FINRA Slams Arbitration Respondents With Punitive Damages. A Must-Read Case
An irreverent Wall Street Blog
by Bill Singerhttp://www.brokeandbroker.com/index.php?a=blog&id=365
FINRA Arbitration Sanctions Frivolous Motion and Awards Punitive DamagesWritten: April 9, 2010
In the Matter of the Arbitration Between Trini L.Thomas, Sr. (Claimant) and Betty Thomas (Claimant) vs. Wofal Oju Offem (Respondent), Todd A. Havemeister (Respondent), Ronald Eiger (Respondent), Donald A. Wojnowski, Jr. (Respondent), Eduardo Manual Cabrera (Respondent), Jesup & Lamont Securities Corp. (Respondent), and Empire Financial Group, Inc. (Respondent) (FINRA Arb. 09-02695, March 22, 2010), Claimants alleged that Respondents solicited their purchase for an initial public offering of a company known as “Tissue Connect,” but that their investment was diverted into 15% Convertible Promissory Notes issued by CSMG Technologies, Inc. [Note: These Promissory Notes are alternately referred to as Convertible Bridge Note due June 30, 2007, issued by Consortium Service Management Group, Inc., issued in connection with an IPO of "Live Tissue Connect."]. In furtherance of their claims, Claimants alleged: Misrepresentation; Violation of Florida Statute §517 (Securities Transactions); Breach of Fiduciary Duty; and, Failure to Supervise.
Claimants sought in excess of $100,000 in compensatory damages, plus interest, attorneys’ fees, rescission, punitive damages, costs. Respondents generally denied the allegations and asserted various affirmative defenses.
A Moving Experience
Claimants filed a Motion for Sanction asserting, among other things thatRespondents failed to comply with a Discovery Order issued by the Arbitrator; Claimants attempted to reach an amicable resolution by sending a letter to Respondents; Respondents’ failure to produce documents has prejudiced Claimants in preparing for the evidentiary hearing; and Respondents failure to comply with the related discovery Order was a flagrant disregard for the arbitration process.
At the conclusion of the Hearing, the Arbitrator ruled that Respondents Offem, Havemeister, Eiger,Wojnowski, Cabrera, JLSC, and Empire are liable on all of the claims asserted by Claimants, as followsas to misrepresentation, Respondents are in violation of Florida Statute §517.301 (Fraudulent transactions; falsification or concealment of facts); as to violation of Florida Statute §517, Respondents sold unregistered securities in violation of §517.07 (Registration of securities); as to breach of fiduciary duty, Respondents violated FINRA Rule 2310 (Suitability), and breached their fiduciary duty by not using due diligence and by selling to Claimants unsuitable securities; and, as to failure to supervise, Respondents breached FINRA Rule 3010 (Supervision) by the failure to properly supervise.
Intentional Misconduct and Gross Negligence
Based on clear and convincing evidence, the Arbitrator found that Respondents Offem, Havemeister, Eiger, Wojnowski, Cabrera, JLSC, and Empire were guilty of intentional misconduct, gross negligence, and failure to supervise. They misrepresented to Claimants that they were depositing funds in escrow, to be released when the IPO for Tissue Connect came on the market, at which time Claimants would be able to buy shares at half price. Claimants were guaranteed that they would double their money in six months to a year.
The Arbitrator found that instead of complying with the above representations, Claimants' investment was converted to a loan to Tissue Connect, for which Claimants were given a convertible note (which was described by the Arbitrator as a "very risky."). Further, the Arbitrator found that Claimants were not told that a sales commission was being paid immediately, were not shown the auditor's report that showed the company to be in financial risk, and were not told that the securities were unregistered. Moreover, the Claimants were told falsely that the product had been approved by the FDA.
TO READ BILL SINGER'S FULL ANALYSIS OF THIS CASE, VISIT
Why no further discipline such as suspension, censure, etc...?
Does the panel forward recomendations to another dept. (ie: enforcement, or somthing)...?
I am just surprised w/ such a blatant neglignece and/or intentional conduct they aren't kicking these guys out of the business.
Thanks as always Bill...
Thanks for your response. You have done an excellent job explaing the process and as usual in excellent form.
While I apreciate your views on FiNRA referrals and potential bias towards smaller indie firms, as I am currently one of them, I feel as if in several instances in my decade plus career there has been a lack of communication between the two arms. Again, I am on the advisory side and have a much smaller sample then yourself of cases and their enforcement outcomes.
As an example, Mr Havemeister has 2 or more previous complaints resulting in a settlement or award and it appears is under investigation by FINRA. (which may be a result of this most recent instance). However, as I look into alot of the other advisors involved in numerous customer complaints in their past, I rarely if ever see, further fines, censure, etc. by FINRA.
I would imagine the result of scrunitiy put on an RR from the discovery in a arbitration and then in a favorable finding for the claimant, which could only have resulted from negligence or worse, would be more than ample to issue fines or the like. As I doubt an investigation by FINRA is more thoruogh than 6 mths of discovery done by a leading securities lawyer. But none-the-less it never seems to occur.
I remember years back I talked to many individuals regarding their investments in a NYC based firm called Sky Capital, the principal had pages upon pages of complaints, criminal activity and worse, and believe it or not a couple of years ago he was arrested and losses mounted to over 25mm. I always wondered why no one ever stopped this guy. And believe me, many people handed the NASD silver platters with this guys dealings spelled out. Before and after the SEC indictment.
It seems likely that this most recent case involves many other investors who have yet to, or never will, come to light. I have had to turn RR's away from my office for DUI's, bad credit, and other actions that don't necessarily point to them being negligent in the handling of anothers money. However, here we have the regulators themselves finding exemplary damages, which as you know, requires much more then mere mishandling, and ironically those damages will likely be paid w/ the gains from the next shady deal.
I was recently (1.5 yr ago) an expert witness in an arbitration and while I wasn't privy to most of the hearing I did get to read the decision / opinion and while the customer was not awarded any substantial damages, the panel believed his claims of fraud, forgery, and neglect. Nothing further happened as a result. Mere months later the same individual is a respondant for similar behavior unrelated to the original claimiant. The writing was more than on the wall.
Just a couple of thoughts, I know no system is perfect and I am playing armchair regulator, lol.
Bill, thanks again for your response and I thorughly enjoy your blog, especially as a 2L w/ a love for this industry.
ps. I apologize for the puncuation / grammar errors.