Finra arbitrators ordered Charles Schwab & Co. Inc. to pay $347,000 to the owner of a registered investment advisory firm for allegedly helping a former official of the RIA lure millions of dollars of assets to her own advisory firm.
Joseph Ziomek, owner of the Laguna Financial Group in Laguna Beach, Calif.,
filed a lawsuit in 2013 against Kaitlin Hewell, former chief compliance officer of the firm, for secretly establishing her own business to compete with LFG while still working at LFG.
Mr. Ziomek alleged Ms. Hewell induced him to entrust most of the business to her and then resigned and attempted to steal his clients while Mr. Ziomek was caring for his critically ill mother and dealing with his own medical issues.
In the
Finra arbitration case, Mr. Ziomek alleged Schwab gave clandestine assistance to Ms. Hewell to open her own RIA with Schwab serving as the custodian. Schwab was also the custodian for LFG.
Mr. Ziomek said he found out years after Ms. Hewell's departure that Schwab had violated its own conflict-of-interest policies regarding RIAs on its platform, and Schwab terminated its custodial relationship with LFG. Mr. Ziomek filed his Finra arbitration claim in November 2016.
The three-person Financial Industry Regulatory Authority Inc. arbitration panel found Schwab liable for $200,000 in compensatory damages, $47,001.12 in costs and $100,000 in attorneys' fees, according to the Aug. 2 award.
Mr. Ziomek had requested damages between $1.2 million and $1.9 million, attorneys' fees of $451,000 and costs of $47,000. In February 2018, Mr. Ziomek settled with Purshe Kaplan Sterling Investments, which was a co-respondent in the arbitration litigation.
"This case involved business and ethical violations by
Charles Schwab in its capacity as a broker-dealer firm administering custodial platform services to an RIA," Robert J. Girard II, founding partner of the Girard Bengali law firm and an attorney for Mr. Ziomek and LFG, said in a statement. "Schwab lied about its involvement and took advantage of LFG's reliance on Schwab's supposed good faith dealings. While Schwab profited from this misplaced trust, the Finra panel administered the appropriate justice."
The arbitrators got it wrong, according to Schwab.
"While we disagree with the outcome of this case, we are pleased to have this matter behind us," Schwab spokesman Peter Greenley wrote in an email.
Ms. Hewell is now a partner at Financial Focus in Carlsbad, Calif. Her firm did not immediately respond to a request for comment.
Omar H. Bengali, who also represented Mr. Ziomek and LFG, said the award against Schwab sends a message regarding how custodians must work with RIAs on their platforms.
"Failing to acknowledge the existence of conflicts between clients will not be tolerated, especially where the motivation is to favor the interests of a potential client above an existing one," Mr. Bengali said in a statement.
The arbitration case involved 18 hearing sessions between July 2018 and June.
