An NASD arbitration panel in October issued an award that found Hanifen Imhoff Clearing materially aided in the fraud of an introducing firm.
The Denver-based clearing firm, now known as Fiserv Correspondent Services, was found jointly liable for $1.7 million in damages for clearing for the now defunct Duke & Co. of Syosset, N.Y.
After a history of run-ins with regulators, Duke was shut down by the NASD in May 1998.
Fiserv says it disagrees with the award and is appealing.
Meanwhile, the case has the plaintiffs' bar buzzing. In an unusually detailed 40-page decision, the three-person NASD arbitration panel laid out a new legal tactic for attorneys to use in pursuing clearing operations that do business with disreputable firms.
As is typical in these cases, Hanifen argued that a clearing broker is not liable for the fraud of an introducing broker - even if the clearing broker was aware of the fraud.
The panel dismissed that argument as a "head in the sand" attitude. The award notes that Hanifen received no fewer than 55 Duke customer complaints, most of which claimed unauthorized trading. The panel said it was "extremely disappointed" by Hanifen's inability to explain how Duke complaints were handled.
Robert Banks, the Portland, Ore., attorney who sued Duke and Hanifen, says Hanifen's only defense against the state-law claim his clients brought was that it didn't know or could not have reasonably known about the fraud.
The arbitration panel blasted regulators, too. Regulators' responses to plaintiffs' complaints were "pathetically minimal," the award says. "Claimants in this case described total frustration in obtaining ... any relief from any regulatory agency." The panel also criticized the NASD for delays in proposing rules to force clearing firms to report complaints to regulators.