money for clients who play by the rules of arbitration only to have brokers not pay them?