Brokers and advisors who close up shop and declare bankruptcy to sidestep paying arbitration awards to the investors they defrauded are the scourge of every investor advocate attorney, and a particular focus for Michael Edmiston, new president of the Public Investor Advocate Bar Association (PIABA).
A former attorney with both Finra’s predecessor NASD and JAMS Arbitration Services and a member of Finra’s National Arbitration and Mediation Committee, Edmiston has seen the challenges with securities arbitration firsthand, but one case stuck with him.
“About 10 years ago, I represented a vibrant retired lady who owned and operated donut shops in California. She was convinced by a broker to invest her IRA and much of her savings in promissory notes which turned out to be Ponzi schemes,” Edmiston told Financial Advisor Magazine.
“After the brokerage firm filed for bankruptcy, we pursued the broker, obtained an arbitration award, had it confirmed as a judgment and spent years trying to collect. Meanwhile, our client, stressed with having to live on Social Security and little else, suffered a stroke, vascular dementia, and passed away in a retirement home. The last time I spoke with her, she thought I was her broker and asked what had happened to her money,” said Edmiston, who has represented investors as an attorney with Jonathan W. Evans & Associates in Studio City, Calif., for 15 years.
“This is just one example of how an investor was harmed. Every time I have an opportunity to speak with a legislator, regulator or other person with any authority to help solve the problem, I try my best to convey the pain, worry and fear that investors suffer when their trust is violated,” Edmiston said.
More than 30% of all customers arbitration awards go unpaid despite Finra’s efforts to address the problem. That accounted for nearly 25% of money awarded to investors in 2020, even as many brokerage firms’ profits grew to record levels, according to the latest PIABA report, which called on Congress, the Securities and Exchange Commission or both to step in and require Finra to create what they call a “National Investor Recovery Pool.”
“While PIABA supports Finra’s efforts to eliminate bad actors on the front-end, none of its efforts resolve the fundamental problem: when a bad actor doesn’t pay the award,” said Edmiston, who will continue the tradition of past PIABA presidents to fight for nonpayment solutions.
As envisioned by PIABA, the National Investor Recovery Pool would provide recovery funds for investors who pursue a claim all the way through a final award if they have exhausted reasonable efforts to collect the award from the respondent, he said.
Funding for the pool could come from Finra fine money, assessments on Finra member firms or fees levied on the investing public.
Finra did not respond to a request for comment by deadline. In 2018 the self-regulator said such a pool would present various conflicts of interest. Instead, the agency has opted to take steps to root out recidivist or rogue firms and brokers through a variety of regulations.