Securities Industry Commentator by Bill Singer Esq

1. Wedbush failed reasonably to supervise one of its registered representatives, Timary Delorme ("Delorme"), who engaged in manipulative trading activity of penny stocks over multiple years, as detailed below. Wedbush was aware of certain aspects of her activity in 2012  and 2013 but its supervisory policies and implementation systems failed reasonably to guide staff on how to investigate the activity. Specifically, in late 2012 and early 2013, Delorme's supervisors: (1) reviewed an email outlining her role in fraudulent transactions involving penny stocks; (2) received copies of two FINRA arbitrations filed by her customers outlining serious allegations of her role in their investments in the same penny stock issuers; (3) learned of a FINRA inquiry into her personal trading in one of those penny stock issuers; and (4) learned of a separate

FINRA inquiry into the allegations underlying the customer arbitrations. Wedbush had no clear process for how to handle red flags of potential market manipulation.

violation of FINRA rules 2111, 5310, and 2010; violation of the duty of fair dealing; fraud; aiding and abetting fraud; breach of contract; gross negligence and/or negligence; third-party beneficiary; and intentional interference with contract. The causes of action relate to China Medical Technologies, Inc. and ZST Digital Networks, Inc. stock. Claimants added the following cause of action in the Amended Statement of Claim: promissory estoppel. Claimants added the following causes of action in the Second Amended Statement of Claim and Third Amended Statement of Claim: negligent misrepresentation; negligent supervision; tortious interference with prospective business relationship; and conversion.  

Although the parties did not agree to a reasoned award in this matter pursuant to FINRA rules, the Panel, having held over 100 sessions in which it heard the equivalent of some 10,000 pages of testimony and received into evidence and reviewed thousands of pages of documents and exhibits, feels it is appropriate to explain its conclusions. 

This Arbitration was filed by Claimants William and Peter Deutsch1 (Deutsch) against Fidelity Brokerage Services LLC et al. ("Fidelity") in the summer of 2012 (FINRA 12- 0759). After an initial Statement of Claim and three subsequent Amendments, the issues finally submitted by Deutsch to the Panel for decision were two-fold: (1) Fidelity's allegedly unlawful lending out of CMED (a delisted Chinese medical technology company) common stock held in the Deutsch margin account(s) and (2) Fidelity's alleged breach of contract and fiduciary duty by refusing to accept purchase orders for CMED placed by Deutsch on or after July 16, 2012. As a result of this conduct, Deutsch asserted he had been deprived of the ability to take control of CMED and eventually sell his interest to a private equity firm or strategic buyer for a net amount ranging from $436 million at the high end to $249 million at the low end . . .

Now turning to the underlying merits of the claim, the Panel finds serious fault with Fidelity's handling of the Deutsch account during the critical period. There did not seem to be much communication or coordination between different departments of Fidelity as to how to approach the client or to formulate a uniform and informed solution to the problems presented by his acquisition strategy. In particular, no one at Fidelity reached out to the client to gain his essential perspective prior to terminating his trading in CMED. In essence, the firm appeared to be more focused on its own interests at the expense of accommodating those of its client or at minimum gaining a key understanding as to what the client's intentions and interests were. Instead, the conclusion was reached that Deutsch and O'Leary were engineering a short squeeze and should be cut off from further purchases of CMED. By reason of the foregoing, the Panel finds in favor of Claimants on this equitable issue. However, as mentioned above, whatever Fidelity did or did not do would not have altered the failure of Claimants' investment because the events that doomed the strategy were either external to Fidelity or internal to CMED. 

The Panel has concluded from the foregoing that an award of any amount by way of the alternate damages calculations presented by Claimants would be entirely speculative, hypothetical, remote or all of the above. Hence, the Panel denies the claim in its entirety. 

correctly applied the law.  The Deutsches alleged that Fidelity breached tort and contract duties by unlawfully lending stock held in their accounts and by refusing to accept certain of their purchase orders for China Medical stock.  The panel ruled that even assuming unlawful actions by Fidelity, the Deutsches failed to prove damages because nothing could have redeemed the Deutsches' failed investment strategy in China Medical.  And damages are an element of both breach of contract and breach of fiduciary duty claims.  . . 

[T]he text of the award directly contradicts this claim: the panel listed all the claims raised in the Deutsches' complaints and expressly stated that those claims were "denied in their entirety," A‐31, including "any and all claims for relief not specifically addressed [t]herein."    A‐32.    The Deutsches posit that the only claims denied were the subset of their allegations the panel described and deemed "submitted for decision," which the panel described as "two‐fold: (1) Fidelity's allegedly unlawful lending out of . . . common stock held in the Deutsch margin account(s) . . . and (2) Fidelity's alleged breach of contract and fiduciary duty by refusing to accept purchase order for [China Medical] placed by Deutsch on or after July 16, 2012."    A‐32.    But the panel's description of "submitted" issues included all of the Deutsches' claims, and the panel's discussion of two time periods does not suggest otherwise.    The "unlawful lending of common stock held in the Deutsch margin account" is an accurate characterization of both the Deutsches' pre‐July‐2012 FINRA rule and their common law claims . . .

[B]etween December 2015 and November 2017, Teixeira defrauded two New Hampshire investors by selling them a series of securities that were supposedly guaranteed and would generate high rates of return.  Teixeira represented herself as a solicitor of high-yield investment funds with connections to investment groups raising funds associated with domestic and foreign real estate developments, who solicited financing through private investors rather than banks.  In fact, Teixeira's claims to be connected to high-level investment groups were false, the investment contracts and notes she sold were worthless, and they generated no returns.  Teixeira would simply convert the invested funds to her own personal use and benefit, without returning any of the invested funds.  In total, the Teixeira obtained approximately $296,250 from the two investors. 

breach of fiduciary duty, elder abuse, and suitability. The causes of action related to Claimant's allegation that, while he was an E*Trade customer, he purchased shares in an energy-related exchange-traded note, Credit Suisse Nassau BRH VelocityShares 3x Long Natural Gas ETN linked to the S&P GSCI Natural Gas Index ("UGAZ"), and suffered losses as the value decreased over the past five years.

• Securities Industry Commentator
• Bill Singer