A FINRA Suitability Case -- and an Arbitrator Who Does His Job!Written: April 5, 2010http://www.brokeandbroker.com/index.php?a=blog&id=359Joseph and Diane Schuessler saw an advertisement for Freddie Mac preferred stock (FRE Pfd.) worth the then current rate of 8.375%, which they wanted to purchase. The Schuesslers went to a WAMU bank branch, where they were referred to WAMU Investments and met with a WAMU broker, who filled out an order form which the Schuesslers read and signed. On June 11, 2008, the Schuesslers requested a one-time purchase through the WAMU broker of 3,000 shares of FRE Pfd. stock for a total price of $75,633.82.

Sometimes you win. Sometimes you lose.

On September 11, 2008, pursuant to the Schuesslers’ instructions, their 3,000 shares of FRE Pfd. were sold for the sum of $7,071.34, resulting in a loss to of $67,525.17.

Ah . . . the stuff of which lawsuits are made!

In the Matter of the Arbitration Between Joseph Schuessler (Claimant) and Diane Schuessler (Claimant) vs. WAMU Investments, Inc. (Respondent) (FINRA Arbitration 09-02004, March 24, 2010), as a result of the purchase of FRE Pfd. stock in their account, Claimants charged Violation of common law fraud, Breach of fiduciary duty, Negligent failure to supervise, Negligence, and Suitability. Claimants sought $75,000.00 in compensatory damages plus interest, costs, expenses, disbursement, expert witness fees, and other relieve. Respondent WAMU sought dismissal of the claims.

Suitability

According to the FINRA Arbitration Decision, the Claimants cited NASD Notice to Members 96-90 [sic] in support of their position that the transaction at issue was unsuitable. However, the Arbitrator noted that pursuant to NASD Rule 2310, a Member’s suitability obligation applies only to securities that have been recommended by a member and would not apply where the member acted merely as an order taker for persons who, on their own initiative, effect transactions without a recommendation from the member. The Arbitrator found that because the Claimants had picked the FRE Pfd. stock, their allegation of Unsuitability was meritless.

Bill Singer's Comment:

NASD RULE 2310: Recommendations to Customers (Suitability)

(a) In recommending to a customer the purchase, sale or exchange of any security, a member shall have reasonable grounds for believing that the recommendation is suitable for such customer upon the basis of the facts, if any, disclosed by such customer as to his other security holdings and as to his financial situation and needs.

(b) Prior to the execution of a transaction recommended to a non-institutional customer, other than transactions with customers where investments are limited to money market mutual funds, a member shall make reasonable efforts to obtain information concerning:

(1) the customer's financial status;

(2) the customer's tax status;

(3) the customer's investment objectives; and

(4) such other information used or considered to be reasonable by such member or registered representative in making recommendations to the customer.

(c) For purposes of this Rule, the term "non-institutional customer" shall mean a customer that does not qualify as an "institutional account" under Rule 3110(c)(4).

Note: Although the Arbitration Decision states that the Claimants based their Suitability claim on NASD Notice to Members 96-90, I have reviewed that Notice and it appears to have either been erroneously cited by the Claimants or erroneously referenced in the Decision. The only NASD Notices to Members on Suitability that I can locate are 90-12, 90-52, 96-60, 96-86, 01-23, 05-59.

Duty to Monitor Account

Claimants also alleged that a broker had a duty to monitor their account. The Arbitrator noted that it is well settled that brokers have no such duty.

Failure to Supervise

Further, the Arbitrator noted that no evidence was submitted as to a lack of or a failure to supervise the broker – and the Arbitrator went so far as to find that there was no testimony suggesting that the broker received insufficient training and finding that WAMU maintained an appropriate supervisory structure.

Fraudulent Conduct

In fairly blunt language, the Arbitrator stated that “there was not one scintilla of evidence regarding any act of fraudulent conduct by the Respondent, its representative or the broker. That allegation is also totally without merit.”

Non-Disclosure of Risk

Finally, the Claimants testified that at no time were they warned of any risk associated with their purchase of FRE Pfd. stock. They stated they were advised that the value of the stock was guaranteed. However, the Arbitrator found that as early as June 11, 2008, the Claimants were advised that only the dividends were guaranteed. Moreover, starting on June 30, 2008, and each month thereafter, the Claimants received monthly statements, which disclosed that

Not a Depostt, Not FDIC Insured, No Bank Guarantee, Not insured by any Federal Government Agency and May Lose Value.

In Conclusion

In refreshingly direct languge, the Arbitrator concluded that Claimants had the responsibility as unsolicited investors to manage their account. Failing that, they bore the risk of loss. Accordingly, Claimants’ claims were dismissed with prejudice.

Bill Singer's Comment: My compliments to FINRA Public Arbitrator Richard E. Conner for respecting his role and for putting in the time and effort to provide a meaningful explanation about the underlying facts and the rationale for his rulings. It doesn't matter whether this was a public customer or an intra-industry dispute. It doesn't even matter that the Respondent won here or that, given the same set of facts, another Arbitrator may well have ruled in favor of the the Claimants. What does matter here is that Arbitrator Conner did his damn job and gave us a Decision that puts things in context.

Job well done! Bravo.