One of the headaches that broker-dealers and their supervisory personnel face concerns the errant broker who sells securities “off the books” without notifying his employer, a violation known as “selling away.” If the broker requests and receives approval for private securities transactions, his or her employer’s liability is clear, but, even when the broker-dealer has not approved what the broker is doing, a customer burned by a selling away transaction may still seek to hold the brokerage liable on a theory of negligent supervision.
Such cases, in their various iterations, probably occur more often than the public might think. We hear from the field, though, that broker-dealers tend to settle these matters, because the facts are often scary. Still, we see the occasional “selling away” case make it through the arbitral pipeline.
In this survey, we analyzed customer-initiated Awards issued in the last five and a half years (Jan. 1, 2010 - June 30, 2015) that we have identified as involving selling away cases (ed: caveat here, FINRA’s scant factual summaries often preclude classifying Awards with certainty, so there are likely many “selling away” Awards in the survey period that were not included in our sample), with a view to determining how often customers win, how often they recover punitive damages, how often the broker-dealer is liable, and the reasons for broker-dealer liability.
Win Rates & Punitive Damages
We identified 60 selling away cases in the last five and a half years that went to a decision before a panel. The customer prevailed in 44 of them, a win rate of 73%. Many of these Awards (17 in all) involved one particular broker, Harold Bluestein, whose employer, GunnAllen Financial, had entered bankruptcy by April 2010, towards the start of our survey period. Every one of those Bluestein Awards was a win for the customer. Excluding the Bluestein Awards resulted in the win rate declining to a still very hefty 63% (27/43). In contrast, the win rate for all Awards issued in the same period in customer-initiated cases was only 44% (1440/3273).
Another notable difference from the usual case was the greater likelihood of the selling away claimant winning punitive damages; she had a success rate of 19% in that category (7/37 times requested in a “win” award), compared to 12% (116/1008) for successful customers who requested punitive relief. When one excludes Bluestein Awards, which had a punitive damage success rate of 0% (0/17), punitive damage claims were successful an even more impressive 35% (7/20).
Liability for the rogue broker in these cases makes general sense, so the figures above are not surprising. But, how often in that mix are the brokers’ employers also held liable? Broker-dealers were named as respondents in 57 of the 60 Awards. In some of those cases, as with all but one of the 17 Bluestein Awards, the broker-dealer was a respondent in name only, either because it filed for bankruptcy or settled out. Subtracting those Awards from our 57 cases left 38 Awards in which the broker-dealer was named and defended to conclusion. In cases where only the broker-dealer was named, it was held liable half (9/18) of the time. In three other cases, where all of the brokers either filed for bankruptcy protection or were voluntarily dismissed by the claimants, the broker-dealer was, in each case, solely liable. When the broker was named with the broker-dealer – and the broker stayed in the case through Award – the broker-dealer was jointly liable with the errant broker 39% (6/17) of the time; one time the broker-dealer was held solely liable and the broker obtained a directed verdict (although the Award does not say whether that broker was the one selling away). All in all, then, customers won damages in 41 of the 57 Awards involving broker-dealers – a 72% win rate – and the broker-dealer was actually assessed in a total of 19 of the 38 cases (a 50% win rate) that it defended to conclusion. In addition, the broker-dealer was liable for punitive damages in 43% (6/14) of the cases in which it was named and the successful customer requested that item of damage.
Why Is the Broker Dealer Liable?
Why are broker-dealers held liable? To answer that question, we took a look at arbitrator remarks in cases awarding damages against them. In Healthright Partners, LP v. Lincoln Financial Advisors Corp., FINRA ID #09-02961 (Salt Lake City, UT, 9/27/10), the employer “had ample opportunity” to prevent the selling away activity ”for more than a year.” In Sleight v. Centaurus Financial, Inc., FINRA ID #10-00536 (Portland, OR, 1/7/11), despite its lax supervision, the employer “would have been off the hook” if, after discovering the selling away activity, it had only warned the claimant customers. A trio of Awards in which the broker-dealer was liable for punitive damages made similar points. See Wiborg v. Pacific West Securities, Inc., FINRA ID #10-02818 (San Francisco, CA, 6/27/11) (employer twice discovered broker selling away the same products involved in the claim, but gave him only “a slap on the hand fine” and exhibited multiple supervisory deficiencies); Tarrant v. Kovack Securities, Inc., FINRA ID #10-03532 (Atlanta, GA, 2/13/12) (employer failed to supervise a disclosed outside activity or to notify the claimants that the broker was fired); and Aufiero v. Payne, FINRA ID #10-05167 (New York City, NY, 3/27/12) (panel cited several supervision and training deficiencies).
(ed: *Expungement was requested by one or more brokers in 14 cases and granted in six of them, five that found no liability and one in which the expungee was not liable. **We recently summarized an explained Award that denied relief in a selling away claim against a broker-dealer because, the panel found, the customers conspired with their broker to hide his outside activities. Bowman v. UBS Financial Services, Inc., FINRA ID #13-01962 (Seattle, WA.) (see SAA 2015-08.)
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