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Explained Award: Sofia v. Fross
Posted on Categories Arbitration, Arbitration Awards, Non-FINRATags , ,

EXPLAINED AWARD: SOFIA v. FROSS, AAA ID #01-16-0002-6358 (Leesburg, FL, 11/27/17).

This week, we follow up our recent review of a lengthy AAA Award in a customer dispute against a broker-dealer (SAA 2017-45) with a shorter, but still detailed and well-reasoned Award arising from a business dispute among three brokers.

The two businesses at issue, Platinum Advisor Strategies, LLC and Platinum Strategies, LLC (respectively, Platinum 1 and Platinum 2, collectively, “Platinum”), founded in 2009 and 2012, respectively, provided business services to other financial advisors – marketing by the former LLC and website and social media by the latter. Brothers Thomas and Robert Fross provided start capital for Platinum 1 and Robert Sofia, who ran the day-to-day operations, provided his labor, or what the Award quaintly terms “sweat capital,” in return for a 20% ownership interest. The three evenly split ownership of Platinum 2, which Sofia also ran.

A Falling Out and its Fallout

By 2015, Sofia wanted to leave Platinum to pursue his own businesses, but the Frosses repeatedly refused his buyout requests. However, on April 19, 2016, Thomas Fross sent Sofia an email entitled “Revocation of Membership,” notifying him that his employment was terminated and his membership interests were revoked. The Frosses ignored Sofia’s queries about compensation for his revoked membership interests. Sofia then brought this arbitration against the Frosses and Platinum, asserting that the revocation violated the Operating Agreements and breached the Frosses’ fiduciary duties to him as a co-member of the LLCs. He also requested a declaratory judgment that he did not violate a non-compete clause in Platinum 1’s Operating Agreement and later added a claim for punitive damages. The Frosses counterclaimed, alleging that Sofia converted $10,000 in Platinum funds, violated the non-compete clause and breached his fiduciary duty by not conveying one of three offers to buy Platinum that he received (the Frosses received and rejected the other two offers).

Sofia Prevails

The three-member Panel rules in favor of Sofia on the key liability issues. The brothers Fross claimed that they did not intend to revoke Sofia’s membership, but merely his “managing membership.” However, the Arbitrators find their testimony to be “inconsistent” and not credible; moreover, the email was unambiguous as to their intent and Sofia received none of the benefits of membership after it was sent. The Arbitrators likewise conclude that the revocation did violate the Operating Agreements because Sofia did not receive notice of the meeting where he was voted out and the Arbitrators did not believe that the Frosses intended to compensate him for his membership interests. The Frosses’ conduct also violated their fiduciary duties to Sofia. However, the Panel finds the pair insufficiently culpable for punitive damages.

Small Comfort for Respondents

The Frosses win on one other point: Sofia converted $10,000 in Platinum funds because he withdrew it and never returned it. But the Panel rejects the other counts of the Counterclaim. Sofia, they agree, did not operate a business in competition with Platinum 1prior to the revocation of his membership; therefore, he did not violate the non-compete clause and is entitled to a declaratory judgment to that effect. The Arbitrators also accept Sofia’s testimony that he did convey the third offer; even if he did not, though, it finds, the Frosses would have rejected it too, so no harm, no foul.

Damage Calculations

The Panel values Sofia’s membership interests at $625,000, the lowest of three buyout bids he offered to the Frosses before the revocation, finding that the company declined in value between the offer and his termination, due to the departure of two valued employees and the intra-management discord. To this, the Arbitrators add $47,607 in prejudgment interest and $297,517 in attorney fees and costs, but set off the $10,000 awarded on the counterclaim.

(ed: According to BrokerCheck, the Fross brothers have been registered with SII Investments in The Villages, Fla. since 2007, while Sofia was also registered with SII in The Villages from 2007 to 2016, bur subsequently registered with a different FINRA member in Clearwater, Fla., where he evidently still works. The Award itself makes no mention of Sofia’s status as a broker, describing him as “office manager” for the Frosses, at least before the founding of Platinum 1. Before that job, also according to the Award, he worked in internet sales for a car dealership, which helps to explain his qualifications to work for Platinum.)

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