New Statistics From FINRA Show Investors Prevail in Less Than Half of Cases

by Jackson Siegal

FINRA has recently revealed that only 42% of the cases that go to hearing result in “some” monetary relief for the customer. This statistic is even more concerning when you consider the fact that customers rarely recover the full amount of damages that they seek.

In turn, lawyers must now have a firm grasp on FINRA’s recovery statistics in order to adequately counsel their clients. For example, a client who is opposed to settlement may change her mind if she knew that only 23% of cases in 2013 were decided by arbitrators whereas 77% were resolved by other means. Only 18% of cases were decided after a hearing. Indeed, 52% of cases were settled by the parties prior to hearing in 2013.

Also of note, FINRA’s statistics reveal that there was a 14% drop in the number of new cases filed between 2012 and 2014. The most common type of controversy was a breach of fiduciary duty and the most common type of security involved in arbitration cases were mutual funds. Lastly of note, the average turnaround time for hearing decisions was 20.2 months for cases closed through January.

You can find FINRA’s latest statists here.

PIABA Issues Report: Expungement Relief Granted in High Number of Settlement Cases

by Lauren Gonzalez

On Wednesday, October 16, 2013, the Public Investors Arbitration Bar Association (“PIABA”) released the findings of a study which raises the notion that investors relying on the public brokerage background reports on FINRA’s website are unlikely to be getting the complete picture.

When an investor lodges a complaint against his or her broker, the complaint moves through FINRA, the Financial Industry Regulatory Authority. Easily accessible on FINRA’s website is its BrokerCheck® tool, which allows for investors to research a member firm or broker and learn about the broker’s employment history, educational background, certifications, and importantly, whether a customer has ever filed a dispute against that broker or brokerage firm.

PIABA’s five-year study of more than 1,600 arbitration cases showed that in cases filed between January 1, 2007 and mid-May 2009, expungement was granted in 89% of the cases resolved by stipulated awards, commonly the result of settlements. For the time period beginning mid-May 2009 through the end of 2011, 96.9% of the cases resolved by stipulated award also granted expungement relief. One financial professional was granted expungement 35 times out of the 40 times he requested it. To have a record expunged means to have any record of a complaint made by investors removed from a broker’s public regulatory record.

The idea that an investor or an arbitrator deciding a case is not receiving a complete picture of a broker’s complaint record can be a scary thought. President of PIABA, Scott Ilgenfritz, commented that “[t]he result is that investors who are diligent enough to seek out information about brokers may be getting a woefully incomplete picture of the individual to whom they will entrust all or most of their nest egg … [W]hat is supposed to be an extraordinary relief measure is now being sought and granted in roughly nine out of 10 settled cases that we studied.”

An investor who sees that a broker has a myriad of customer disputes may be less likely to elect that person as his or her broker. Also, the number and type of customer disputes filed against a broker can influence an arbitrator’s decision in later cases filed against that broker. For instance, think about a broker who has had 10 previous customer complaints of churning an account with nine of those complaints expunged. An arbitrator making a decision on a churning case involving that particular broker would be more likely to grant an award in favor of the investor in a churning case if the nine expunged records still existed on the broker’s record. Similarly, the arbitrator would be less likely to grant an award in favor of the investor in a churning case if the broker’s report only showed one prior customer complaint. The unfortunate truth is that the broker still has those ten complaints; however, under the current rules investors, and eventually arbitrators may not be able to fully see the entire picture. When an arbitrator is making this decision, the arbitrator often times holding the investor’s entire life savings in his hands. Full disclosure of any and all prior complaints and disclosures would make for a more fluid relationship between investor and broker prior to the arbitration process.

As per the PIABA report, the SEC and FINRA intended for expungement to be an extraordinary remedy, not one that is freely given. Several recommendations that the report makes include more thorough training for arbitrators regarding motions seeking expungement relief, FINRA proposition of rule changes with respect to respondents bargaining for settlement negotiations upon an agreement to expunge, and changes to the procedural application in motions for expungement relief.

This report indicates an eye-opening realization of the need for change. Allowing for complaints to be expunged so easily is a detriment to investors who are attempting to do their due diligence in selecting an appropriate broker to entrust their hard-earned money with. This report means that investors cannot rely on FINRA’s BrokerCheck® reports and investors must be more creative in their background checks on potential brokers. One solution would be for investors to look at all awards involving that broker through FINRA’s website.

FINRA has already sent a notice to its arbitrators on expanded expungement guidance. In its notice, FINRA attached mandatory reading for all FINRA arbitrators. FINRA also mentioned in its notice that the organization planned to issue follow-up communications including revisions to its expungement arbitrator online training course, an “Arbitrator Audio Workshop”, an article in an upcoming issue of its arbitrator newsletter, and revisions to the “Expungement Page” on its website.

It will be interesting to see how this report and raw data will impact FINRA’s rules and regulations in the near future.

For Arbitration Award Payment, Insurance is No Easy Fix

by Nicholas Kulik

Hedging against catastrophic occurrences through products such as life, car and home owners insurance have been staples for years. But what about “errors and omissions” insurance for broker-dealers? In response to a growing problem of brokerage firms going bankrupt after losing securities arbitration cases, the FINRA (Financial Industry Regulatory Authority), Wall Street’s industry-funded regulator, is floating the idea of requiring brokerages to carry insurance for the payment of arbitration awards to investors.

A total of $51 million of arbitration awards were granted in 2011, or 11% of total awards, have not been paid due to many small brokerage firms closing up shop after they could not afford awards levied against them. This insurance requirement could allow customers to recoup some of their losses that would otherwise go unpaid.

Sounds like a great idea, right? While insurance may provide some financial relief to investors who may otherwise be out of luck, the policies can also be riddled with exceptions and coverage limitations. These may include allegations of fraud and problems stemming from risky investments. Additionally, many insurance underwriters may not want to cover small brokerages, which they often view as high-risk. Other issues FINRA will have to consider in developing an insurance mandate includes how much coverage to require firms to buy and the effect of this directive on the financial industry as a whole.

Even if requiring insurance is not the solution, lawyers for investors and consumer advocates have no shortage of alternative proposals. The following are four more possible solutions to FINRA’s problem of unpaid awards and the hurdles experts say regulators would have to overcome to make them viable.

S.E.C. (Securities Exchange Commission) regulation calls for all brokerages to keep funds on hand to pay liabilities known as net capital requirements. However, this can be as little as $5,000. At a recent conference of securities lawyers, the question was posed, “Why don’t we just hike up that amount?” Several problems arise from this potential plan. First, changes in SEC regulation could take years to implement, leaving harmed investors waiting in the meantime. Second, even a substantial requirement of $500,000 could still leave investors stranded when they win arbitration awards exceeding that amount.

If individual brokers cannot afford awards, why not require all 630,000 brokers under FINRA governance to contribute annual dues to a newly created recovery fund? The dues would not be steep and could create around $126 million annually to cover potential unpaid awards. Problems may arise despite the funds size, by encouraging small firms to pursue risky investments and then close up shop when things go south knowing investors can recover from the fund.

If creating a new fund is not ideal, FINRA could look to an organization that exists with a large sustainable fund already in place. The Securities Investor Protection Corporation is a non-profit organization that provides insurance coverage in cases where brokerages close and customers’ assets go missing. SIPC, which is funded by the brokerage industry, accumulates annual interest of $1.6 billion which could potentially be enough to pay such unpaid awards. Issues arise with this reform measure because the proposal would likely be tied up in Washington D.C. for years with debate of the dangers of making the good actors cover the bad actors.

For more information, see Arbitration Award Insurance

Finding a Solution to Unpaid Arbitration Awards

By Nate Irvine

Going to an arbitration proceeding can seem like rolling the dice. Arbitrators may be biased, expert witnesses can be persuading, and attorneys might be overconfident or less than stellar. However, in extreme cases an X-factor exists. The broker could go belly up and leave the claimant penniless. In fact, this is a growing concern for smaller brokers and FINRA is searching for an answer.

The following represents a sample of alternatives:

New Insurance Requirements

Force brokers to purchase insurance that provides coverage for arbitration awards. The premiums would most likely be very expensive. Most firms in the industry whether big, or small, would probably not support the increased expense. Furthermore, the last thing anyone wants to do in the current economy is choke off small business growth with excessive regulation.

Raise Capital Requirements

FINRA has no power to raise the capital requirement because that power belongs to the Securities and Exchange Commission (“SEC”). The SEC already requires every brokerage firm to maintain certain capital requirements to cover liabilities, which includes arbitration awards. It would take the SEC years to raise its requirements because of the powerful brokerage lobbyists. Besides, such a solution is not all encompassing because it would not provide adequate protection for investors whose brokers close up shop regardless of increased requirements.

Industry Insurance Fund

Another potential option is for FINRA to create a fund that every broker is required to make an annual contribution to. There are about 630,000 brokers that FINRA regulates, so such a fund could be created by forcing brokers to pay minimal contributions. However, some attorneys believe this solution would cause brokers to take unnecessary risks, leading to an increase in bad business practices. Yet the risk might be mitigated by capping the amount investors could recover.

Extend SIPC Coverage

The Securities Investor Protection Corporation (SIPC) provides insurance for customers when brokerages fail. However, they do not cover arbitration awards. Some believe that SIPC coverage should be extended to include arbitration awards. However, the biggest brokers in the industry are unlikely to support such an idea because they already pay their arbitration claims.


In order to be competitive in the industry, smaller brokers utilize a variety of enticing sales tactics to gain new clients. However, greater rewards equal greater risk, which includes the possibility of forfeiting arbitration awards. Buyer beware in the short term, there is no clear solution to the problem at hand and most seem skeptical of solutions proposed to mitigate damages produced by smaller brokers that fail.

For more information on this article can be found at: Solutions to Unpaid Arbitration Awards

Don’t Fall for Pump-and-Dump Stock Email Scams!

By Leticia B. Santiago

The Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC) recently issued an alert warning investors not to invest in “pump-and-dump” stock schemes. The alert warned investors to be on the lookout for email spam promoting these “pump-and-dump” stocks. Alert also stated that these scams could be promoted on social media like Facebook and Twitter.

Promoters of “pump-and-dump” schemes often claim to have “inside” information about new developments. Others say they use an “infallible” system that uses a combination of economic and stock market data to pick stocks. Enticing subject lines and short messages offering investors an opportunity to strike it rich are designed to quickly attract interest and lure investors into buying the stock, all with the goal of creating a run-up in price.

The senders of these emails often are trying to create a buying frenzy by sending mass emails, essentially “pumping” the stocks. Then, once there has been a spike in sales, they “dump” their shares by selling them and stop hyping the stock. Then, the price typically falls dramatically and investors lose their money or are left with worthless, or near worthless, stock.

The Executive Vice President of FINRA’s Office of Fraud Detection and Market Intelligence, Cameron Funkhouser, stated that “[s]pam email is the bait used to lure people into making bad investment decisions. No one should ever make an investment based on the advice of an unsolicited email.”

The alert included data from McAfee Threats Reports that confirms that there has been a rise in email-linked to “pump-and-dump” stock schemes.

The Director of the SEC’s Office of Investor Education and Advocacy, Lori Schock, warned that “[i]nvestors should always be wary of unsolicited investment offers in the form of an e-mail from a stranger. The best response to investment spam is to hit delete.”

Accordingly, investors should always be wary of unsolicited investment promotions, whether it is through email or social media.

FINRA Releases Study Indicating Floridians Are Too Confident in Assessing Their Financial Knowledge

By Netaly Masica

In 2012, the FINRA Investor Education Foundation commissioned its second national study of the financial capability, which evaluates how key indicators—categorized as “making ends meet,” “planning ahead,” “managing financial products,” and “financial knowledge and decision-making”—vary with underlying demographic, behavioral, attitudinal, and financial literacy characteristics.

The study, released on May 29, 2013 and available at, compares the financial capabilities across all 50 states and the District of Columbia, and across the nation as a whole. This blog entry explores the financial capabilities of Floridians compared to the national average with specific emphasis on the fourth factor, “financial knowledge and decision-making.”

Making Ends Meet. This indicator encompasses the extent to which Americans balance monthly income and expenses (spending vs. saving) and how they deal with everyday financial matters (e.g., medical debt). This indicator is at least partially influenced by general economic conditions.

Floridians tied for fifth in the country in spending less than their household income, meaning that Floridians are more likely than the national average to save their money. 44% of Floridians reported spending less than their household income, while the national average was 41%. This is not surprising considering that over 20% of Florida’s respondents indicated that they are retired, and according to the survey, respondents who receive retirement income are less likely to have difficulty in making ends meet.

Planning Ahead. This indicator shows the ability of Americans to make necessary changes to buffer themselves against financial emergencies. In Florida, 49% of respondents reported having “rainy day” savings to cover three months of unanticipated financial emergencies. While Florida did not rank in this category, this is still significantly more than the national average of 44%.

Managing Financial Products. This indicator encompasses how money inflows and outflows are managed (i.e., methods of receiving income and payment methods), where money is stored (e.g., banking, investments), and how money is borrowed (i.e., debt).

Floridians ranked third in avoiding only making the minimum payment on their credit card. In other words, 27% of Floridians reported paying only the minimum payment during the past year compared with 34% of all Americans.

Financial Knowledge and Decision-Making. This indicator measures the level of financial knowledge and the skills to apply the knowledge to actual decision-making situations. Of principal importance is the gap that exists between self-reported knowledge and real-world behavior.

On a test of five basic financial literacy questions, Floridians answered an average of 2.8 questions correctly compared to the national average of 2.88 questions. Financial literacy is strongly correlated with behavior that is indicative of financial capability. Those with higher literacy are more likely to plan for retirement and to have an emergency fund, and less likely to engage in expensive credit card behaviors.

Despite the relatively low levels of financial literacy as measured by the questions, Americans tend to have positively biased self-perceptions of their financial knowledge. When asked to assess their own financial knowledge, nearly three-quarters of respondents (73%, nationwide and 74% for Florida) gave themselves high marks. In reality however, only 14% of respondents nationwide (11% for Florida) were able to answer all five questions correctly and only 39% (37% for Florida) were able to answer four or more questions correctly.

Those respondents who stated they received financial education scored higher than those who did not; however, the study indicated that these findings did not imply a causal relationship between financial education and financial literacy, and may be attributable solely to the differences in education levels, employment, and other demographic factors.

In conclusion, financial capability encompasses multiple aspects of behavior relating to how individuals manage their resources and how they make financial decisions, including the factors they consider and the skill sets they use. The information provided by this survey allows the public, policymakers, and researchers to compare trends that lead to sound and unsound investments, and will hopefully encourage education on investment.

FINRA Bars Financial Advisor who lost over $40 million for his NFL Player-Clients

by Josh Brandsdorfer

Just a few weeks ago, FINRA took action against a Broward County financial advisor who persuaded current and former NFL players to make high-risk – and now worthless – investments in a failed Alabama casino. Jeffery Rubin, a financial advisor from Lighthouse Point, was found to have “taken advantage of the professional athletes who placed their trust in him,” according to FINRA’s executive vice president and chief of enforcement, Brad Bennett. Rubin’s actions resulted in FINRA barring him from the securities industry.

Rubin’s clients include many high profile athletes with South Florida ties, such as Fred Taylor, Terrell Owens, Santana Moss, and Samari Rolle. Rolle was one of the first athletes to complain about Rubin and later filed documents against Rubin with FINRA. “Many unsuitable and misrepresented investments and services were provided by” Rubin, according to Rolle. FINRA supported Rolle’s claim, further alleging that Rubin had made “unsuitable recommendations” to invest in “illiquid, high-risk securities issued in connection with the now-bankrupt casino in Alabama.”

Even worse, Rubin breached his fiduciary duty to his clients after he received a 4% ownership stake and $500,000 from the project promoter for the referral investments from the NFL players. Rubin recommended that the players invest in the Center Stage Alabama entertainment complex for more than three years, until the casino filed for bankruptcy while owing $68 million in 2011.

While current professional football players continue to turn to Rubin for investment advice, Jacob Zamansky, a New York securities fraud attorney said that the companies Rubin was working for at the time of the alleged investments can be held responsible as well for the huge losses incurred by the football players even though Rubin did not tell his former bosses about the casino investments. Zamansky acknowledges the need for accountability on behalf of both Rubin and his employer in instances such as this one because many of the players cannot go back to the NFL and earn back the money that they lost due to the short earning career of a professional athlete.

Players lose $40M, thanks to Broward adviser, investigators say – Sun Sentinel

Increase in FINRA Fines Emphasizes Members’ Need To Observe Suitability and Due Diligence Obligations

by Bianca Olivadoti

Last year, FINRA assessed $78.2 million in fines—a 15% increase from 2011, according to a recent study released by Sutherland Asbill & Brennan LLP.

With a total of 1,541 cases filed, 2012 was the fourth consecutive year of growth in FINRA disciplinary actions.  Suitability and due diligence violations earned clear spots as number one and number two on the list of allegations.

Suitability violations alone accounted for $19.4 million in fines.  In particular, FINRA has focused these suitability cases on complex products, such as real estate investment trusts (REITs), unit investment trusts (UITs), and collateralized mortgage obligations (CMOs).

The increase in these actions has emphasized the need for firms to conduct a thorough suitability analysis before selling products to their customers.  Brokers must make sure to disclose all risks at the point of sale, especially with complex alternative investments.

Likewise, FINRA’s growing emphasis on complex products has caused an explosion in the number of due diligence cases during the past two years.  In 2012, 62 due diligence actions generated $12.8 million in fines.

As long as interest rates stay low, firms will continue to put together alternative investment products with high potential yields.  This may result in suitability and due diligence violations remaining at the top of the list.

FINRA Takes Action Against Unscrupulous Broker

by Joseph Bendel

FINRA filed a preliminary injunction this past month against Westor Capital Group for the misappropriation and misuse of customer funds. FINRA charges that Westor has refused to allow customers to withdraw money from their accounts, as well as executed unauthorized trades within customer accounts, and has requested a cease-and-desist order from the court. Further, FINRA has issued a complaint against Westor for, among other things, failure to maintain control of investor accounts, as it is required to do under federal securities law.

While the complaint has been filed in court, it is unlikely that it will ever come to a trial. FINRA allows for the named parties in a complaint to respond to the complaint. In such case, the issue will be heard by a FINRA disciplinary panel and may result in fines, censure, or other non-judicially imposed sanctions. This case highlights FINRA’s market regulation at the investment firm management level to protect consumers. See the full story here.


FINRA Launches Low Cost Telephonic Mediation Pilot Program for Simplified Arbitration Claims

On January 16, 2013, FINRA announced the launch of a new pilot program designed to reduce costs of mediation for cases that qualify under FINRA’s simplified arbitration process, specifically, cases involving claims under $50,000.  Under the new program, which began on January 15th, the costs of mediation would be substantially reduced in a number of respects:

  • For claims under $25,000, mediators in FINRA’s program will provide pro bono services, which means they will not charge a fee for their service.
  • For claims between $25,000 to $50,000, mediators participating in FINRA’s program have agreed to reduce their standard fee to $50.00 per hour.
  • FINRA will not charge any administration fee for these cases.
  • The mediation would take place telephonically, eliminating travel expenses for the mediator and the parties.

Linda Fienberg, President of FINRA Dispute Resolution, stated, “Telephone mediation is a lower-cost alternative, and would benefit dispute resolution forum users in many ways. Besides eliminating the travel and preparation costs typically associated with in-person mediation, telephonic mediation offers greater convenience and flexibility, and is a practical alternative for all parties involved.”

While the efficacy of telephonic mediation remains to be seen, FINRA is certainly trying to make its dispute resolution process for small claims faster and less expensive. Last year, FINRA raised the threshold for its simplified arbitration process from $25,000 to $50,000.  Under FINRA’s simplified arbitration procedure, investors’ arbitration claims are decided by a single arbitrator without a hearing; the arbitrator makes a decision entirely on the parties’ written submission.  The new telephonic mediation program will provide small claims investors with another avenue to resolve their claims at substantially reduced costs.  For more information on FINRA’s new pilot program, click here: