FINRA Arbitrator Denies Claim and Assesses Atty Fees

A Claimant seeking recovery from Citigroup Global Markets Incorporated originally filed his claim in the Middlesex Superior Court of Massachusetts, where it was dismissed and remanded to arbitration in March 2009. The Statement of Claim was filed in Dispute Resolution for the Financial Industry Regulatory Authority (FINRA) in July 2010, seeking $100,000 in compensatory damages related to the recommendation and purchase of preferred shares of Lehman stock. The Claimant asserted various causes of action including breach of contract, breach of fiduciary duty, failure to supervise, negligence, misrepresentations and violation of federal and state securities laws, among other things.

In accordance with FINRA Rule 12904(g) of the Code of Arbitration Procedure, the parties jointly requested an explained decision by the arbitrator. Arbitration awards are rendered by giving the decision only, without any reasons given by the arbitrators as to why they decided one way or the other and how they arrived at the amount of damages awarded, if any. Rule 12904 provides a way for the parties to have an “explained decision”, if both sides agree and jointly request one.

The case was heard by a single arbitrator since the amount in controversy was $100,000. The sole arbitrator listened to the two day evidentiary hearing and then took the case under advisement to consider all of the oral and documentary evidence prior to writing his explained decision. The arbitrator began by stating that the claim revolved around the February 6, 2008 recommendation and purchase of 4,000 shares of Lehman preferred stock at $25 per share or a total of $100,000. The broker, Weaver, recommended the purchase as being suitable for the Claimant, Lucchese, and although he was reluctant he agreed to make the purchase. He testified that he was “not a big fan” of Lehman stock and that he felt it was not “not in line” with shares of other companies. Nevertheless, he agreed to the recommendation and the purchase was made. The stock began falling in price in the spring and Lucchese contacted Weaver about the stock, when the value of the shares had declined by 20% to $80,000. Weaver told him that Lehman was a good company and recommended that Lucchese hold onto the stock.

By September 9, 2008, the value of the stock had fallen to roughly $37,000 (a 63% drop in price) and Lucchese called Weaver and told him “he was amenable to taking a loss of $63,000.” Weaver told him Lehman was too big to fail and that he should hold the stock. A huge debate exists as to whether Lucchese told Weaver unequivocally to sell and get him out of the stock. Naturally, Weaver says he did not and if he had done so he would definitely have sold the shares. Lucchese obviously says he gave him orders to sell the shares. Weaver’s supervisor talked to the Claimant and he too denied ever getting a direct sell order. Shortly after Lehman filed for bankruptcy on September 15, 2008, Weaver said he “messed up” by not selling the stock when the Claimant said he would be willing to take a $63,000 loss, but not because he was given a direct order to sell. The bottom line in this case for the arbitrator was “who to believe.”

Commenting on the arguments of counsel, the arbitrator decided that there was no credible evidence that Lucchese gave a direct instruction to Weaver to sell the Lehman stock. He also concluded that the broker had a good faith basis for advising Claimant to stay the course on September 9th, based on a research report giving the stock a “Buy/Speculative” rating with a target price of $35. Furthermore, he concluded that Weaver, just like everyone else in the financial world, had no reason to know or expect that Lehman would file for bankruptcy September 15, 2008.

The real issue was whether Lucchese gave a direct order to sell the Lehman preferred stock. An email to Weaver’s supervisor Malenfant said “Again, I strongly questioned him (Weaver) about the survivability of Lehman at this juncture and that I was amenable to sell my preferred stock at a loss.” However, again there was no mention of a direct instruction or order to sell the stock in the email. Therefore, the arbitrator concluded that the evidence presented during the hearings lacks support of the Claimant’s assertion that a direct order to sell Lehman preferred stock was given to the broker, Weaver.

In addition to having the sole arbitrator write an explained decision outlining the fact that Lucchese’s story and his request for damages was not backed by definitive credible evidence, the award was that Claimant’s claims were denied in their entirety. As if that wasn’t bad enough, the arbitrator poured salt in the wound by deciding that the Claimant was liable to Citigroup for their attorneys’ fees of $49,985. Additionally, the arbitrator assessed the entire $3,150 in forum fees for the arbitration against the Claimant, Lucchese, plus the $400 for the explained decision. So, instead of getting the $100,000 or something short of that in the form of a compromise of compensatory damages from Citigroup, Mr. Lucchese ended up getting stuck with a $53,535 tab for his arbitration. (FINRA# 10-03334; Alphonse M. Lucchese v. Citi Smith Barney, Citigroup Global Markets Incorporated, Robert Joseph Malenfant and Alfred George Weaver).

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