Securities Lawyers Blog
A Financial Industry Regulatory Authority (FINRA) arbitration panel ruled that Citigroup Inc. (Citigroup) must pay $3.1 million to a Florida couple who alleged that their financial advisor, Scott King (King), solicited them to invest in real estate developments. The case was filed by Dr. Nasirdin Madhany and his wife, Zeenat Madhany, alleging negligent supervision, breach of fiduciary duty, fraud, and breach of contract. The panel’s decision represents an important win for consumers and refutation of common arguments employed by the industry to avoid responsibility for their employee’s wrongful conduct.
The case involved a typical, and all too common, “selling away” scenario. Selling away occurs where a broker sells securities to customers that are not approved by the brokerage firm. Selling away investments represent a substantial risk to the investing public because brokerage firms do not record the transactions on their books and records and do not supervise the activity to ensure that the investment is appropriate for the customer.
Brokerage firms usually defend selling away cases by arguing that they were not aware of the securities transactions and therefore cannot be found liable. Firms also argue that they do not know the broker’s customer because in many cases the investor does not have a brokerage account with the firm. Therefore, the firm argues that it cannot be responsible for investment losses occurring to investors they do not know and away from the firm.
However, these arguments misconstrue the principal that is being protected in a selling away case. Brokerage firms should be liable for selling away activities because employing firms are responsible for supervising the broker’s conduct. An investor’s financial losses are a foreseeable consequence of the failure to supervise the broker. Thus, it does not matter if the customer is known to the firm or if the securities were approved since those facts have no bearing on whether the supervision employed was appropriate.
While we cannot know the exact reasoning for the Madhany panel’s award against Citigroup the award is consistent with the notion that brokerage firms have an obligation to reasonably supervise their employees and are liable for harm caused by the failure to do so. In this case, it was alleged that the Madhanys were advised by King to invest in condominium developments controlled by Lawton “Bud” Chiles III (Chiles), the son of former Florida Governor Lawton Chiles. King allegedly arranged and attended meetings between the Madhanys and Chiles. The meetings resulted in the Madhanys investing $1,000,000 into real estate projects. Subsequently, the Madhanys and several other investors signed a $12,000,000 loan guarantee with Wachovia Bank.
In 2010, the real estate projects entered foreclosure and the Madhanys suffered a complete investment loss. In addition, a court entered a judgment in favor of Wachovia Bank and against the group of investors for the $10 million guarantee. The Madhanys asked the FINRA panel to award them their investment losses plus amounts sufficient to satisfy the Wachovia Bank guarantee.
Citigroup filed a motion to dismiss the case claiming in part that the Madhanys were not customers of Citigroup because they did not have accounts with the firm. The panel denied the motion. After the trial hearing, the panel found Citigroup “liable for breach of fiduciary duty as financial advisor to Claimants as well as negligent supervision…”
The decision awarded the investors their investment losses plus an indemnity for the Madhanys in the amount liable to Wachovia Bank. The decision also affirms that brokerage firms are obligated to implement supervisory protocols sufficient to ferret out and detect violations of the securities laws and will be held accountable when they do not.
The attorneys at Gana Weinstein LLP are experienced in handling selling away cases and other fraudulent activities. Our consultations are free of charge and the firm is only compensated if you recover.