Stifel Plans to Appeal $133M FINRA Arbitration Award
FINRA arbitrators demanded Stifel pay $133 million in penalties, one of the most significant arbitration awards in the organization’s history. But Stifel is fighting back, promising to appeal the decision in court.
According to the arbitration award released on Wednesday, the accusations of negligence, fraud and breach of contract stem from Stifel’s “investments in structured notes.” The Jannetti family (including David, Sarah Lyn, Adam and Leah) brought the claim, and the arbitrators’ mammoth award far exceeded the $5 million in damages the claimants requested.
FINRA opted for such a massive sum because it believed Stifel had “actual knowledge of the wrongfulness of the conduct” and knew there was a “high probability” the Jannetti family would face damage. However, despite knowing this, the firm allegedly intentionally pursued the course of conduct.
These examples of “egregious conduct” included overconcentrating the Zannetti’s accounts in structured notes and accounts “in limited industries,” as well as disregarding Stifel’s own “investment philosophy” in the Zanettis’ accounts. (Structured notes are generally investments, often debt, coupled with a derivative component that ostensibly provides downside protection.)
FINRA also alleged Stifel placed its financial interest ahead of its clients and the firm breached its fiduciary duty.
According to Jeffrey Erez, an attorney representing the Zanetti family, David Zanetti moved from New York to Miami after selling his business, looking to invest intelligently for retirement. But Stifel broker Chuck Roberts convinced him that the structured notes were “a secure, safe way” to generate high returns with low risk, which was “misrepresented,” according to Erez.
“And what’s unique is it wasn’t so much ‘he said, she said,’ because we have text messages with this client and text messages with many other clients that tell you exactly what the broker believed at the time and what he was representing to people at the time,” Erez said, arguing all of these texts were off-channel, without supervision from Stifel.
FINRA mandated that Stifel pay David Janetti $26,123,965 in compensatory damages and $78,371,895 in punitive damages, while the compensatory damages and punitive damages for the other family members each grew into the hundreds of thousands, totaling about $106 million.
In addition, Stifel had to pay the family’s attorney fees, which FINRA said amounted to 25% of the total compensatory and punitive damages, approximately $26.5 million. The total penalty is $132,603,660.
But in response to the decision, Stifel argued it plans to seek judicial review of the “outsized award, which is supported by neither the facts nor the law.”
“The claims were brought by a sophisticated family of experienced and aggressive investors who understood the risks involved, participated in the selection of investments, monitored them closely and only complained after incurring losses,” the Stifel statement read.
Erez noted that several of the family members in the suit were college-aged at the time of the investments, so he questioned their sophistication.
“You could say sophisticated or not sophisticated, but I believe we proved that the broker himself didn’t understand the risk of the product he was selling,” he said. “So if the broker himself doesn’t understand the risk, how can the client have to know better than the broker?”
Punitive damages send a message, and the fact that Stifel was named (and hit with such an immense fine) should be seen as directed toward the firm rather than a wayward broker, according to Sander Ressler, the managing director of Essential Edge Compliance Outsourcing Services.
“It’s a crazy amount,” he said. “If you’re going to send a message, it’s clear. It’s not ambiguous.”
Erez said he had already filed a motion to confirm the award in federal court and was confident the Zanetti family would remain victorious. He argued that being upset about the size of an award or a panel’s decision was not grounds for appeal.
“It’s reflexive to say, ‘We’re going to look into it and do a review,’ and the courts are there for that purpose,” he said. “But we calculated that the interest is about a million dollars a month, so they do so at their own cost.”
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