Cambridge ordered to pay bank over ‘aggressive’ client solicitation

A regional bank with a wealth management arm won a FINRA arbitration award of more than $225,000 from an independent brokerage it accused of sharing confidential client information.

McHenry Savings Bank, which has three branches in McHenry, Illinois, and other towns in the suburbs of Chicago and an investment program called MSB Wealth Management, will receive the hundreds of thousands of dollars in compensatory damages plus costs from Cambridge Investment Research under the unanimous May 11 ruling by a Windy City-based panel. McHenry had alleged that a former registered representative “aggressively solicited its clients using confidential information provided by the Cambridge respondents,” according to the award. 

Cambridge is known as one of the largest independent wealth managers and for being integral to the breakaway movement of brokers over past decades. However, recent arbitration cases and lawsuits have seen it and similar indie firms being accused by financial advisors of acting more like wirehouses and other employee brokerages in seeking to thwart or stem that tide. 

The bank’s allegation about the private client data is “very surprising” to hear about Cambridge, said Robert Herskovits of the Herskovits law firm. Herskovits didn’t represent any parties in the case but often represents brokers in FINRA arbitration cases against their former brokerages.

“The question then becomes, ‘How does Cambridge have that confidential information?’” he said. “That may well be why Cambridge got dinged here. That's the only logical inference to draw, but it's purely an inference.”

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That’s because the award, like many FINRA arbitration panel decisions, doesn’t offer any details about the nature of McHenry’s claims against the brokerage it used prior to switching to LPL Financial roughly a year and a half ago. Representatives for McHenry declined to comment on the case, and Cambridge issued a statement noting the firm’s disagreement with the decision.

“This case was a contract dispute between McHenry Savings Bank and Cambridge,” spokesman Jeff Wulf said. “Cambridge believes that it fulfilled all legal, regulatory and contractual obligations. Furthermore, notwithstanding the varied allegations of the statement of claim, Cambridge has no reason to believe that the outcome of the case reflects adjudication of any confidentiality or privacy concerns.”

Efforts to reach the rep who once worked for McHenry but stayed with Cambridge when McHenry moved to LPL, Vickie Lynn Benedetti, were not successful. In their decision, the arbitrators didn’t hold Benedetti liable for any damages in connection with McHenry’s claims.

Bank-based investment programs like McHenry represent an area of the marketplace that has been drawing significant attention lately from wealth managers. Recruiting and M&A deals have consolidated the channel of bank and credit union practices working with brokerages they refer to as “third-party marketers” or TPMs for short. 

McHenry and Benedetti came into Cambridge’s fold in 2018 when the firm purchased a midsize brokerage with about 150 reps called Broker Dealer Financial Services. Individual teams and enterprises often opt out of large moves in the wake of a recruiting or M&A transition because the deals usually alter their operations without any input from them. It’s not clear what caused McHenry to drop Cambridge or what the firm did when McHenry left for LPL, though.

The bank accused the rep, Cambridge and its affiliated RIA of breach of contract, defamation, misrepresentation, unfair competition and interfering with contracts, business relations and prospective economic advantage, the award states. In the statement of claim, McHenry requested compensatory and punitive damages, attorney fees and costs and orders against Cambridge and Benedetti enjoining them to return the data and refrain from further infractions.

Cambridge and the rep denied McHenry’s allegations and called for the panel to dismiss the bank’s claims.

In the award, the arbitrators found Cambridge and its RIA liable for $225,000 in compensatory damages to McHenry, $375 to cover the non-refundable part of the bank’s filing fee and $8,100 out of the $9,450 in hearing fees for nine sessions ending in March. The panel assessed the remaining hearing costs to McHenry and denied its other claims for relief.