Malcolm Segal was a registered representative, and operated his own branch office of Aegis Capital Corp. in Langhorn, Pennsylvania operating under the name J&M Financial. Segal also controlled or operated another company, National CD Sales.
Beginning sometime in 2013, it appears that Segal began to sell investors bank certificates of deposit, which at least according to Segal, offered significantly better terms than general bank CDs, but which were completely safe, and FDIC insured. According to Segal, the CDs were offered through Stearns Bank, with whom he had been doing business for 25 years.
Segal Recommended Fictitious Bank Investments
Following the sales of these CDs, Segal would send his customers not only monthly checks, but also monthly customer statements showing that their funds were invested in FDIC Insured CDs. However, Segal, who used to work at a bank, actually forged these documents, and in or around December 2013, began stealing money directly from various Aegis customer accounts by forging wire instructions transferring money to accounts at National CD Sales, which Segal owned and controlled.
As it turns out, the bank investments recommended by Segal were entirely fictitious. In typical Ponzi scheme fashion Segal was funneling money from new investors and was using that money to make payments to existing customers. As the monthly payments owed to his victims increased he used more forged documents and Aegis statements in an attempt to cover up his theft. Segal’s house of cards eventually collapsed in July 2014, when Segal could no longer these payments and interest check to his victims began to be declined for insufficient funds.
AEGIS Capital Denies Responsibility
The investors complained to Aegis, who co-incidently approved Segal’s outside business activities as a CD salesman and the president of National CD Sales. Aegis Capital appears to have denied any responsibility for these investor claims and Segal’s conduct, but nonetheless fired Segal in July 2014 for his “failure to cooperate with an internal investigation.”
On September 24, 2014, the Financial Industry Regulatory Authority (FINRA), ostensibly in response to Segal’s termination, and the allegations surrounding his termination, asked for documents from Segal decided to call Segal in for an On the Records Interview. Segal of course failed to show up, and approximately two months later, on November 25, 2014, FINRA and Segal entered into an agreement where Segal agreed to a permanent bar from association with any member in any capacity, not for stealing millions from his customers, but instead for failing to cooperate with FINRA’s request for information. Malcolm Segal AWC
At or about this same time, certain of Segal’s customers filed claims against Aegis Capital in arbitration seeking to hold Aegis liable for his conduct, among other things based upon its failure to adequately supervise Segal.
AEGIS Seeking Injunction for Protection Denied
However, in addition to denying any responsibility for Segal’s conduct or Aegis’ failure to supervise Segal, Aegis took the position that Segal’s customers are total strangers to Aegis, Aegis never authorized Segal to steal from his customers, and Aegis ran into the United States District Court for the Eastern District of Pennsylvania seeking “emergency” relief in the form of an injunction protecting Aegis from the adjudication of these claims in arbitration before FINRA.
“Herculean efforts” by securities broker-dealers “to avoid resolution of disputes through arbitration” is not new. Smoothline Ltd. v. N. Am. Foreign Trading Corp., 249 F.3d 147,148 (2d Cir. 2001). Notwithstanding that it was the securities industry that pushed mandatory arbitration on customers in the 1980s, when it all began in 1987 following the United States Supreme Court decision in Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 226 (1987), the reason why securities broker dealers seek to avoid arbitration is because in arbitration, under the Code of Arbitration Procedure, absent special circumstances, motions to dismiss are not permitted. However, in federal court, broker-dealers may get lucky, and may get a court to dismiss particularly a selling away case, based upon complex and often esoteric legal doctrines. In FINRA securities arbitration, everyone generally gets their day in court.
In any event, Aegis’s efforts to avoid arbitration at all costs did not work. Judge Petrese B. Tucker for the US District Court for the Eastern District of Pennsylvania properly denied Aegis’ request for an injunction. Order Denying Preliminary Injunction
Judge Tucker citing at least two cases from within the Third Circuit held that investors interacting only with associated persons of FINRA members can bring FINRA claims against FINRA member institutions. See Emmertz, 526 F.Supp.2d at 529; Hoegler, 2008 WL 304924, at *3. Despite whatever administrative benefits having a limited definition would garner, FINRA Rules leave the definition of “customer” open while specifically limiting the definition of “customer” in other sections of its rules, thus suggesting a more flexible interpretation in this case. See FINRA Rule 4210(a)(3) (defining a “customer” as “any person for whom securities are purchased or sold or to whom securities are purchased or sold whether on a regular way, when issued, delayed or future delivery basis.”); FINRA Rule 226l(c) (defining “customer” as “any person who, in the regular course of such member’s business, has cash or securities in the possession of such member.”); Metlife Securities, Inc. v. Pizzano, No. 09-CV-4459, 2010 WL 2545170, at *3 n.l (D.N.J. June 18, 2010) (detailing NASD Conduct Rule 2520(a)(3) and NASD Conduct Rule 2270(b), later adopted by FINRA as Rule 4210 and FINRA Rule 2261(c), respectively).
Numerous other courts have interpreted the Code similarly. Vestax Sec. Corp. v. McWood, 280 F.3d 1078, 1082 (6th Cir. 2002)(rejecting the argument that the Code requires the defendant-investors be direct customers of the NASD member firm in order to compel arbitration against the member); Oppenheimer & Co., Inc. v. Neidhardt, 56 F.3d 352 (2d Cir. 1995)( investors who had been defrauded by a representative of an NASD securities brokerage firm were “customers” of that firm under the NASD Code despite their never opening formal accounts with the firm); BMA Fin. Servs., Inc. v. Guin, 164 F. Supp. 2d 813, 820 (W.D. La. 2001) (“[NASD] Rule 10301(a) does not require the Defendant-Investors to be direct customers of [the member].”); SEC. v. Ruppert, 80 F. Supp. 2d 786, 789 (S.D. Ohio 1999) (“The facts that [the customers] never had an account with [the member] and that the . . . promissory notes in which both [customers] invested were not approved products of [the member] are irrelevant.”).
I was counsel in one such case, more than a decade ago, Multi-Financial Securities Corp. v. Brown, 2002 U.S. Dist. LEXIS 26527 (E.D. Pa. December 20, 2002), where the Court held the same thing, where, persons associated with the member firm, hold themselves out “on their business cards, stationary, promotional materials, and [their] internet site” as offering securities through the member, courts will find that those persons are “customers” of the member. See, e.g. Multi-Financial Securities Corp., v. Brown, 2002 U.S. Dist. LEXIS 26527 (E.D. Pa. December 20, 2002)(citing, Vestax Securities Corp. v. McWood, 280 F.3d 1078 (6th Cir. 2002); John Hancock Life Insurance Co. v. Wilson, 254 F.3d 48 (2d Cir.2001); see also BMA Fin. Servs., Inc. v. Guin, 164 F. Supp. 2d 813 (W.D. La. 2001).
Courts and securities arbitration panels, in identical circumstances, have long held brokerage firms responsible for the conduct of their registered representatives in “selling away” cases based upon the broker-dealer’s failure to supervise. See, e.g., Hunt v. Miller, 908 F.2d 1210 (4th Cir. 1990); Harrison v. Dean Witter Reynolds, Inc., 974 F.2d 873 (7th Cir. 1992)(firm liable for agent’s selling away activities); Hollinger v. Titan Capital Corp., 914 F.2d 1564 (9th Cir. 1990)(same); State Security Insurance Co. v. Burgos, 583 N.E.2d 547, 557 (Ill. 1991)(liability for firm where broker acted with apparent authority); Salmon v. New England Securities Corp., FINRA Arb. No. 01-06935 ($1.4 million award against member for associated persons “selling away” third party notes); Sleight v. Centaurus Financial, FINRA Arb. No. 10-00536; Brezden v. Associated Securities Corp., FINRA Arb. No. 07-03054 (reasoned award against member for failure to supervise agent’s selling away activties); Chandler v. FSC Corporation, NASD Arb. No. 05-0443, (reasoned award against member for failure to supervise agent’s unauthorized selling away); Battle v. Northeast Securities, Inc., NASD Arb. No. 06-04110, (same)(reasoned award); Dobison v. Jospehthal, Lyons & Ross, Inc., NASD Arbitration No. 96-00963 (arbitration award against brokerage firm for broker’s selling away of unregistered notes and warrants).
Investors purchasing fictitious CDs through Segal’s Ponzi scheme, however, need to act quickly.
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