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Regulation and Compliance > Federal Regulation > FINRA

RIA Wins $347K Arb Award From Schwab

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Charles Schwab Corp. office building in New York. (Photo: Victor J. Blue/Bloomberg)

Financial Industry Regulatory Authority arbitrators have ordered Charles Schwab to fork out about $347,000 to the owner of Laguna Financial Group, a move the RIA’s attorneys hailed as “another victory in the fight against corporate greed.”

Schwab, though, took issue with the arbitration panel’s decision that it violated its own policies and procedures. Spokesman Pete Greenley said Thursday: “While we disagree with the outcome of this case, we are pleased to have this matter behind us.”

After 18 hearing sessions and eight pre-hearing sessions, the three-person FINRA panel ruled that Schwab was liable for $200,000 in compensatory damages, about $47,001 in costs and $100,000 in attorneys’ fees, according to the Aug.1 arbitration award.

Complicated Context

Laguna Beach, California-based LFG and its CEO, Joseph Ziomek, filed a FINRA arbitration claim in late 2016 against Schwab, claiming the company clandestinely helped Kaitlin Hewell — LFG’s former chief compliance officer — ask LFG clients to move their assets to her own, separate RIA firm. They also said Schwab knew Hewell’s firm was a direct competitor of LFG.

Schwab served as the custodian for both RIAs at the time. LFG and Ziomek sued Hewell over these activities in 2013 in the Superior Court of California, Orange County.

It was “inadvertently disclosed” to Ziomek several years later that Schwab’s conduct violated the custodial firm’s policies and procedures, and Schwab ended its custodial relationship with LFG, according to Girard Bengali, the law firm representing Ziomek and LFG.

“This case involved business and ethical violations by Charles Schwab in its capacity as a broker-dealer firm administering custodial platform services to an RIA,” Robert J. Girard II, a co-founder of Girard Bengali, said in a statement.

“Schwab lied about its involvement and took advantage of LFG’s reliance on Schwab’s supposed good faith dealings,” Girard said. “While Schwab profited from this misplaced trust, the FINRA panel administered the appropriate justice.”

The arbitration panel’s finding of liability against Schwab is “significant as it alters the landscape of business ethics for high-net-capital broker-dealer firms that offer a custodial platform” to RIAs, the law firm said in an announcement about the order.

With the award, the FINRA panel “sent a message that should reverberate through FINRA-member firms — that where clear conflicts of interest exist, they must be identified, disclosed and mitigated,” according to Omar H. Bengali, the firm’s other co-founder.

“Failing to acknowledge the existence of conflicts between clients will not be tolerated, especially where the motivation is to favor the interests of a potential client above an existing one,” Bengali said in a statement.

Hewell, now a partner at Financial Focus in Carlsbad, California, did not respond to a request for comment as of press time.

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