A half dozen years after she first filed a wrongful termination claim and following losses in FINRA arbitration and two appeals, a financial advisor prevailed at the highest court in the land.
“My hope was to help other financial advisors in similar circumstances avoid this issue,” Denise Badgerow of Thibodaux, Louisiana-based Southern Wealth Strategies wrote in an email to Financial Planning. The Supreme Court ruled, in an 8-1 decision on March 31, that she and other advisors have the right to seek to vacate an arbitration in state, rather than federal, court.
Badgerow’s
An “unfortunate outcome” that Secretary of the Commonwealth William Galvin’s office “didn't have the authority” to issue the rule doesn’t signal the end of potential state-level guidelines or other actions the securities regulator could take to end some practices in the state, according to Micah Hauptman, the director of investor protection with the Consumer Federation of America.
“This looks like it's a one-off,” Hauptman said. “At least in my reading, the court did not specifically address whether the secretary can deem certain conduct unethical or dishonest.”
An advisor’s day in court
The Supreme Court’s decision affirms Badgerow’s right to seek to overturn a 2018 arbitration decision in state court, but it won’t lead to her doing so. She and her former Ameriprise colleagues Greg Walters, Thomas Meyer and Ray Trosclair have resolved that matter, Badgerow said in an email. However, the potential that federal courts alone have the authority to “look through” arbitration proceedings under the Federal Arbitration Act could have prevented some advisors from trying to have an award decision vacated through state-level cases.
A 2009 decision in Vaden v. Discover Bank applied the look-through rule to motions to compel arbitration,
“Denying federal courts the ability to exercise jurisdiction in facilitating the entire arbitration process, including the confirmation of an arbitral award or vacatur of a procedurally-flawed arbitral award, would undermine the effectiveness and purpose of the FAA,” Szalai wrote.
Out of all nine judges, only retiring Justice Stephen Breyer ruled in favor of restricting the reviews of the arbitrations to federal courts.
“The majority has tried to split what is, or should be, a single jurisdictional atom — a single statute with connected parts, which parts give federal judges the power to facilitate a single arbitration proceeding from start to finish: to order arbitration; appoint an arbitrator; summon witnesses; and confirm, vacate or modify an arbitration award,” Breyer wrote in a dissent. “The need for simplicity, comprehension, workability and fairness all suggest that these interrelated provisions should follow the same basic jurisdictional approach, namely, as Vaden explains, the look-through approach.”
The arguments of Breyer and the firm that fired Badgerow have no basis in the language of the section of the arbitration law governing FINRA proceedings, so adapting the look-through rule would represent “expansion by judicial decree,” Justice Elena Kagan wrote in the opinion of the majority while citing another earlier case.
“The look-through rule is a highly unusual one: It locates jurisdiction not in the action actually before the court, but in another controversy neither there nor ever meant to be,” Kagan wrote. “We recognized that rule in Vaden because careful analysis of Section 4’s text showed that Congress wanted it applied to petitions brought under that provision. But Congress has not so directed in Sections 9 and 10. Congress has not authorized a federal court to adjudicate a Section 9 or 10 application just because the contractual dispute it presents grew out of arbitrating different claims, turning on different law, that (save for the parties’ agreement) could have been brought in federal court.”
The whole case stemmed from Badgerow getting fired a day after she alerted Ameriprise that the practice’s principals were paying her through an entity that wasn’t registered with FINRA, she said. The panel of arbitrators ruled against her because the entity, REJ Properties, was her employer rather than the three principals of the firm, according to Badgerow, who’s now affiliated with Advisor Group’s Woodbury Financial Services as her brokerage and RIA.
“We continued to fight to shed light on the truth relating to my wrongful termination,” Badgerow said. “It made no sense. FINRA let them violate the rules and dismissed my whistleblower claim. We discovered in a separate action that the principals made materially false misrepresentations and omissions when testifying in front of the FINRA panel that we believed was a solid basis to vacate the award.”
Attorneys for Walters, Meyer and Trosclair didn’t respond to a request for comment. Representatives for Ameriprise, which wasn’t a defendant in the case, declined to comment.
The SEC wins another jury verdict in latest 12b-1 case
Two days after a different jury
“We felt that the industry itself was being bullied a little bit, and we felt that we would have a good shot at putting the brakes on this initiative,” Ambassador Executive Vice President Adrian Young said in an interview. The firm has employees with about 5,000 primarily mass affluent clients and nearly $1 billion in assets managed with available “Biblically responsible” screens, according to Young. The RIA uses American Portfolios Financial Services as its brokerage.
The firm invested its clients’ money in share classes that cost more because of the 12b-1 marketing and distribution fees and yielded less over time due to the expenses, according to the SEC’s May 2020
“Investment advisers have fiduciary duties to act in their client’s best interest, to seek best execution of client transactions, and to fully and fairly disclose all material facts relating to conflicts of interest,” SEC Enforcement Director Gurbir Grewal said in a statement. “And when they don’t, as the jury found today, they put their clients at risk. That’s why we will continue to pursue investment advisers who breach their fiduciary obligations.”
Ambassador reduced its maximum account expenses to 1.25% from 1.75% due to collecting the 12b-1 fees and disclosed them in its client agreements, Young said. The firm made the case that, even though the clients had mutual-fund share classes with higher expense ratios than other possible options, the customers were paying less overall. As in
Young, the firm and fellow defendants Bernard Bostwick and Robert Kauffman believe that there’s likely to be “a really significant reduction” in the disgorgement if the judge takes into account how many clients would be eligible for cheaper share classes, he said.
“It has been a long, arduous, expensive road to defend the allegations,” Young said. “If we do decide to appeal, it's going to keep the issue open. It means that we're going to have to continue to deal with the issue itself, which has been taxing not only from a dollar standpoint but from a time standpoint.”
The verdict in support of the SEC constitutes a “huge” victory for the regulator in court, according to Hauptman of the Consumer Federation.
“I view a jury as a proxy for what investors would reasonably expect,” Hauptman said. “These conflicts of interest have been widespread. It’s the closest indication of what investors reasonably expect when they receive investment advice, and they don't expect to be put in investments that enrich the financial firm and its professionals at their expense.”
Fiduciary target off Robinhood’s back
Robinhood, the self-directed brokerage app,
Galvin’s office filed its first case under the fiduciary rule against Robinhood after the guidelines
“As a broker-dealer, Robinhood has a duty to protect its customers and their money,” Galvin said in a statement at the time. “Treating this like a game and luring young and inexperienced customers to make more and more trades is not only unethical, but also falls far short of the standards we require in Massachusetts.”
Robinhood vowed to fight the case vigorously, and, this past December, the firm’s lawyers
Nothing in the existing laws “suggests that the legislature intended to give the secretary authority to override existing Supreme Judicial Court precedent or to empower him, in the absence of clear direction, to redefine familiar securities concepts through rulemaking and thereby change, and make non-uniform, the law that applies to broker-dealers in Massachusetts,” Riccuiti said in the decision.
Other than those under the fiduciary rule, the rest of the allegations against Robinhood still stand in the ongoing case. The company is “pleased” that the judge found the rule to be invalid, Robinhood Chief Legal and Corporate Affairs Officer Dan Gallagher said in a statement.
“The Massachusetts Securities Division has consistently mischaracterized and disparaged Robinhood’s platform and customers without any legal basis,” Gallagher said. He noted that the ruling took Galvin to task for his “decision to act unilaterally and reject any effort at coordinating with federal and state authorities.”
“Contrary to the actions of the secretary in this matter,” Gallagher added, “we believe that market participants and regulators can best serve investors when we all work together.”
Galvin’s team is “considering options for a possible appeal right now,” spokeswoman Debra O’Malley said in an email. Citing the ongoing case, she declined further comment.
