The Wall Street Legal & Regulatory Feed
Securities Industry Commentator by Bill Singer Esq
December 27, 2021
FINRA Says It Had No Part In Deciding Schwab Customer Arbitration -- Seriously?(BrokeAndBroker.com Blog)
http://www.brokeandbroker.com/6228/cristo-schwab-finra/
Way back in pre-Covid 2017, a disgruntled Schwab customer filed a FINRA Arbitration Statement of Claim complaining about the release of his records to the IRS. Then the dispute wound up in federal court. Then back in arbitration -- sort of. Then back in federal court. In 2021, four years after the hostilities began and in the middle of Covid, things moved on to Zoom hearings, but the customer didn't want to argue his case via Zoom. He said that's not what he bargained for way back when things started. As kids used to say like it or lump it, and, accordingly, the parties proceeded to Zoom hearings and Zoom court proceedings.
Kimberly Nguyen, Plaintiff, v. Raymond James & Associates, Inc., Defendant (Order, United States District Court for the Middle District of Florida ("MDFL"), 20-CV-195 / December 23, 2021)
https://brokeandbroker.com/PDF/NguyenMDFLOrder211223.pdf
https://brokeandbroker.com/PDF/NguyenMDFLOrder211223.pdf
As summarized in the Syllabus of the MDFL Order:
This matter comes before the Court upon Defendant Raymond James & Associates, Inc.'s Motion to Dismiss the Second Amended Complaint and Incorporated Memorandum of Law [Doc. 122], Plaintiff's Opposition [Doc. 131], and Defendant's Notice of Supplemental Authority [Doc. 134]. Defendant argues that the complaint is pleaded in shotgun form, fails to state claims for breach of fiduciary duty and negligence, and that the claims are barred by the independent tort doctrine and precluded from being asserted as class action claims by the Securities Litigation Uniform Standards Act. The Court, having considered the motion and being fully advised in the premises, will DENY Defendant Raymond James & Associates, Inc.'s Motion to Dismiss the Second Amended Complaint and Incorporated Memorandum of Law.
As will likely prove a recurring fact pattern presented against other FINRA member firm broker-dealers, we have these allegations under the "The Facts":
Plaintiff, Kimberly Nguyen, has been a client of Defendant Raymond James & Associates, Inc. since June 2015. [Doc. 117 ¶ 25]. Raymond James operates as a registered broker-dealer with the Financial Industry Regulatory Authority (FINRA) and as a registered investment advisor firm with the United States Securities and Exchange Commission (SEC). Id. ¶ 26. It engages in most aspects of securities distribution and investment banking, and operates as a wealth management firm, offering portfolio management, financial planning, and advisory services. Id. It offered commission-based accounts for which it charged clients a modest fee per trade and feebased accounts which attracted an annual fee based on a percentage of the assets in the client's account. Id. ¶¶ 2, 4.Plaintiff and the putative class members' assets were originally placed in commission-based accounts by Raymond James. Id. ¶¶ 2, 27. Plaintiff's investment strategy was to buy and hold, and she paid modest commissions for the few trades that were executed. Id. ¶ 29. In January 2016, Raymond James' registered representative, without conducting any suitability analysis, advised Plaintiff to transfer her assets, including shares in various mutual funds, into a fee-based account. Id. ¶¶ 30, 27. This was done even though the registered representative knew Plaintiff's investment 3 strategy, and at no time was Plaintiff advised that the fee-based account was not suitable for her. Id. ¶ 30. Raymond James' policies and practices were designed to strongly encourage its registered representatives to solicit and recommend that clients transfer to fee-based accounts, and transitioning smaller clients to Freedom Accounts was profitable for registered representatives. Id. ¶¶ 59, 60, 65-67, 71-74.Based on the advice of the registered representative, Plaintiff executed a Client Freedom Account Agreement. Id. After the Agreement was executed, Plaintiff chose a portfolio model. Id. at ¶ 31. Raymond James then liquidated the assets in her commission-based account, transferred the funds to her fee-based Freedom Account, and reinvested the funds. Id. Plaintiff did not base her decision to enroll in the Freedom Account program on the purchase or sale of a particular security. Id. As is the case with Plaintiff, Raymond James transferred the assets of members of the putative class without conducting any suitability analysis. Id. ¶ 33. After switching Plaintiff's and putative class members' assets to the Freedom Account, Raymond James maintained those assets in the fee-based accounts without monitoring the accounts to determine- via an account suitability analysis-whether it should transfer the assets back into a commission-based account in view of the limited trading activity. Id. ¶¶ 51, 56. It also did so without supervising its broker-dealers to ensure the required monitoring was being performed. Id. In failing to conduct account-type suitability analyses before transferring clients into fee-based accounts and having processes and procedures in place to do so, and in allowing the assets to remain in those accounts without proper monitoring, Raymond James was negligent and breached its fiduciary obligations to Plaintiff and putative class members, as well as duties under state law. Id. ¶ 35, 57, 58, 86.As a result of the switch in account types, Plaintiff and putative class members were charged far higher fees than the modest per-transaction commissions for commission-based accounts and Raymond James profited significantly at their expense. Id. ¶¶ 32, 34, 52-54, 77. Following its class-wide transfer of assets, Raymond James reported significant increases in the value of assets in fee-based accounts. Id. ¶¶ 78-84. Its stock doubled from $41 per share to more than $90 per share due to its growth in fee-based accounts over the relevant time period. Id. ¶ 83.
at Pages 2 - 4 of the MDFL Order
https://brokeandbroker.com/PDF/DoeCtAppGA211217.pdf
John Doe was charged in November 2010 and January 2011 with two felony counts of habitual violator for operating a vehicle without a license -- said license revocation arose from a string of DUIs. On August 19, 2011, Doe pled Nolo Contendere to one count of misdemeanor habitual violator, and, accordingly, he agreed, in part, to 12 months of probation, payment of a $1,300 fine, and 40 hours of community service. In response the State agreed to "Dead Docket" the second felony count, which would be deemed a Nolle Prosequi upon the successful completion of the 12-month probation. After the Trial Court accepted Doe's plea, the State dead-docketed and then nolle prossed the second charge. All's well that ends well . . . or so it would seem.
On February 5, 2021, Doe filed a Motion to Restrict and Seal the predicate felony charges upon which he pled to the one count of misdemeanor:
alleging that he is unable to obtain "gainful employment within the Banking and Investment industry" because of the felony charges on his record. In his motion, Doe explained that he was convicted of the misdemeanor offense of habitual violator, which is a lesser included offense of felony habitual violator, and that he, therefore, was entitled to have any record pertaining to the felony charge restricted by the Georgia Crime Information Center, and all agencies maintaining such information in Cherokee County, pursuant to OCGA § 35-3-37 (j) (1). He further requested that all the records of the case be sealed by the Clerk of the Superior Court of Cherokee County pursuant to OCGA § 35-3-37 (m).
at Page 2 of the GACtApp Opinion
During the hearing on his Motion at the Trial Court, Doe testified that:
[H]e is unable to obtain work as an independent financial advisor because he must disclose the offense to the Financial Industry Regulatory Authority and the Securities and Exchange Commission, that he has "lost out on dozens of jobs over the last ten years due to this record being publicly available," and that the charge is not connected to what he does for a living in that it is does not involve dishonesty, theft, or fraud; if the offense is restricted from his record under OCGA § 35-3-37 (j) (4), it will be removed from his "FIRNA" and SEC disclosure records. According to Doe, "[a]t first glance, it doesn't look like [he's] been convicted of a misdemeanor traffic violation, but rather, that [he is] a habitual or career criminal, which is not the case." During the hearing, the trial court acknowledged that it had not "had any dealings with the new statute yet"; asked Doe to email his "opening statement" and "argument," which the trial court would then forward to the State; and instructed the State to prepare a letter brief in response to the email. . . .
at Pages 2 - 3 of the GACtApp Opinion
The Trial Court denied Doe's Motion on May 20, 2021, ruling that:
[D]oe was not entitled to restriction of his criminal history record under OCGA § 35-3- 37 (h) (2) (A) because the nolo contendere plea was not a dismissal, nolle prosse, or reduced violation of a local ordinance. The trial court further ruled that Doe was not entitled to relief pursuant to OCGA § 35-3-37 (j) (1) because his negotiated plea was to a lesser-included offense of the original felony charge, and that the Code section provides for relief only when the individual " 'was convicted of a misdemeanor offense that was not a lesser included offense of the felony charge.' "
at Page 4 of the GACtApp Opinion
Upon securing legal counsel, Doe moved the Trial Court to reconsider, but that court denied the motion. On appeal to the GACtApp, Doe argued that:
the trial court erred in ruling that a nolo contendere plea is not a conviction within the meaning of OCGA § 35-3-37 (j) (4) (A), and that he is, therefore, ineligible for record restriction. Doe further alleges that it is irrelevant under subsection (j) (4) (A) that his plea was reduced from a felony.
at Page 5 of the CACtApp Opinion
An important aspect of Doe's appeal was that provisions of the Georgia Code at issue had changed during material periods of his plea and sentence, and that the State and the Trial Court was, at times, guilty of mixing metaphors between the "Old" and the "New" provisions of the Code. For a sense of that issue, consider this narrative:
As Doe explains in his reply brief, the newly-revised Code section had only been in effect for several weeks when he filed his form petition. Doe acknowledges that he "plainly does not qualify for relief pursuant to (j) (1)" and that he immediately notified the trial court at the start of the hearing on his petition that he qualified for relief under (j) (4) (A). The State did not object to proceeding under (j) (4) (A), but chose to argue that (j) (1) applies instead. The trial court even indicated during the hearing that it was not familiar with the amended statute but that it would consider the competing subsections and asked the parties to further brief the issue. As set out in footnote 1, supra, the State in its letter brief acknowledged that Doe was seeking relief under (j) (4) (A) rather than (j) (1), but elected to argue that the latter subsection applied to Doe's situation. Importantly, the State did not argue that the trial court should deny Doe's petition because he was requesting relief under a different subsection than the one listed in his petition. Because Doe properly amended his petition to seek relief pursuant to OCGA § 35-3-37 (j) (4) (A), and because the June 11, 2021 order impliedly allowed the amendment, we find no merit to the State's contention that the trial court's obligation in considering this matter was limited to the four corners of Doe's original petition.
at Pages 9 - 10 of the GACtApp Opinion
Additionally, Doe argues that the Trial Court had erred in ruling that his Nolo Contendere plea was not a conviction subject to the OCGA. GACtApp found that in Georgia, it was settled law that a Nolo Contendere plea is a conviction; and, as such, in pertinent part that OCGA allowed a defendant to [Ed: footnote omitted]:
request record restriction access to criminal history records where the defendant has been convicted of a misdemeanor provided that the defendant has completed the terms of his or her sentence and has not been convicted of any crime in any jurisdiction for at least four years prior to filing a petition. If the defendant satisfies these requirements, the trial court must then "weigh the benefits of a proposed judicial action against the harms." Doe v. State, 347 Ga. App. 246, 253 (4) (819 SE2d 58) (2018).
at Page 11 of the GACtApp Opinion
GACtApp reversed the Trial Court's finding that the Nolo plea was not a conviction and its denial of Doe's Petition to restrict his record. Accordingly, GACtApp remanded the case to the Trial Court with instructions to undertake the statutory weighing tests to determine the relative weight to be afforded Doe's right to privacy versus the public's interest in knowing.