FINRA’s Unpaid Arbitration Awards Problem

It seems like a way to get justice against fraud: requesting an arbitration hearing with FINRA after losing money in a fraudulent or shady investment your broker insisted was solid. A defrauded investor then files a complaint with FINRA, who arranges an arbitration hearing, and money damages are awarded to the investor, paid by the broker and/or the broker dealer.

Sounds fair, right?

While many investors have been able to recover at least some of their losses, about 25% of these judgments go unpaid. FINRA arbitration panels awarded $84 million to investors in 2017 alone. Of that sum, $21 million of it remains unpaid. So what good is arbitration if you’re still waiting to receive your award from a “deadbeat?” Most of these awards are against small brokerage firms which are out of business and did not carry insurance.

When you sign a contract with a broker dealer, arbitration is included in the contract, limiting or restricting you from filing a claim in civil court against the broker. You’re required to go through the arbitration process to file a complaint and recover damages, which can be expensive.

Here’s a current example of how this works: Former broker and investment advisor Frank Roland Dietrich (CRD#: 2506091) sold more than $10M of mortgage notes from the Woodbridge Ponzi scheme to customers of his employer, Quest, without obtaining approval from Quest. He made $260,864 in commissions from these sales. Dietrich sold $400,000 worth of these mortgage notes to an investor. The investor, a retired Coast Guard veteran, also took care of his wife, who is blind. The investor lost $140,035, and was awarded $276,226 in compensation by the FINRA arbitration panel. Quest, allowed Dietrich to retire in March of 2018, and FINRA banned him indefinitely in November of 2018.

There is no indication that Dietrich has paid this award. But what if he decides not to pay the award? Will Quest cover it? In some cases, the broker dealer does cover the awards. But there are also instances of broker-dealers closing and/or declaring bankruptcy. If the individual broker declares bankruptcy (especially Chapter 7), you may be lumped in with all the other creditors trying to recover monies owed from the broker.

Scott Silver is currently involved in another arbitration case involving broker Rafael Golan (CRD#:1074079) of Delray Beach, FL. Golan is also the owner of Crystal Bay Securities Inc. (CRD#:142339) his employer and registred broker-dealer since 2007. Golan and Crystal Bay lost an arbitration hearing in December, which awarded $300,000 to an elderly disabled client. The claimant’s attorney stated that Golan offered to settle the case for pennies on the dollar. With two more pending claims against him and his company, Golan filed for Chapter 11 bankruptcy and is now closing down his company.

Mr. Silver is quoted by Investment News Daily reporter Bruce Kelly, “I have an arbitration case pending trial next week against Mr. Golan that is automatically stayed because of the bankruptcy. My clients are near 90, and he put all their assets, $250,000, in nontraded REITs and other illiquid junk. It’s true elder abuse because you can’t recommend to the clients that they sell and start over,” he said.

Golan is just one part of a larger problem that sees defrauded investors get hurt a second time. But FINRA is working to reduce the problem of unpaid awards, including working with the SEC. Although there are rules in place to force awards to be paid, such as suspending brokers and dealers, FINRA is continuing to address the problem. Additional proposed rules include preventing asset transfers to avoid paying awards.

One possible option: Presidential candidate and Senator Elizabeth Warren (D-Mass) recently introduced legislation that would create a fund for these unpaid arbitration awards that would come from FINRA’s fines.

While the financial industry continues to make money, American investors are still hoping to avoid doing business with the next Bernie Madoff.

Silver Law Group has represented many investors in claims against the owners and central persons of small broker dealers. Scott Silver obtained a punitive damage award of $150,000 against the owner of one broker-dealer which was paid after a NY federal judge confirmed the arbitration award.

Silver Law Group represents investors in securities and investment fraud cases. Our lawyers are admitted to practice in New York and Florida and represent investors nationwide to help recover investment losses due to stockbroker misconduct. If you have any questions about how your account has been handled, call to speak with an experienced securities attorney. Most cases are handled on a contingent fee basis, meaning that you won’t owe us until we recover your money for you. Contact us today and let us know how we can help.