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Court Affirms $1 Million "Selling Away" Claim

Investors frequently pursue “selling away” claims against brokerage firms, alleging that the brokerage firm is somehow responsible for the actions of its registered representative, even if the firm was not aware of the broker’s activities, and did not profit from them. In most cases, brokerage firms vigorously defend against such claims, and in my experience, Courts and NASD Panels justifiably scrutinize such claims with a great deal of skepticism. 

But occasionally such claims are successful. And a recent case demonstrates once again that a claimant who obtains an award in an NASD arbitration almost always will be successful resisting any attempt by the brokerage firm to vacate the award.

In Walnut Street Securities, Inc. v. Bonnie Lisk, 2007 WL 2094902 (M.D. N.C. 2007), 18 investors purchased unregistered securities of a fraudulent investment called ETS Payphones, Inc. But the investors did not purchase these securities through Walnut Securities or its registered representative. Rather, they purchased the securities from a separate corporation owned by the representative and her daughter. 

The sales were made directly through the daughter, and not the representative. Only of the investors believed she was dealing with Walnut Securities. Based on these and other facts, the investors pursued claims in an NASD proceeding against just the brokerage firm based on the failure to supervise. After a 6 day hearing, the Panel awarded damages of $1,057,457.

Walnut Securities then moved to vacate the Award, arguing that that Court and not the arbitration Panel should decide whether the claims were arbitrible, that the NASD rules could not be a basis for a claim of failure to supervise, and that the Panel manifestly disregarded the law. The District Court quickly disposed of each claim, finding the brokerage firm had waived the arbitribility issue under North Carolina law by participating in the arbitration without objecting , and finding there was sufficient evidence to support the liability determination, especially in light of the limited review permitted of arbitration decisions.

Full post as published by OverRegd - Securities Regulation and Litigation Blog on August 21, 2007 (boomark / email).