Finra arbitrators deny both IBD's, brokers' efforts to keep each other from clients

Editor's note: The story has been revised to correct the explanation of the arbitration decision and to amplify related details.

Finra arbitrators this week denied efforts by both an independent broker-dealer and two of its former brokers to prevent the other from contacting clients with whom they worked, in a decision that could have ramifications for the independent sector.

A panel of three Financial Industry Regulatory Authority Inc. arbitrators unanimously rejected claims brought by NexTrend Securities Inc. against Scott David Offerman and Sonya Lee Gotz. Offerman and Gotz, a husband-and-wife broker team, were affiliated with NexTrend from early 2019 until mid-2020.

In the statement of claim it filed against the couple in late September 2020, NexTrend accused them of breaching their contracts with the firm after they resigned, as well as statutory trade secret misappropriation. The couple denied the allegations.

Offerman and Gotz asserted a claim seeking expungement of the reason for their departure from their Forms U5. They also claimed misappropriation of trade secrets and confidential information, and breach of contract.

In addition, the couple sought permanently to enjoin NexTrend and Mark Scott Cherlin, a firm official, from soliciting any of their customers and any customers they introduced to NexTrend.

The arbitrators denied the counterclaim by Offerman and Gotz, as well as counterclaims made by NexTrend and Cherlin.

Both sides basically wanted to retain clients Offerman and Gotz worked with while at NexTrend. They sought permanent injunctions against each other.

The arbitrators ordered that a permanent injunction from a Dallas district court be granted. That May 25, 2021, injunction permanently restrained NexTrend and Cherlin from using lists of customers who completed securities transactions with Offerman and Gotz prior to Jan. 30, 2019.

The injunction also prevented Offerman and Gotz from using NexTrend forms for 1031 Delaware Statutory Trust real estate transactions.

NexTrend requested actual damages of $1 million and exemplary damages of $3.2 million. Offerman and Gotz requested compensatory and punitive damages of about $9 million. The arbitrators did not award damages to either side, according to the Feb. 20 arbitration award.

The arbitrators also denied Offerman and Gotz’s counterclaim and a third-party claim they made against Cherlin for wrongfully causing the termination of their relationship with NexTrend and for interfering with their clients.

The arbitration panel did grant the expungement from Offerman and Gotz’s Forms U5 of references to their departure from NexTrend “based on the defamatory nature of the information.”

The fact that the arbitration panel denied all of NexTrend’s claims and recommended expungement “is a big victory for the brokers,” said their co-counsel, David Abell, owner of Abell Law.  “This was a very important case for the entire independent industry."

The arbitrators’ decision demonstrates that a brokerage doesn't own the clients of its independent-contractor representatives, Abell said.

“In the independent channel, there’s a lot of movement between broker-dealers, and independent brokers typically expect that they’ll maintain the customer relationships they built over the course of their career — their independent contractor agreements should be clear on this issue,” Abell said.

But Leland de la Garza, an attorney for NexTrend, said the Finra arbitration award “reflected half the story.”

De la Garza accused the arbitration panel of rushing to judgment before NexTrend had an opportunity to finish its discovery work.

“It seems this panel was more interested in completing this arbitration than ensuring that its discovery orders were completed or enforced,” de la Garza said. “We believe that evidence we were denied would have influenced the case.”

NexTrend may be inclined to fight the decision.

“We are considering whether to seek to vacate the award,” de la Garza said.

Abell said Offerman and Gotz were vindicated by the arbitration decision, especially the expungement of the explanation for their resignation from NexTrend.

“It’s a message to B-Ds not to weaponize the Form U5 and to be accurate and truthful when making required disclosures” in the Central Registration Depository, said Abell, who represented the brokers along with Bryan Forman, owner of Forman Law Firm.

The arbitration case was heard in Dallas. Offerman and Gotz are based in New York City. The case required 41 hearing sessions between Oct. 30, 2020, and Dec. 16, 2022. There also were 11 prehearing sessions.

“This has been a long, drawn-out process,” de la Garza said.