EXPLAINED AWARD: TULLIS v. AMERIPRISE FINANCIAL SERVICES, INC., FINRA ID #16-01261 (Portland, OR, 6/27/17).
This Award includes a so-called “Dissenting Decision” that is largely a concurrence fleshing out in detail the majority’s one paragraph “Findings” in favor of the customer claimants; the only disagreement in results between the arbitrators is that the dissenter would award pre-judgment interest (for reasons that he does not explain).
The dissenter, one of three on an all-public panel, elucidated his purpose at the beginning of his opinion: “…[T]he Arbitrator considers that most decisions deserve to be explained in order to create a body of precedent unavailable now that most courts no longer have jurisdiction over most securities litigation. Hopefully, this decision may help contribute to that body of law.”
What the Majority Says
Customers Jan and Scott Tullis brought their claim against their broker, Andrew Hall, and his employer, Ameriprise. The Panel finds Hall’s investment strategy unsuitable in several respects. First, he raised the equity component of their asset allocation from 70% to 100% or, taking into account “expected margin leverage,” 133%. Secondly, Hall invested in unit investment trusts (“UITs”) comprised of closed-end funds (“CEFs”), many of which were leveraged, less liquid and more volatile than comparable investments, and further increased Claimants’ equity exposure. Finally, he sold the original UITs and invested 50% of the proceeds in UITs of CEFs invested in master limited partnerships tied to oil prices and the remaining 50% in a UIT that was not properly diversified because it held only 12-13 individual stocks.
A Concurring “Dissent”
The third Arbitrator agrees that Hall did not “know his customer” and purchased securities unsuitable for the Claimants’ financial situation and needs. The Claimants were $120,000 in debt, due mainly to Scott Tullis’ occasional unemployment, business losses and their children’s college educations, when they inherited $800,000 from Scott’s mother in April 2014. According to the Arbitrator, Claimants had two options: “(1) paying off debts and using income from the balance to get back on their feet and (2) keeping the inheritance intact and using the income to try to pay off debt. The latter strategy “clearly encouraged their spendthrift behavior,” which was “evident from the beginning,” making that option unsuitable for Claimants. However, “Respondents failed to conduct even a cursory analysis of the pros and cons of the two approaches,” merely “because Claimants didn’t want to consider it” (emphasis in original), adopting the second option. And, indeed, Claimants’ debt further increased to more than $140,000 by mid-2015. The fact that the second option made more money for Ameriprise (since it left more of the inheritance to invest) causes the Arbitrator to term it a conflict of interest as well. Nor do meeting Claimants’ investment objectives – “Growth and Income” and risk tolerance – “Moderate to Aggressive” – satisfy Respondents’ suitability obligations.
The UITs imposed their own suitability problems, given “the precarious nature of Claimants’ financial situation” and their large debt. These include: (1) high up-front costs and penalties for early selling; (2) the riskiness of some UITs, such as those invested in CEFs, and (3) the increase in Claimants’ equity exposure from 70% to nearly 100% or, considering margin borrowing, roughly 133%. Finally, the dissenter agrees with the majority’s characterization of, and criticisms of, the final set of UITs Hall purchased for Claimants, noting that they were even riskier than the earlier set. “In sum, Respondents maximized the benefits they derived from Claimants’ accounts instead of giving Claimants prudent ‘investment’ advice, after first obtaining all the pertinent facts about their customers, as required by FINRA rules.”
(ed: *We sincerely doubt that FINRA Arbitrators will develop a consistent corpus of law that can function as stare decisis the way judicial case law does, but we think that the “dissenter” has a point: although we would not go so far as to call them “precedents,” we agree that other arbitrators may find previously-issued Explained Awards useful in framing their own decisions. This is one reason why we report on them here. **Another use of Explained Awards is to cast light on the thought processes of the arbitrators who issue them. It is for this reason that we make our Explained Award summaries, dating back more than 10 years, available through the “Awards Plus” feature of our Arbitrator Reports, both in ARBchek and in-house searches.)
Like what you see here?
Twice a week we present blog posts consisting of one write-up from each of our two flagship weekly online Alert services. Consider a subscription to these publications to receive the full array of coverage right on your desktop every week. Give it a try and sign up for a free trial to the Securities Arbitration Alert and the Securities Litigation Alert.