Articles Posted in Arbitration

The Financial Industry Regulatory authority has broadened its list of public arbitrators to preside over cases. The self-regulatory organization will provide dispute participants with the names of 15 public arbitrators, instead of 10, from which to choose. FINRA’s Board also modified its eligibility requirements for who can chair an arbitration panel.

FINRA allows plaintiffs and defendants of arbitration cases to choose three arbitrators.

In other FINRA arbitration news, the SRO is asking the U.S. Securities and Exchange Commission to approve a proposed rule change that would allow monetary awards mandating that parties pay one another damages to be offset. This rule change is for situations in which an arbitration panel awards damages to both the respondent and claimant and one party can’t or doesn’t pay what it owes.

If approved, the rule would allow the party that owes more money to only have to pay the net difference. If arbitrators don’t mean for an award to be offset when both parties owe one another money, they must state so in the award notice.

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Two North Carolina investors have filed an arbitration claim with FINRA against Morgan Stanley (MS) over unsuitable investments involving the financial firm’s Cushing MLP High Income Exchange Traded Note. The married couple, who are retirees in their sixties, are accusing the brokerage firm of:

· Common law fraud

· Negligence

· Breach of fiduciary duty

· Negligent supervision

· Failure to adequately disclose the risks

In a phone interview with InvestmentNews, the claimants said that they have lost over $100K. According to the couple, a Morgan Stanley broker invested about $150,000 of their money in the Morgan Stanley Cushing MLP High Income ETN, which is an exchange traded note connected to master limited partnerships with shipping and energy assets. Their legal team said that the couple did not understand the extent of the risks involved in that they could potentially lose their principal. This was a loss they could not afford. Instead, the claimants were purportedly told that their investment would make them money.

The Cushing MLP High Income Exchange Traded Note seeks to give investors cash upon maturity or early repurchase, as well as variable coupon payments every quarter (depending on how the underlying index, performs). The claimants’ broker fraud lawyers believe that Morgan Stanley recommended the exchange traded note to investors who were seeking to make money but may not have understood or been fully apprised of all the risks.

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Ex-Dallas Broker Accused of Texas Securities Fraud Face Five Years
Wade Lawrence, a former Dallas broker, has pleaded guilty to Texas securities fraud. As part of his plea bargain the 43-year-old will have to forfeit $1.5 million and pay over $250,000 in fines. He also faces up to five years behind bars for his $2.1 million securities scam.

According to prosecutors, over the course of working for several securities firm over the last seven years, Lawrence falsely offered risky investments with the promise of 20% to 100% returns. He lost a significant amount of money and invested just a portion of investors’ funds. Lawrence used a lot of investors’ cash to cover his own living expenses, personal travel, as well as pay for fancy jewelry. The Associated Press reports that to date Lawrence has given back $581,000 to investors.

Minnesota-Based Brokerage Firm Files for Bankruptcy
Broker-dealer Fintegra has filed for bankruptcy in U.S. Bankruptcy Court in Minnesota. The firm had to stop its securities business in June after it was hit with a $1.5M arbitration award that placed it under the $250,000 regulatory net capital requirements of minimum.

According to the FINRA arbitration panel, Finestra and a broker violated state anti-fraud provisions related to the sale of Miasole Investments II, an unregistered security. The securities fraud complaint, submitted by Fintegra customers, states that the broker-dealer could only pay $300,000 of the award. However, InvestmentNews reported that the attorneys for one of the clients said that to date none of the award has been paid.

Fintegra, in its FOCUS report with the SEC, admitted that it had been named in five separate lawsuits, all involving the alleged sale of securities that were either unsuitable or violated state securities laws.
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The Investor Choice Act in Congress, A U.S. House bill written by Keith Ellison, D-Minn., is looking to stop investment advisers and brokers from obligating investors to pursue their claims in arbitration instead of going to court. The proposed legislation would bar pre-dispute mandatory arbitration clauses in contracts between clients and their representatives.

As of now, almost all brokerage agreements, and an increasing number of investment adviser ones, come with provisions mandating that investors take their disputes to the arbitration system, which is run by the Financial Industry Regulatory Authority. There are those that believe that the forum favors brokers and advisers. Meantime, others say that the arbitration system is much more efficient for investors than going to court.

This is not the first time that Ellison has pushed for ending mandatory arbitration. He unveiled a similar bill in 2013 but it did not become law. The Public Investors Arbitration Bar Association has put out a statement voicing its support for Ellison’s latest bill, which it says gives investors back their right to choose whether they want to take their dispute to court or arbitration.

Investors are accusing brokerage firms of making inappropriate recommendations and selling investments in Icon Leasing Fund Eleven, LLC and Icon Leasing Fund Twelve, LLC to them even though they would not be able to withstand the high risks. The two funds are registered, non-traded Equipment Leasing Direct Participation Programs (DPPs).

Not only are the Icon Eleven and Icon Twelve investments very high risk and illiquid investments, but also there are little if any secondary markets where their shares can be sold. Investment dividends from Icon cannot be predicted because they are contingent upon profits made from equipment leases.

During their offering periods, the two funds started paying distributions. However, not long after Icon Eleven and Twelve stopped taking new investors, the investments’ value started to drop fast and dividend payments became inconsistent. The decline has resulted in significant financial losses for investors.

The U.S. Securities and Exchange Commission has approved a Financial Industry Regulatory Authority-proposed rule that would create greater transparency of Nontraded real estate investment trusts. Under the new rule, investors will have to be provided with more information about the costs involved in buying shares of nontraded REITs.

With the existing practice, brokerage firms can list nontraded REITS as having $10/share price. The new rule would obligate broker broker-dealers to include a per share estimated value for an REIT or unlisted direct participation program on customer statements and make other disclosures.

Firms would calculate an REIT or DPP per share estimated value by either using the appraised value methodology or the net investment methodology. The appraised value method involves using the liabilities and assets of the REIT or DPP to determine the valuation upon which the share value would be based. The valuations would have to be conducted at least once a year by a third-party valuation expert. The net investment method involves brokerage firms articulating in customer statements that a portion of return of capital is included in a distribution and that this return lowers the estimated per share value listed on the statement.

The U.S. Securities and Exchange Commission (“SEC”) has approved a Financial Industry Regulatory Authority (“FINRA”) rule that could make it tougher for brokers to expunge customer complaints from their records in settled arbitration cases. Rule 2081 bars brokers from making settlements with customers contingent upon the customer’s consent to not oppose the expungement of the dispute from the public record of the broker.

A record of arbitration complaints filed against brokers is kept as a part of the CRD system. The CRD system contains data about registered representatives and members, including their registration, employment, and personal histories. It also includes disclosure information pertaining to civil judiciary, disciplinary, and regulatory actions, criminal matters, and data about customer disputes and complaints.

The public can access this data through FINRA’s BrokerCheck website. Brokers can have a customer dispute erased from the CRD system and BrokerCheck only through a court order that confirms there has been an arbitration award that recommends such relief.

According to statistics put together by the Financial Industry Regulatory Authority, the number of securities arbitration cases brought by the self-regulatory agency is on target to exceed last year’s total. A likely contributor to the increase can be attributed to the numerous Puerto Rico municipal bond cases already filed by investors who sustained huge losses. More of these are inevitable, especially as FINRA just increased its arbitrator pool to deal with cases involving muni bonds from the US territory.

The broker-dealer regulator said that during this first quarter alone, 1,011 FINRA arbitration cases were submitted-a definite increase from the 919 securities arbitration claims filed during 2013’s first three months. However, the number of arbitration cases that were closed during this first quarter is less than in two years prior, with just 946 resolved. Compare that to the over 4,400 and 4,800 cases in 2013 and 2012, respectively.

That said, 5O% of arbitration cases decided during this initial quarter rendered damage awards, which is more than in the last two years. The most common claim in FINRA arbitration cases filed in 2014 so far is breach of fiduciary duty. Negligence, failure to supervise, and breach of contract are the other leading claims.

According to Investment News and The Wall Street Journal, sources in the know say that the Financial Industry Regulatory Authority wants to limit how many brokerage industry insiders can act as arbitrators in investor disputes with broker-dealers and brokers. The amendment would keep anyone affiliated with the securities industry, including lawyers and ex-brokers, from representing themselves in the role of public arbitrator. FINRA’s board of directors will decide whether to approve a proposed rule changes on this matter at a meeting this week.

Under the FINRA arbitration system, there are two arbitarator categories: nonpublic and public. Public arbitrators usually don’t have a current insider industry connection with the securities industry. Meantime, arbitrators that are nonpublic can have current ties, even working as a banker or a broker or securities fraud lawyer.

Usually, there are three arbitrators on a panel presiding over an investor-broker dispute. The panel members are selected from a list of arbitrators. Respondents and claimants go through this list to eliminate those they don’t want on the panel.

The Financial Industry Regulatory Authority Inc. says that J.P. Turner & Co. has to pay restitution of $707,559 to 84 clients over the sale of inverse and leveraged ETFs that were unsuitable for them, as well as for excessive mutual fund switches. The SRO says that the broker-dealer did not set up and keep up a supervisory system that was reasonable but instead oversaw inverse and leveraged ETFs the same way it did traditional ones. It also accuses the financial firm of providing inadequate training regarding ETFs. By settling, J.P. Turner is not denying or admitting to the charges.

Leveraged and Inverse Exchange Traded-Funds

Inverse and leveraged ETFs “reset” every day. They are supposed to meet their objectives daily so their performance can rapidly diverge from that of the benchmark or underlying index. Unfortunately, even if long-term index performance exhibits a gain, investors can be susceptible to substantial losses. Markets, when they are volatile, can only exacerbate the situation. Also, leveraged and inverse ETFs are not suitable for all investors.