Max B. Tharpe Charitable Foundation, Inc. v. Holland, FINRA ID #14-00200 (Boca Raton, FL, 7/29/15).
A majority of the Panel in this case awarded punitive damages and, as required by Florida law, made findings in support of its decision in this explained Award.
We briefly summarized this Award in a recent Alert, as part of a survey of recent explained Awards finding breach of fiduciary duty (SAA 2015-30). As a result of that review, we thought it merited a more thorough review here.
The Allegations – Per Panel
Barbara Morin, president of a charitable foundation, executrix of the Estate of the late Max B. Tharpe and sole trustee of a Trust in Mr. Tharpe’s name, alleged that the broker for Mr. Tharpe, the Foundation and Trust, William J. Holland, engaged in an unauthorized sell-off of Wachovia stock from its account; Ms. Morin also complained about the exchange of a New York Life annuity for a Hartford annuity. She filed a claim on behalf of the Foundation, the Trust and the Estate (collectively “Claimants”) for conversion, breach of fiduciary duty, negligence and other causes of action against both broker Holland and his employer, Edward D. Jones & Co.
A Motion to Dismiss
Respondents filed a pre-hearing motion to dismiss, asserting (1) that Claimants’ claims arising out of the 2007 security transfers violate FINRA’s six-year eligibility rule; (2) that Morin lacked authority to bring the claims without court authorization; and (3) that the claims are barred by the Florida statute of limitations. The Panel denied the two timeliness grounds and the objection to Morin’s capacity to act, as it related to the Foundation. It did grant the motion as to the Estate and the Trust without prejudice, based on the objection to her capacity, but gave her one month to obtain appropriate orders authorizing her to act. When she failed to obtain them by the first hearing, the Panel dismissed those parties without prejudice, leaving the Foundation as the sole claimant.
Award and Explanation
The Panel unanimously holds Respondents jointly liable to the Foundation for $384,864 in compensatory damages and $34,647 in costs, but one Arbitrator dissents from a punitive damage award, also against both Respondents, for $100,000. The majority identifies three instances of “intentional misconduct” by Respondents justifying punitive damages. First is “their egregious failure to timely execute” the Foundation’s instruction to sell 30,464 shares of Wachovia in one block and instead selling them in 13 separate transactions over an eight-month period as the market declined, thereby giving themselves “excessive sales commissions.” Secondly, Respondents used the sales proceeds to purchase 81 different securities for the Foundation’s account, “all without advance approval or post-purchase trade confirmations.” Finally, they persuaded Mr. Tharpe to exchange a fully paid-up New York Life insurance policy for “a single payment immediate annuity policy from Hartford Life Insurance Co.” Not only did the 87 year-old lose the residual value of the New York Life policy, but Holland failed to notify him of a 4% “totally fraudulent sales commission” on the Hartford annuity that amounted to $49,549. Moreover, Holland’s supervisors knew of the commission and Edward Jones split it with him. The dissenting Arbitrator did not explain his objection to the punitive damage award, but he did signal his disagreement with the reasons given by the Panel for assessing punitive sanctions.
(ed: *FINRA severely limits the grounds for a dismissal motion filed before a claimant rests. The six-year eligibility rule is certainly a valid basis, but a state (or federal) statute of limitations is clearly not. Moreover, while a motion may be granted on the ground that the moving party was not associated with the accounts, securities or conduct at issue in the case, we discern no allowance for granting a pre-hearing dismissal on the ground that the opposing party lacks the requisite standing. Query whether a court would vacate the Award if the Foundation had lost and Morin filed an appropriate Award challenge. Query, too, whether the Dispute Resolution Task Force’s anticipated proposal to allow pre-hearing “jurisdictional” challenges would encompass this kind of standing objection. **Florida’s punitive damage statute, section 768.72 of the Florida Statutes, states in relevant part: “A defendant may be held liable for punitive damages only if the trier of fact, based on clear and convincing evidence, finds that the defendant was personally guilty of intentional misconduct or gross negligence.” Moreover, an employer is only liable for punitive damages if, in addition to the foregoing findings, the employer “actively participated in such conduct” or engaged in harmful conduct “that constituted gross negligence” or its officers, directors or managers “knowingly condoned, ratified, or consented to such conduct.” Here, the arbitrators certainly fleshed out their findings enough to conform with the statute.)
Like what you see here?
Twice a week we present blog posts consisting of one write-up from each of our two flagship weekly online Alert services. Consider a subscription to these publications to receive the full array of coverage right on your desktop every week. Give it a try and sign up for a free trial to the Securities Arbitration Alert and the Securities Litigation Alert.