“Clearing firms are generally not responsible to customers for the actions of an introducing broker”
Warren v. Tacher, C.A. No. 3:99-CV-806-R (W.D. Ky., 6/2/00):
We mentioned this recent ruling in this well-known arbitration case in last week’s Arbitration Alert (00-26). The Award under challenge in this proceeding constituted the largest punitive damages award in SAC’s Award Database (NASD ID #97-04772, Louisville, 9/20/99).
Ironically, it was the investor-Claimants who initiated the vacatur proceeding.
As the Court notes, the $15 million punitive damages and $4.7 million compensatory damages awards are unlikely to be collected from the two Kensington Wells principals, Steven Vornea and Salvador Tacher, against whom the Arbitrators ruled. Messrs. Tacher and Vornea are both “in bankruptcy proceedings and Tacher has been indicted for fraud.” Petitioners seek confirmation of the Award in part, but request vacatur of the Panel’s dismissal of the claims against KWI’s clearing broker, Bear Stearns & Co., Inc.
They claim that the Panel acted in manifest disregard of the law, committed arbitrator misconduct for refusing to hear evidence, and exceeded their powers by dismissing their claims against Bear Stearns “prior to discovery and a full-blown evidentiary hearing.”
While the Panel clearly refused to hear evidence in dismissing the case against Bear Stearns, the real issue is whether that refusal prejudiced Claimants through the exclusion of material evidence. The Court is skeptical that discovery, if provided, “would overcome the panel’s decision…. Clearing firms are generally not responsible to customers for the actions of an introducing broker and do not owe fiduciary duties to the customer, and courts have confirmed pre-hearing dismissals on these grounds.”
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Nothing herein is intended as legal or financial advice. The law is different in different jurisdictions, and the facts of a particular matter can change the application of the law. Please consult an attorney or your financial advisor before acting upon the information contained in this article.
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Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.
He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page - SECLaw.com, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.
