Lawyer Tells What Really Goes On in FINRA Arbitration

Kevin Galbraith, who represents brokers in FINRA arb cases, gives ThinkAdvisor a look at what really goes on in the dispute forum

When caught up in a FINRA investigation it's crucial to be honest, Galbraith says. When caught up in a FINRA investigation it's crucial to be honest, Galbraith says.

Internet dating: Singles’ paradise or the devil’s playground? If you’re fleeced of more than $1 million by a fraudster you met on a dating site, chances are you’d call the craze hellish. That’s exactly what happened to a 75-year-old widow whose total $1.1 million life savings was stolen by a smarmy scammer who gave her a snow job on Match.com.

A Financial Industry Regulatory Authority arbitration against Charles Schwab Corp. to recover $870,000 is scheduled for November, Kevin Galbraith, a New York City attorney representing the victim, tells ThinkAdvisor, in an interview. The other $203,000 that the swindler bilked had been held at a bank.

Galbraith charges that Charles Schwab, where the newly widowed client had $870,000 in assets, was negligent and violated statutory prohibitions on elder fraud abuse when, acting on her request two years ago, it immediately liquidated the woman’s account.

The scammer, who wooed the Kingston, New York, widow with declarations of love — they’d never met in person — convinced her he could secure higher returns on her investments. He then instructed her to wire him all her money. She complied. This included the $203,000 at Bank of America. No effort has been made, as yet, to recover those funds, according to Galbraith.

The Match.com con artist, 33, was arrested in July 2016 and pleaded guilty to wire fraud. He and an accomplice had also bilked numerous other women in the same manner on a variety of online dating sites.

Charles Schwab declined to comment for this article.

Elder financial fraud is on the rise, “supercharged” by the internet’s vast and easy reach, says Galbraith, who focuses on securities fraud and defending financial services employees faced with regulatory enforcement actions.

Formerly specializing in class action suits, he represented investors hurt by the London Whale trading debacle at JPMorgan Chase and Citigroup’s subprime collateralized debt obligations fraud. He has also helped win multimillion-dollar settlements on behalf of Ponzi scheme victims.

ThinkAdvisor recently interviewed Galbraith, on the phone from his Manhattan office. Among other intra-industry matters, he discussed how advisors should conduct themselves during internal investigations as well as what goes on in FINRA arbitrations brought by advisors to expunge false Form U5 reports. Here are highlights of our conversation:

THINKADVISOR: What should the Schwab advisor have done when the widow asked him to liquidate her account?

KEVIN GALBRAITH: Hit the “pause button,” elevate his concern to his supervisors and insist that she come in for a meeting to discuss [her request]. He cautioned her briefly but took no further steps. The sudden liquidation of a very large account after years of inactivity — particularly in the wake of her husband’s death — was a very bright red flag that demanded Schwab’s attention and care.

What did the woman do next?

She made another call, this time to an 800-number call center. The rep didn’t ask any questions, simply took the liquidation order and executed it, completely liquidating the account of $870,000. That was the critical first step in the sequence of events that has left this woman financially decimated.

Did they catch the guy?

It actually was a couple that was running the scam. My client was just one of several victims. There was a criminal indictment in Oklahoma, and I believe they both pleaded guilty. I don’t know if they’ve been sentenced yet.

You’re now exchanging discovery with Schwab attorneys and preparing for the hearing. Who’ll be there from Schwab?

The broker, the call center customer service rep and the supervisor.

Studies indicate that senior citizen financial scams are on the increase. Why is that?

With the breadth and spread of the internet, elder financial abuse is rampant. Seniors have always been targets for financial fraud, but the wide access on the internet, whether it’s email or Match.com or some other site, has supercharged it and made it possible for these scammers to run their schemes on a much larger level.

As another part of your practice, you do a great deal of work representing financial advisors on issues of employment and regulation. Any intra-industry types of disputes on the rise?

Unpaid discretionary bonus claims. I’ve seen too many cases where brokers or investment bankers have worked the majority of a year, or even an entire year, and terminated right around bonus time. Then, only a tiny fraction of what the person was owed is paid, or the bonus is withheld altogether. My clients say: “They can’t structure my compensation so that the vast majority of it is in a discretionary bonus, have me work the entire year to everyone’s satisfaction and then kick me out to the street and try to get away with not paying me that very significant portion of my compensation!”

What are FINRA’s announced enforcement priorities for this year?

Some areas of emphasis are social media use, cybersecurity, preventing elder financial abuse and rooting out high-risk and recidivist brokers. The key is how [to what extent] these priorities are put into action.

Why has FINRA made social media an enforcement priority?

Facebook, Twitter and LinkedIn [etc.] are forums for communicating with the public. FINRA is putting firms on notice that they need to be all over that with regard to their employees. They’re cautioning firms that if brokers and other employees use social media in a professional context, such as prospecting or communicating with clients, they need to supervise, monitor and approve those public-directed communications.

What’s FINRA’s next step when it comes to these enforcement priorities?

There’s no formal rules approval process. The enforcement division announces priorities, and they can just be acted upon.

What would that entail?

FINRA can send out inquiry letters to either individual brokers or brokerage firms — in many cases, both — requesting information. If the documents satisfy their concerns, they can simply close down their inquiry. If they think there’s some remaining question of potential wrongdoing, they can refer it to the enforcement staff.

Then what?

If FINRA believes that unlawful conduct can be proven, they’d file an enforcement action that would be heard in an administrative forum. There can be very severe consequences against the broker if that happens.

Are Form U5 expungement claims filed by advisors on the rise?

I see a slight uptick in my practice. FINRA statistics indicate that from 2015 to 2016 there was a slight increase of about 8%.

Why would a firm file a false U5 about a broker?

There are times when either a personality conflict or some other friction or dynamic leads to the filing of a damaging U5.

In representing an advisor in such a case, what do you do?

Bring a FINRA arbitration on behalf of them. It’s typically heard by a single arbitrator, who makes a decision. They can issue an award that instructs FINRA’s Central Registration Depository (CRD) personnel to edit or revise the U5 to make it accurate and fair.

What should FAs know about dealing with an internal investigation?

One principle applies to all investigations: transparency and truthfulness. Responding honestly to questions and concerns the firm raises is the critical first step to establish credibility. This is the right thing to do ethically, and it helps build a framework of trust. Not every internal investigation ends happily for advisors. But I assure you that any time an advisor isn’t honest during the process, it will end badly.

Why would an advisor be the subject of that type of investigation?

It could be anything from dating a colleague to “selling away” to trading activity or a trading pattern or a customer complaint that could raise a red flag for the compliance department.

Dating a colleague would be a violation of firm policy?

Sure. Depending on the level of the relationship been the people; for example, a boss and someone who, arguably, is an underling.

The purpose of that policy is to prevent sexual harassment. Companies across all sorts of industries are a whole lot more sensitive to that now.

How can an advisor’s involuntary termination be pursued legally?

This tends to be a very emotionally charged event. We work with clients to determine the basis of any legal claim. Oftentimes, there’s an opportunity to explore a negotiated resolution with the firm.

What do you think about the fact that some industry groups still want to kill the Labor Department’s fiduciary standard rule for FAs advising retirement accounts?

I find it unseemly that certain financial services lobbying groups have poured millions of dollars into the effort to defeat the fiduciary standard. So many firms — the savvy ones — have embraced the new standard even for non-retirement accounts and recognize that it serves their clients’ interest and helps firms distinguish themselves from competitors who seem to want to run away from that elevated standard of care. The arguments against the rule seem pretty thin.

Do you think that resolution of advisor-firm disputes will continue to be required through FINRA arbitration only?

I don’t see that changing anytime soon. By and large, the system is working. It’s not perfect; but other forums, such as court, which can take years and years to resolve a dispute, can be time-consuming and much more expensive than FINRA’s forum. So I don’t see it going away.

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