For the second time in about two weeks, a FINRA arbitration panel has cited state statutes to slap a wealth management firm with tens of millions of dollars in punitive damages.
A three-member Financial Industry Regulatory Authority panel walloped Stife Financial’s brokerage arm on Wednesday with a $132.5 million penalty over investment recommendations made by an embattled broker in Miami. That eclipsed the $95.3 million penalty a separate panel had handed down against UBS and one of its brokers on Feb. 27— an amount then deemed the second-largest in FINRA’s history. (The largest, for $400 million, was handed down in 2009 in a claim against Credit Suisse.)
Arbitrators in both the recent cases cited state statutes to lay on punitive damages with a trowel. The latest decision against Stifel again involves a Miami-based broker named Chuck A. Roberts whose recommendations of complicated investments known as structured notes have already resulted in two previous awards against the firm.
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The penalty handed down on Wednesday is going to four family members — David, Sarah Lyn, Adam and Leah Jannetti — who accused Stifel of breach of fiduciary duty, negligence and violations of the Florida Securities and Investor Protection Act, among other things. It includes $79.5 million in punitive damages, which made up roughly 60% of the total.
Stifel, according to the arbitrators, “had actual knowledge of the wrongfulness of the conduct and the high probability that injury or damage to Claimants would result and, despite that knowledge, intentionally pursued that course of conduct, resulting in damage.”
Stifel responded by saying it plans to “seek judicial review of this outsized award,” which it said was “supported by neither the facts nor the law.”
“The claims were brought by a sophisticated family of experienced and aggressive investors who understood the risks involved, participated in the selection of investments, monitored them closely and only complained after incurring losses,” a spokesperson for the firm said in an email.
UBS, in its own case two weeks ago, also said it planned to seek judicial review of the arbitration penalty imposed on it, which consisted of nearly $69.7 million in punitive damages. That award stemmed from recommendations that Andrew Burish, a broker in Madison, Wisconsin, had made to clients who were shorting Tesla stock — or betting it would fall in value.
UBS specifically said it thought the punitive damages in its case “were inconsistent with the facts and the law.”
‘Punies’ not so puny
Punitive damages, or “punies” as they’re sometimes called, are intended to punish conduct that’s deemed grossly malicious or neglect and to deter defendants and others from committing the same violations again. The Florida state statutes cited in the latest award against Stifel allow punitive damages to be calculated in most cases at three times the level of compensatory damages — meant to provide restitution to victims — and sometimes as high as four times.
FINRA arbitration panels seldom go into the reasons for their decisions, but the Stifel ruling did provide some detailed justifications for the punitive damages award. Among other things, the panel faulted Stifel for allowing its clients to be overconcentrated in structured notes — a type of debt security often offering high returns but also usually coming with substantial risks and fees.
The arbitration panel also noted that Stifel’s broker Roberts had also been placed under “heightened supervision” by regulators and was no longer supposed to be selling single structured notes.
“And he did it anyway,” said Lou Straney, a regulatory expert at Arbitration Insight. “That was probably one of the trigger points for the panel.”
“And these structured products are particularly complex and risky and require a very high level of disclosure,” Straney added. “And they’re certainly never to be overconcentrated in a portfolio. From all appearances, all of those things were violated.”
Straney said arbitration panels are typically made up in large part by retired lawyers and judges. He said it’s highly like the arbitrators in the latest Stifel case were familiar with the Florida statutes they cited when imposing punitive damages.
Text messages presented as evidence
Jeffrey Erez, who’s representing clients in many of the complaints involving Stifel and Roberts, said this latest case involved “leverage” — or money borrowed for the purpose of investing. That leverage heightened both the possible returns and the risks for clients.
“That’s why the losses were accelerated and magnified,” Erez said.
As in his other cases against Stifel, Erez said text messages Roberts sent to his clients played a large role. He said messages presented to the arbitration panel clearly showed Roberts himself did not appreciate the risks he was exposing investors to.
“If we can prove the broker failed to appreciate the risks and misunderstood the risks of structured notes he created, how should the clients be in position to know better than the broker?” Erez said.
Erez said he has 16 more complaints outstanding against Stifel related to Robert’s recommendations of structured notes. Of his two previous victories before arbitration panels, the first resulted in a $14.3 million award in October. That total included $9 million in punitive damages.
The second award, from November, was for $2.4 million but included no punitive damages. Erez said he knows of another lawyer who has two outstanding complaints against Stifel related to Roberts’ recommendations.
Why keep Roberts around?
Roberts remains registered with Stifel, according to BrokerCheck. Roberts, who runs a practice called the CR Wealth Management Group, has seen at least 24 customer complaints filed against him since late 2022. Of those, two were denied and one withdrawn.
BrokerCheck lists him as having 34 years of industry experience. He came to Stifel in 2016 after stints at Morgan Stanley and its predecessor, Smith Barney, Oppenheimer, Paine Webber, Lehman Brothers and other firms.
Straney said it can be mystifying why a firm like Stifel would maintain its relationship with a broker with so many customer complaints. Often, he said, it’s because the firm knows it will need the broker’s cooperation in defending itself in future cases.
“The issue is that they know they face a bunch of other complaints,” Straney said. “They know that they need him to testify and they need his knowledge of the situation and, to defend against the case, they need him on their team.”
