The three-member FINRA arbitration panel rejects liability against a clearing broker that allegedly facilitated trading in fraudulent securities.
The 33-page Award includes 10 pages of explanation, issued after 305 evidentiary hearings, 93 witnesses, the Panel’s review of more than 10,000 exhibits, and six days of oral argument. All quotations below are from the Award.
Parties and Allegations
The Second Amended Complaint increased the number of claimants (requiring a two-page caption to list them all), but three of them later withdrew without prejudice; therefore, the Award refers to them as “Amended Claimants” in the Case Summary and “Remaining Amended Claimants” when explaining the Panel’s ruling. The respondents were: Raymond James & Associates, Inc. (“RJA”), Raymond James Financial Services, Inc. (“RJFS”) and Insight Securities, Inc., the last of which the Remaining Amended Claimants voluntarily dismissed from the case. RJA had clearing agreements with the claimants, whose introducing brokers, “E.H. and her team,” were affiliated with: “non-SEC (Securities and Exchange Commission) and non-FINRA (Financial Industry Regulatory Authority) registered, offshore broker-dealer Biscayne Capital BVI, Ltd. (‘Biscayne Capital’), a British Virgin Islands entity.” The Amended Customers: “were victims of a massive fraud orchestrated by the developers of a series of real estate projects in Florida that were in financial distress. Amended Claimants, primarily individual citizens of the Republic of Ecuador as well as Ecuadorian business entities and a religious organization, alleged that they suffered financial losses after having purchased in their investment accounts, knowingly or not, propriety products of the Biscayne Capital related companies.”
Normal Clearing Firm Functions
The Panel finds that the Remaining Amended Claimants did not prove that RJA violated any law, regulation, rule or industry standard in its role as their clearing firm. “Upon the trade clearing, RJA would send out a confirmation to the account holder which reflected the price provided by Biscayne Capital…. RJA would also provide a link on the confirmation that would reroute to the SEC EDGAR website to permit the purchasing claimant to review the prospectus for the product purchased.” Both of these, according to the arbitrators, were normal clearing firm functions, nor was there any evidence that any of the Remaining Amended Claimants used the link to view any of the relevant prospectuses. “RJA valued the Biscayne Capital proprietary bonds on the monthly statements it prepared through use of a value it obtained from a recognized third-party vendor. Remaining Amended Claimants presented no evidence that the valuation was not accurate.” Otherwise, RJA merely cleared and custodied the securities at issue. “Consequently, the Panel finds, based on the evidence presented, that RJA had no substantial role in the sale or purchase of any of the Biscayne Capital propriety bonds to Remaining Amended Claimants.”
No Red Flags and No Ponzi Scheme Until Afterward
RJA stopped clearing for Biscayne Capital accounts: “by the end of 2016. In 2017, some of the Biscayne Capital proprietary products, for the first time, stopped paying interest…. The Biscayne Capital proprietary bonds collapsed in late 2017, and the hint of a possible Ponzi scheme arose.” In fact, “Remaining Amended Claimants presented no contemporaneous proof that the Biscayne Capital proprietary products were a Ponzi scheme when Remaining Amended Claimants’ Biscayne Capital accounts were custodied at RJA,” nor did they convince the Panel that there were any “red flags” of which RJA should have been aware at that time. The Panel finds that the Remaining Amended Claimants’ “whistleblower,” E.H., lacks credibility because she was, in fact, one of the brokers who engaged in the questionable trading and was trying to deflect blame from herself to RJA.
No Liability Against Raymond James Financial
The Panel also rejects the claim against Respondent RJFS. “A key to this claim is that one of Biscayne Capital’s principals, F.C., as an independent contractor, maintained a branch for a few months at RJFS,” which occurred in 2008. However, none of the Remaining Amended Claimants opened accounts at RJFS until after the collapse of the Biscayne Capital proprietary products in 2017, when two of the Remaining Amended Claimants transferred their accounts from Insight Securities. “There was no evidence presented at the hearing to even remotely suggest that F.C. had any involvement with these two accounts.”
No Losses Suffered at Raymond James Either
Finally, the Panel accepts the testimony of the Respondents’ damages expert, who testified that the Remaining Amended Claimants earned a profit when their accounts were custodied at RJA, over the Remaining Amended Claimants’ damages expert, who: “assumed that every dollar invested by claimants with E.H. and her team at B.C. Corp. that was lost was chargeable to RJA, no matter where the product was purchased, no matter where the product was custodied, and no matter whether the product was transferred into or out of RJA.” Remaining Amended Claimants’ claims are denied in their entirety.
