The Wall Street Legal & Regulatory Feed
Securities Industry Commentator by Bill Singer Esq
July 5, 2022
Charles Schwab SIP Robo-Adviser Cited In FINRA Arbitration (BrokeAndBroker.com Blog)
https://www.brokeandbroker.com/6540/schwab-sip-finra/
Schwab Intelligent Portfolios ("SIP") was advertised as a robo-adviser that didn't charge advisory fees; however, from March 2015 through November 2018, Schwab profited on its clients' cash holdings by arbitraging the difference between what was earned by Schwab lending out those balances and what Schwab paid to the clients -- and, SIP had allocated relatively high levels of cash rather than investing those amounts. SIP clients were were not fully informed about the interest earned on the cash balances in their portfolio, which prompted the SEC to order Charles Schwab & Co. to pay a $52 million in disgorgement and prejudgment interest, and a $135 million civil penalty. In one of those troubling quirks of Wall Street regulation, while the SEC was finalizing its multi-million dollar settlement against Schwab, the firm was battling it out in a FINRA arbitration with a SIP customer, who was complaining about transaction errors. Read about that arbitration in today's blog.
https://www.finra.org/sites/default/files/aao_documents/20-01604.pdf
In a FINRA Arbitration Statement of Claim filed in May 2020 and as amended, customer Claimant Fallon asserted breach of fiduciary duties; violation of FINRA Rules 2111, 3110, 2165; and 4530(B); and
common law fraud. As asserted in the Award:
At the hearing, Claimant requested $345,448 in damages, plus 1/3 for attorneys' fees ($115,137.82), plus expert fees of $35,167.50, plus $29,415.65, equaling $525,168.97, plus an award of appropriate punitive damages. Alternatively, if rescission of the unauthorized options trades is allowed instead, Claimant requested $427,312.69 in damages, plus 1/3 for attorneys' fees ($142,423.32), plus expert fees of $35,167.50, plus $29,415.65, equaling $634,319.16, plus an award of appropriate punitive damages.
As set forth in the FINRA Award:
The causes of action related to Claimant's allegation regarding the purchase of options, unspecified non-dividend paying stocks, over-concentration in many stocks, and repeated violations of Claimant's margin limits.
Respondents generally denied the allegations, asserted affirmative defenses, and requested the expungement of the matter from the industry records of Respondents Mishne and Thacker.
The FINRA Arbitration Panel found Respondents Oppenheimer and Mishne jointly/severally liable to and ordered them to pay to Claimant Fallon $192,746.3` in compensatory damages, $27,305.72 in interest, and $300 in filing fees. The requested expungements were denied.
Bill Singer's Comment: Hey, good for customer Claimant Fallon, who won over $200,000. Except, we don't quite know what the customer was complaining about, do we? What the FINRA Award say is that Fallon sued regarding something to do with the purchase of options and non-dividend paying stocks and an over-concentration in "many stocks" and repeated margin violations. Okay, so, take a shot, this arbitration involved just what exactly? How nice that Wall Street has found a system whereby customers are forced into mandatory arbitration where we have to play guessing games to figure out what the hell went on at the FINRA brokerage firm. Worse, we don't even have a clue as to why the Panel awarded about $193,000 rather than the higher requested damages. It's one hell of a rug that Wall Street gets to sweep all of this under!
Order Determining Whistleblower Award Claims ('34 Act Release No. 34-95198; Whistleblower Award Proc. File No. 2022-60)
https://www.sec.gov/rules/other/2022/34-95198.pdf
The SEC's Claims Review Staff ("CRS") issued a Preliminary Determination recommending the denial of a Whistleblower Award to Claimant. The Commission ordered that CRS' recommendations be approved. The Order asserts that [Ed: footnote omitted]:
[C]laimant's submission of information to the Commission was not "voluntary," as required by Section 21F(b)(1) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 21F-3 and 21F-4(a)(1) thereunder, because Claimant provided information in *** after Enforcement staff had already subpoenaed Claimant and taken Claimant's testimony in the *** Investigation on a subject matter related to his/her information. Second, the CRS determined that, under Rule 21F-8(c)(7), Claimant was ineligible for an award because Claimant had knowingly and willfully made false statements to Commission staff during Claimant's *** testimony.
The FINRA Small Firm community -- those member firms with less than 150 registered representatives -- has been under-represented and under-served for years. The small firm community has been victimized by a gerrymandered Board of Governors and disappointed by too many candidates who proved unwilling to confront the existential threats facing Wall Street's independent firms.
Securities Industry Commentator and BrokeAndBroker.com Blog publisher Bill Singer, Esq. has been asked to help formulate a coalition to energize the base and ensure more responsive and proactive representation at FINRA. Bill was a founder of the NASD/FINRA Dissident movement and one of the original four "contested" candidates in 1998 to upend NASD/FINRA's erstwhile practice of using its National Nominating Committee to pack the Board with docile Governors committed to the status quo.
Discussions are ongoing among interested founding parties, and a more formal announcement is contemplated post-Labor Day. The initial goal of the coalition will be to attract and nurture candidates for the Small Firm Governor seat, and to provide them with the resources to win election. Additionally, the coalition will attempt to promulgate a Statement of Principles. For those interested in a stroll down memory land, consider this from 2006: https://www.rrbdlaw.com/2006/nasddis.htm
Please contact Bill at rrbdlawyer@gmail.com if you are interested in becoming part of the next generation of small firm advocates.