By Harry A. Jacobowitz, Esq.
The Award, Inlow v Barrows, FINRA ID No. 22-01360 (Los Angeles, CA, Oct. 30, 2023) explains why it holds two brokers liable to the customer, but rejects liability against a third one and finds no liability under some causes of action.
The Claimant, Ronald J. Inlow (“Inlow” or “Claimant”), filed the arbitration against the three brokers, Michael Barrows (“Barrows”), Eric J. Ludovico (“Ludovico”) and Mark Stewart (“Stewart”), but not against any broker-dealer, alleging:
“violations of federal securities laws; violations of California securities laws; violations of California Unfair, Unlawful, and Fraudulent Business Practices; breach of contract; common law fraud; breach of fiduciary duty; and negligence and gross negligence. The causes of action relate to GWG Holdings, Inc. L Bonds.”
Why Two Brokers Are Liable
The Award is notable for expressly addressing all claims asserted by Inlow, whether or not they are successful. The Panel finds that Inlow has proven that both Barrows and Ludovico committed: “a violation of section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder….” The reason? “In making this determination, the Panel concluded that, on the basis of the evidence presented, Claimant did not show by a preponderance of the evidence that the securities in question in this case (GWG L-Bonds) were unsuitable for all customers, but did show by a preponderance of the evidence that such securities were unsuitable for Claimant Ronald J. Inlow in the quantities purchased.” The Award declares that the elements of common law fraud are the same, so the Panel incorporates the foregoing conclusion in its evaluation of this count. Inlow similarly proves a claim for negligence against the same two brokers, but that claim is superseded by the findings of securities and common law fraud. Finally, the Panel finds that Inlow had a fiduciary relationship only with Barrows, not with Ludovico, and that Barrows violated his fiduciary duty. Barrows and Ludovico are jointly and severally liable for $1,035,360.46, plus interest since August 1, 2023 and $10,655.68 in costs.
Why Not the Third One?
The Award does not directly explain Stewart’s role, but it appears that it was supervisory. With respect to the negligence count, the Panel finds that Inlow has proven that:
"Stewart was negligent with respect to his failure to adequately review and update his review of alternative investments on ACG’s ‘approved list’, but has not proven … that such negligence was the proximate cause of GWG L Bonds remaining on ACG’s ‘approved list’ as of the date of Claimant’s purchases, in that the preponderance of evidence does not establish that such securities were not suitable for any customers, even if unsuitable for Claimant in the volumes purchased by him.”
Presumably, this is also why the Panel rejects the Section 10(b) and Rule 10b-5 claim against Stewart. Stewart is not liable for common law fraud because Claimant did not prove a conspiracy to commit fraud or that Stewart “culpably aided or abetted” the other brokers. Finally, the Panel finds that Stewart had no fiduciary relationship with Inlow.
What About the Other Causes of Action?
The Panel rejects Inlow’s other claims in full. Causes of action for violation of the Securities Act of 1933 (included in the securities fraud count) and California Corporations Code sections 25501 and 25504 both fail because the bond issuer, GWG Holdings, Inc., made no misrepresentations or omissions of material fact. The count for violation of the California Unfair Business Practice Act fails for two reasons: 1) there was no “on-going unfair business practice” and 2) Inlow did not prove that Stewart personally received any funds on which an award of restitution, the only available remedy under the statute, could be made. Finally, Inlow alleged the breach of two contracts: 1) the one between him and broker-dealer Accelerated Capital Group (“ACG”) and 2) “Respondents’ oaths and agreements to submission to FINRA rules and regulations, to which Claimant asserts he is a third party beneficiary.” However, the claim for breach of the former contract fails because Inlow failed to prove “that any of Respondents were the alter-egos of ACG,” and the claim for breach of the second one fails because Inlow was only an incidental beneficiary of that contract.
The Denial of Other Relief
Inlow and the respondents also requested attorney fees, but the Panel denies both motions. It explains its denial of Inlow’s motion as follows: “Under California law, attorneys’ fees may be awarded only if authorized by contract or by statute. Claimant did not present into evidence any contract to which Claimant was a party or third party beneficiary providing for the recovery of attorneys’ fees by the prevailing party. The only claim asserted by Claimant which provides a statutory basis for recovery of attorneys’ fees was the claim under California Corporations Code Sections 25501 and 25504. As discussed above, Claimant did not prevail on that claim.” The Panel does not address Inlow’s request for other remedies, including punitive damages, and denies the brokers’ requests for expungement relief, including the one by Stewart.
(ed: This Squib was prepared by Harry A. Jacobowitz, President of HAJ Research and Writing LLC. Mr. Jacobowitz, a member of the Pennsylvania bar, and his firm perform legal research and writing for attorneys and handle substantive searches of SAC’s Award database. He can be contacted at firstname.lastname@example.org.)