A $250K settlement and the slow pace of expungement reform

A million-dollar client arbitration complaint against Raymond James involving “a highly speculative options strategy” ended in a settlement and the expungement of a broker’s record.

The firm agreed to pay a settlement of $250,000 to Lawrence A. Savarese Jr. on behalf of the Lawrence A. Savarese Revocable Living Trust and Jennifer D. Port for the Jennifer Laird 2013 Family Trust, according to the Jan. 5 decision by FINRA arbitrators in Boca Raton, Florida. After the parties agreed to the settlement in November, the panel unanimously approved the removal of the complaint from Alex. Brown advisor James D. Sheehan’s BrokerCheck record.

In the decision, the three arbitrators “agreed there was clear and convincing evidence” that Sheehan “was not involved in any of the options trading at issue in the claim,” according to a brief statement from the panel included in the award. The arbitrators noted that a third-party firm, Harvest Volatility Management, rather than Sheehan or Raymond James, conducted the options trading as part of Harvest’s Collateral Yield Enhancement Strategy. In addition, the claim “contained several false allegations” about how Sheehan described the strategy, the panel said.

The attorney who represented the clients didn’t respond to requests for comment. Representatives for Raymond James, the parent company of Alex. Brown, declined to comment. Sheehan didn’t respond to a call and email to his New York-based practice, The Sheehan Wealth Management Group. Harvest, which lists $3.7 billion in assets under management on its SEC Form ADV, didn’t respond to inquiries to its New York office either.

Familiar products and issue
Questions relating to expungements and options investments represent two of the most common issues in recent arbitration claims. Options-based products such as the one sold to the Alex. Brown clients drew an uptick in claims after the volatility of December 2018. In terms of expungements, FINRA raised the minimum cost of filing a claim for expungement in September 2020 in response to critics who said it was too easy for brokerages and their registered representatives to clear their records. They’re still calling for more client involvement and oversight of claims seeking expungement.

The fact that arbitrators selected by the parties gained familiarity with the client complaint before making a decision means that “this expungement went through the right process,” according to the Public Investors Advocate Bar Association Foundation President Lisa Bragança of Bragança Law. Still, she found the arbitrators’ rationale for the expungement “irritating” because “I know that brokerage firms do not settle for $250,000 when a claim is false,” she said.

“If everything went through this process, we probably would be working on a different project at the foundation,” Bragança said. “There would be bigger fish to fry. It's not perfect. It still should be a regulatory process. … It at least comes closer to arbitrators who looked at more than just what the broker chose to put in front of them.”

After Bragança’s organization, the North American Securities Administrators Association and other public commenters pointed out weaknesses in FINRA’s plan last year to alter expungements, the regulator withdrew the proposal. In September, CEO Robert Cook pledged “to come forward with a discussion paper looking at expungement more generally to really provide some data and some background” ahead of meeting with stakeholders to discuss broader reforms. Bragança and other PIABA Foundation members haven’t heard anything from FINRA since the SEC tabled its earlier rule proposal in May, though, she said.

“FINRA plans to issue an expungement discussion paper in the coming months and will then hold meetings with various stakeholders,” FINRA spokeswoman Michelle Ong said in a statement.

Regulation and compliance

Raymond James wins in arbitration against ex-brokers seeking $36M

December 1, 2021 8:06 PM

The case
Raymond James sought expungement of Sheehan’s record as part of its statement of answer to the two estate trusts’ May 2020 claim. The clients accused Raymond James of fraud, misrepresentation, unsuitability, negligence, failure to supervise, and breaches of contract and fiduciary duty, among other allegations. They sought a combined $1.3 million in compensatory damages for trading losses, margin interest and fees, as well as punitive damages, attorney fees and other costs. It’s not clear when they sustained losses, but an estimated 100 claims involving a similar options overlay strategy at UBS often cite the sharp equity losses in 2018.

“Harvest Volatility Management’s overlay strategies and investments reflect our philosophy of efficiently exploiting volatility, while providing our clients with a choice in vehicles that are biased or unbiased as to market direction,” according to the firm’s website. “We manage an active, efficient approach to risk-managed portfolios to earn results.”

The panel ruled that the estate trusts’ claims about the Harvest strategy were “factually impossible or clearly erroneous” on the grounds that certain parts of them were false and Sheehan wasn’t involved with the violations of FINRA’s guidelines, according to the decision. The clients’ lawyer didn’t oppose the request for expungement or attend the hearing on the matter after the settlement. Sheehan, who didn’t contribute to the client payout, can clear the complaint from his Central Registration Depository file after receiving court approval.

“The arbitration panel unanimously issued an Award recommending the expungement of this arbitration from my CRD records after affirmatively determining that I was not involved in the sales practice conduct that was alleged in the claim, and that the claim, allegation, or information was factually impossible or clearly erroneous,” Sheehan said in a remark on the case that’s temporarily displayed on his BrokerCheck. “I am currently undertaking the process of confirming the award in court pursuant to FINRA rules.”

Sheehan’s BrokerCheck contains no other disclosures over his 24-year career with Alex. Brown since 2017 and prior tenures at UBS and Merrill Lynch. Sheehan, whose practice biography describes him as a “a detail-oriented U.S. Marine Corps veteran,” has many clients who are executives in the oil and gas industries.

Even though the notion that the client claim is false doesn’t pass “the reasonableness check” in light of the settlement, advisors often find themselves on the receiving end of bad information from fund managers, according to Bragança. As an example, she pointed to the thousands of client claims spanning several billions of dollars in damages tied to Puerto Rican bonds.

“There were all kinds of misrepresentations made to brokers about those funds,” Bragança said. “The arbitrators are loath to have all of this land on the backs of the individual brokers, so this is a way for them to offload it. The problem is that then this doesn't get reported on anyone's CRD.”