Investors lose life’s savings, but they can’t get justice
Oh, hi there. Did you just come in? I didn’t hear you, what with pounding my head against the wall here.
First, let me just wish you a happy Leap Day! We get an entire extra day this year, thanks to the six hours per year that the Gregorian calendar omits. So, you may think there’s only 24 hours in day, but there’s a whole ’nother 59.2 seconds you could be watching cat videos on Facebook.
But that is not the way I think you should spend this very special extra day of your life. You should do something meaningful, like volunteering at a soup kitchen, contemplating your true calling in life or binge-watching cable TV to test my own personal theory that, at any moment among the 300 channels piped into the Funny Money household, there is at least one “Law and Order” rerun somewhere, even if it’s during rain delays on the Hungarian curling channel.
‘In the arbitration justice system ...’
That, unfortunately, may be the only place you’re going to find any justice for a shockingly large number of American investors, which is why I’ll spend my Leap Day pounding my head against the wall to numb my sense of outrage at the latest report regarding the increasingly rigged game we call America’s Financial Industrial Complex.
Let’s take the case of Willie Cabbil, a retired General Motors Co. worker and pastor in Alabaster, Alabama. Cabbil lost his entire retirement account of nearly $350,000 when an investment broker sold him phony promissory notes in 2010. According to findings by the Financial Regulatory Authority, or Finra, the broker had a shady past and shouldn’t have been hired by the securities firm involved, Resource Horizons Group LLC, late of Marietta, Georgia.
In 2013, after 18 months of Finra’s mandatory arbitration process, Resource Horizons was ordered to cough up $300,000 for its negligence in supervising Cabbil’s broker. Instead of paying, Resource Horizons went out of business owing, according to Finra documents, nearly $5.3 million in three separate arbitration cases.
“I never got paid a dime,” Cabbil said Thursday. He has trouble sleeping, along with health problems from the stress of losing his life’s savings, and has had to sell his house. “I assumed the firm would pay me out of its own pocket or have insurance. This has been a devastating experience. I feel victimized all over again.”
Even Detective Lenny Briscoe wouldn’t have a one-liner for that. As for me ...
You have the right to remain ripped off
The problem, says Hugh Berkson, a securities attorney who’s president of the Public Investors Arbitration Bar Association, is that a securities brokerage doesn’t have to set aside enough capital to cover those kinds of claims and isn’t required to insure against such losses. Berkson is the author of a new study from the association that found one-third of all Finra arbitration awards went unpaid during 2013, a total of $62.1 million. Finra itself says the problem was smaller in 2014, just one-sixth of all awards, or $34 million, but didn’t release data.
Finra spokeswoman Michelle Ong notes that the authority recently wrapped up a 14-month study of arbitration issues, and its experts couldn’t come up with a consensus on how to handle unpaid awards, other than pulling a brokerage firm’s license. And it’s not just arbitration where the problem comes up. “The reality is that problems with collection of judgments exist across all courts, arbitration forums, and government agency settlements,” Finra said in a statement.
Berkson criticizes Finra for withholding data on the problem, and proposes what would seem to be a relatively simple fix: requiring securities brokers to create a pool of money to pay for uncollectible claims. The cost would be about $100 for each of Finra’s 643,000 brokers.
In 2013, Finra considered changing its rules to require that brokerage firms carry insurance to cover paying arbitration awards, but decided against the move because the cost would be “prohibitively high” for brokerages. But $100 per broker sounds plenty affordable, and Finra doesn’t like that idea, either.
By the way, the Arbitration Bar Association notes that Finra itself, a nonprofit regulator, has a net worth of nearly $1.5 billion and refunded $20 million in fees to its members during 2013.
Meanwhile, down in Alabaster, Alabama, Willie Cabbil, who worked hard, saved, invested and played by all the rules only to be victimized by Finra-regulated brokers, is likely to die without ever seeing a penny of the $300,000 the authority says he rightly deserves.