A brokerage gets hit with a $13.5M award, but it's likely uncollectible

An arbitration panel has awarded more than 30 former clients of the now-expelled broker SW Financial nearly $13.5 million over allegations its brokers used their money as a "personal slush fund" for unsuitable trades.

But industry experts say SW Financial's bar from the industry raises serious questions over whether the claimants in the case will ever be able to collect. A three-member arbitration panel overseen by the Financial Industry Regulatory Authority decided on Friday that SW Financial owes 33 former clients $13.48 million in compensatory and punitive damages over allegations that the firm had made unsuitable trades, breached its fiduciary duties, broken contracts, obtained unjust enrichment and committed other misdeeds.

The award comes more than a year after SW Financial, a Melville, New York-based firm formerly called Salomon Whitney, was expelled from the industry by FINRA for violations of the Regulation Best Interest conduct standard. Reg BI generally calls on firms to do what's best for their clients while disclosing unavoidable conflicts of interest.

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In expelling SW Financial, FINRA contended the firm had violated Reg BI's disclosure obligation by not accurately explaining to clients how it would be compensated from its sales of certain private securities. In a related settlement, the industry self-regulator also suspended CEO and firm co-owner Thomas Diamante for a year and hit him with a $50,000 fine.

Friday's $13.5 million arbitration decision comes in response to a claim filed in November 2022, several months before the expulsion. Douglas Schulz, a securities expert and the president of Invest Securities Consulting, said it may very well constitute the biggest such award handed down in the past 10 years. 

The only trouble, he said, is that the chances of obtaining it from a barred firm are practically nil.

"If they have completely gone out of business or are bankrupt or have dissolved, then there's probably nothing to collect," Schulz said.

New York State business records list Salomon Whitney as still active, although they indicate the firm's latest filing statement is past due. The office phone listed in FINRA documents has been disconnected.

The claimants attorney in the arbitration case, Jonathan Neuman, did not immediately respond to requests for comment.

SW Financial has paid at least some of the money regulators have found it owes clients over its many alleged trading misdeeds over the years. On April 3, the SEC appointed a tax administrator to oversee a fund containing $236,173 that the firm paid after settling allegations that its trading practices had violated anti-fraud securities laws, as well as Reg BI. But that's only a fraction of the $13.5 million awarded in Friday's arbitration decision.

Bill Singer, a securities lawyer and retired author of the Broke and Broker blog, agreed that the chances are slim that the claimants who won last week will ever see the money owed them. Singer said he has long called on FINRA to establish an anti-fraud fund that could be used to pay injured parties when a firm that's at fault is insolvent or out of business.

Money for the fund would come from fees collected from FINRA member companies and registered representatives, Singer said. The fee amounts would be set, he said, by "taking a look at any trailing three years and seeing what percentage of compensatory damages were not paid. And then you use that as a starting threshold."

FINRA's untested new rule

Groups like the Public Investors Advocate Bar Association, made up of securities lawyers, have long complained about firms' ability to avoid paying arbitration awards and regulatory fines simply by going out of business and declaring bankruptcy. FINRA responded to the complaints last year with the adoption of a rule compelling brokerages with dodgy disciplinary records to start paying money into a fund for future awards. 

But FINRA has yet to identify any firms that have received this regulatory black mark. Singer said the trouble with the new rule is that money for a compensation fund is supposed to come from firms that have already been flagged as sketchy.

"At that point, it's a firm that's likely already in trouble and may not have the money to set aside," he said.

Awards from zero to $4M

Like many arbitrators, the three members of the panel in the SW Financial case did not go into detailed reasons for the award. According to the decision, the claimants had argued that SW Financial's "egregiously unsuitable trading" had cost them $4.5 million in fees and commissions and $6 million in out-of-pocket losses.

The claimants ultimately sought $10.9 million in compensatory and punitive damages, interest, attorneys' fees and other costs. The arbitration panel ultimately adjusted some of the amounts designated for individual claimants and set the amount for punitive damages at 30% of the underlying awards.

The biggest single amount — just over $4.1 million — went to a claimant named Eddie Yaklin. It consisted of nearly $3.2 million in compensatory damages, for $2 million in trade losses, $878,809.87 in commissions and fees and $252,138.37 in expenses and interest, as well as $950,461.08 in punitive damages. 

Two claimants, Robert Pollard and John Trobaugh, were meanwhile awarded nothing. The arbitration panel found they hadn't provided sufficient documentary support or expert testimony for their claims.

The decision states SW Financial was dropped by its legal counsel, which it leaves unnamed, on April 9. After that, the firm was represented by Bruce Boyle, who is listed by LinkedIn as SW Financial's chief compliance officer. Attempts to reach Boyle through LinkedIn were unsuccessful.