financial industry regulatory authority

On Nov. 3, the 2nd U.S. Circuit Court of Appeals partially vacated a judgment of the court below with the result that a married couple from Illinois can pursue suitability and other claims against Ameriprise Financial Services Inc., the defendant below.
The married couple, John and Elaine Beland, appealed after the U.S. District Court for the Southern District of New York ruled in favor of Ameriprise and enjoined an arbitration the Belands had instigated before the Financial Industry Regulatory Authority, or FINRA, the 2nd Circuit opinion says.

Claims Against Ameriprise

The Belands brought claims against Ameriprise for, among other things, breach of fiduciary duty, breach of contract, fraud and negligent misrepresentation after a decline in the value of their personal financial assets.
The combined account balances, as stated by the Belands, fell from more than $2.6 million when opened in 1995 to about $800,000 in early 2009.
They sought an arbitration award of at least $1.5 million for damages to the account and for punitive damages, as well as costs and fees, the opinion said.

Ameriprise Failed to Adhere to the Conservative Investment Strategy

Ameriprise allegedly failed to adhere to the Belands’ conservative investment strategy — a suitability claim — and directed the Belands’ assets into mutual funds that allowed the company to collect excessive fees.
The decision of the district court hinged on the fact the Ameriprise had already taken part in the settlement of a class action lawsuit and that class included the Belands, who never opted out of the class, and never submitted a claim for payment under the terms of the settlement, the opinion says.
Ameriprise had first filed a motion with FINRA to stay the arbitration, but the arbitration panel denied it. The company then moved in the district court to enforce the settlement agreement and enjoin the Belands from pursuing the arbitration.
The district court had exclusive jurisdiction to enforce the settlement agreement. It ruled against the Belands and ordered them to withdraw their pending arbitration with prejudice. The district court determined that, as class members, the Belands “had expressly released all of their arbitration claims by virtue of their failure to timely opt out of the class-action settlement,” the 2nd Circuit’s opinion says.
The Belands’ arbitration included suitability claims, however, and these were carved-out of the settlement agreement, along with a few other claims. The 2nd Circuit therefore held that the district court had erred when it directed the Belands to withdraw their arbitration complaint.
Several of the Belands’ claims were found to be covered by the settlement agreement, so the district’s court’s decision was affirmed in part. The case was remanded for resolution consistent with the 2nd Circuit’s opinion.
The class action lawsuits in question were filed in the district court between March and May of 2004 against several Ameriprise affiliates. The class plaintiffs alleged conflicts of interest, misrepresentations and omissions, biased and “canned” financial advice and advisory services, failure to disclose financial incentives and fees, and placing clients’ money into investments that benefited the defendants and not the clients. The court consolidated the five cases into In re American Express Financial Advisors Securities Litigation. The American Express Co. was once the parent of Ameriprise, but Ameriprise was spun off in 2005 and the two are no longer linked, the opinion says.
An amended consolidated complaint was filed in 2005 that accused the defendants of a failure to disclose an unlawful and deceitful course of conduct designed to improperly financially advantage themselves to the detriment of the class, the opinion says. The complaint alleged that financial advisors pushed clients into a pre-selected, limited number of mutual funds in order to reap millions of dollars in secret kickbacks, the opinion says.
The Class period ran from March 1999, to April 2004, and was later extended to April 2006. In January 2007, the lead plaintiffs moved to settle, and in early 2007, the roughly 2.8 million potential class members were notified. The class action settlement was approved by the court in July 2007.
Pertinent to the Belands’ case, the class notice stated that the released claims did not include “suitability claims unless such claims are alleged to arise out of the common course of conduct that was alleged, or could have been alleged, in the Action,” as quoted in the 2nd Circuit opinion.
A suitability claim is generally defined as a claim that a broker knew or was reasonably aware that the securities recommended to the customer were unsuitable in light of the customer’s investment objectives but recommended them anyway, the opinion says.
In their FINRA arbitration complaint, the Belands stated that Ameriprise invested their money in many of its “house” mutual funds, including high-yield junk-bond funds and risky small-cap technology funds or start-up funds, leading to significant losses over time. These choices were at odds with the Belands’ express wish to invest conservatively.

Ameriprise Adviser Obscures Truth About $1.8 Million Loss

As noted, the Belands’ combined account balances fell to $800,000 in 2009 from $2.6 million in 1995. The Belands alleged that when they confronted their Ameriprise adviser about the decline, he resorted to deceit, providing false justifications and obscuring the truth about his company’s motives and conflicts of interest. Moreover, when they received the notice about the class action settlement, this adviser told them to do nothing.
Though the Belands neglected to opt out, the settlement agreement had carved out suitability claims from it general release unless the claims were alleged to have arisen through the same course of conduct as the released claims.
The 2nd Circuit found the Belands’ claims did not arise through the same course of conduct. The class action investors claimed Ameriprise steered them into its own proprietary mutual funds regardless of their individual needs, creating conflicts of interest that were not adequately disclosed to investors. The Belands’ claims that their Ameriprise adviser disregarded their instructions and investment goals while managing their trusts does not fall within the class action’s common course of conduct.
In addition, some of the Belands’ claims involve conduct after the class period, and so could not be released. The class-action period ran from March 1999 to April 2006. The Belands’complaint covers conduct into 2009.
Regarding a novel issue in the 2nd Circuit, the court also addressed whether the district court had the power to enjoin arbitration. The Federal Arbitration Act does not explicitly give the judiciary the authority to enjoin a private arbitration, but previous decisions within the circuit have said the court can do so if the court determines that the parties’ arbitration agreement is invalid for some reason, and in cases where judicial proceedings started in a foreign country act as a waiver of arbitration.
The 2nd Circuit reasoned that the same principles applied to the Belands’ situation. The opinion says it would make little sense to conclude that the district courts lack authority to decide question concerning arbitration within its jurisdiction where action by the court is necessary to enforce the terms of parties’ own agreement. The court also relied on the fact that the settlement agreement explicitly stated that the federal district court retained jurisdiction.

Guiliano Law Group

The practice of Nicholas J. Guiliano, Esq., and The Guiliano Law Group, P.C., is limited to the representation of investors in claims for fraud in connection with the sale of securities, the sale or recommendation of excessively risky or unsuitable securities, breach of fiduciary duty, and the failure to supervise. We accept representation on a contingent fee basis, meaning there is no cost to unless we make a recovery for you, and there is never any charge for a consultation or an evaluation of your claim. For more information contact us at (877) SEC-ATTY.