After 109 Arbitration Hearings, Broker Beats M FINRA Suit

December 20, 2018

Law360 (December 19, 2018, 9:32 PM EST) — Following 109 hearing sessions before a Financial Industry Regulatory Authority arbitration panel, clearing broker C.L. King & Associates Inc. has defeated breaches of fiduciary duty and contract claims asserted by an investor seeking $40 million in damages over his account’s collapse.

In a 2-1 decision, the panel denied the claims of businessman Carl Cummings, suing through a holding company, that C.L. King was obligated to notify him when a margin call was issued for his account with NSB Advisors, a registered investment advisor that filed for bankruptcy in 2015 and for which C.L. King was the custodial broker.

The FINRA ruling published Monday gives no insight into the panel’s reasoning, but when asked Wednesday evening, attorney Richard Roth, who represented the broker and CEO Candace King Weir, said C.L. King had given notice of the margin call to NSB as required and had no duty to bypass the investment manager.

“That is just not the law,” Roth told Law360.

The 2014 claim originally listed NSB and its principal as respondents and asserted causes of action related to “the trading and investment strategy utilized” in Cummings’ account, including an “alleged overconcentration in shares of APCO Oil and Gas International Inc., short options exposure and margin debits, as well as unlawful securities transactions allegedly made by respondent Weir,” according to the award published Monday.

Cummings withdrew claims against NSB and the principal in May 2014.

By the close of evidence in the case, the last hearing in which was held Sept. 28, the panel agreed to dismiss claims against Weir, finding that she had little involvement in issues related to C.L. King’s relationship to Cummings.

“Moreover, the panel found that she took no independent action outside of her role as CEO that would leave her liable individually,” the panel said.

According to Christopher F. Robertson, another attorney representing C.L. King, the brokerage was facing an exposure of well over $40 million when considering attorneys fees and costs, but emerged victorious because it handled its relationship with Cummings as a clearing broker in a way that comported with industry customs and practices.

Any other result would have “set the industry on its head,” he said.

“We’re very pleased with the result,” Robertson told Law360. “We think its right and confirms that in a highly regulated industry, when a firm acts in accordance with those regulations, there should not be liability.“

Attorney J. Michael Bishop, representing Cummings, told Law360 he and his client were “obviously disappointed” with the outcome and pointed out arbitrator John D. Mattingly’s dissent.

“We don’t agree with the decision and if you notice, the arbitrator who dissented was the most experienced of the three on the panel,” Bishop said Wednesday evening.

Each side will pay for half of almost $137,000 in fees assessed by FINRA for seven pre-hearing sessions and 109 hearing sessions that spanned from July 2015 to this past September.

“The length of this case was ridiculous,” Roth noted.

The case bears a strong resemblance to another high-dollar FINRA claim linked to NSB: In May 2017, a panel found in C.L. King’s favor in a $68 million claim brought by trusts that claimed the brokerage enabled the defunct NSB to pursue risky investment strategies.

Cummings and his company, Utility Service Holding Company Inc., are represented by J. Michael Bishop of Smiley Bishop & Porter LLP, Frank A. Lightmas Jr. of The Law Offices of Frank A. Lightmas Jr. LLC and Kathyrn N. Guzner of Guzner Law PC.

C.L. King and Weir are represented by Christopher F. Robertson of Seyfarth Shaw LLP and Richard A. Roth of The Roth Law Firm PLLC.

The case is Utility Service Holding Company Inc. v. C. L. King & Associates Inc. et al., case number 14-00343, with the FINRA Office of Dispute Resolution.

–Additional reporting by Jack Newsham.