The opinion of the court was delivered by: O'neill, J.
Plaintiffs Steven and Shirley Kulchinsky seek a Court Order vacating or modifying the decision of a panel of FINRA*fn1 arbitrators. They argue that the panel incorrectly declined to award attorney's fees in their favor. Defendant Ameriprise argues that for several reasons the panel did not err in refusing to award attorney's fees. Ameriprise thus seeks confirmation of the arbitration award. For the following reasons, I will deny the Kulchinskys' motion to vacate and grant Ameriprise's motion to confirm.
Ameriprise*fn2 is a financial planning firm. It employed investment broker Jeffery Southard from September 1997 until September 2003. During the time period relevant to this case, Southard lived and worked in New Jersey.
The Kulchinskys--also New Jersey residents--were two of Southard's clients. In May 2002, Southard began advertising what he called "Ohio Bonds." He told potential investors that the bonds would yield tax free monthly interest at a rate of six percent. The bonds, which he allegedly sold primarily to elderly investors, were later revealed to be fraudulent. Southard was actually running a ponzi scheme. The facts relevant to the Kulchinskys' claims in the present case are set forth below.
On September 24, 1997, Ameriprise entered into a franchise agreement with Southard which classified Southard as an independent contractor. On October 22, 2002, the Kulchinskys made their initial investment into Southard's Ohio Bonds in the amount of $77,039.26. Less than one month later, on November 19, 2002, the Kulchinskys invested another $10,000. Both checks were made payable to JDBAC Financial Services--a company that Southard purported to own and operate.
At some point during the summer of 2003, Ameriprise became concerned
that Southard was violating company policy. On July 3, 2003,
Christopher E. Mlynarczyk, Ameriprise's Manager of Field Compliance,
interviewed Southard at his home office. Mlynarczyk determined that
Southard had acted improperly in at least four ways and thus
recommended that Southard be terminated for cause immediately.
Mylnarczyk's interview notes indicate that he discussed the Ohio Bonds
with Southard but that Southard was unable to produce any
documentation to verify their legitimacy. See Email from Mlynarczyk to
Carol Rostad, et al. (July 3, 2003 5:11 pm) (Pl.'s Ex. E).*fn3
Mlynarczyk ordered Southard to produce the necessary
documentation by July 7, 2003. Id.
On July 11, 2003, Donald Weaver, Ameriprise's Group Vice President, wrote in a letter to Southard:
You recently admitted in an interview with FCM Chris Mlynarczyk, American Express Senior Special Agent John Golbreski, and Registered Principal Scott Safford that you had gifted $10,000 to [an unnamed client]; placed client funds into the checking account of JDBAC Financial Services, Inc.; sold AEFA clients' investments in Ohio notes; and failed to disclose on your Outside Activities Disclosure form that you had sold non-AEFA investments to clients. This is in violation of company policy. . . . .
Pursuant to Section 16 of the Franchise Agreement, "Special Regulatory Supervision," AEFA has the right to suspend an Independent Financial Advisor's rights to operate the Independent Financial Advisor Business and restrict the advisor from offering products and services. This is to inform you that effective July 11, 2003, you are hereby suspended from AEFA. . . . .
If our investigation confirms that you are in default under the Franchise Agreement, this letter will constitute notice of that default.
Letter from Weaver to Southard (July 11, 2003) (Pl.'s Ex. F). Ameriprise did not, however, attempt to advise Southard's clients of his suspension and departure from the firm. See State of New Jersey Bureau of Securities, Summary Order of Revocation and Assessment of Penalties ¶ 20 (Nov. 25, 2008) (Pl.'s Ex. 1175).
Southard's suspension led him to file suit against Ameriprise. On July 17, 2003, counsel for Ameriprise wrote to Southard's attorney to express Ameriprise's concern "that [Southard] has breached his fiduciary obligations to both AEFA and to its clients." See Letter from John P. Lacey, Esq., counsel to Ameriprise, to Kevin D. Sheehan, Esq., counsel to Southard (July 17, 2003) (Pl.'s Ex. G). In the letter, Ameriprise's counsel further asserted that "it appears that [Southard] may have defrauded several individuals, and that such fraud may be continuing." Id.
The parties settled the lawsuit on September 16, 2003. The settlement agreement provided that "neither Party acknowledges or makes any admission of liability herein."
See Settlement Agreement between Ameriprise and Southard (Sep. 16, 2003) (Pl.'s Ex. H). It further provided that "AEFA will report to [FINRA] under the category of 'Other' that Mr. Southard 'voluntarily resigned after he was suspended based on suspected dealing in unregistered and unreported securities and in commingling personal funds with client funds in violation of his franchise agreement. Mr. Southard denies that he violated the franchise agreement.'" Id.
On September 26, 2003, the Kulchinskys invested $184,123.32 into Southard's Ohio Bonds. The check was signed by Shirley Kulchinsky and made payable to JDBAC Financial Services.
FINRA requires its member organizations to file a "Form U5" whenever a registered representative of the company is terminated. Question 7B on the Form U5 asked: "[c]urrently is, or at termination was, the individual under internal review for fraud or wrongful taking or property, or violating investment-related statutes, regulations, rules or industry standards of conduct?" FINRA, Form U5 (Pl.'s Ex. I) (emphasis in original). Ameriprise answered "yes." As a result, it was obligated to provide "complete details of all events or proceedings on appropriate [forms]." See id. at 1. Ameriprise explained that: "[Southard] terminated his franchise agreement after he was suspended based on the appearance that he had offered unregistered securities to customers, settled in the field and commingled personal funds with client funds in violation of his franchise agreement and company compliance policies. Southard denies such violations." Id. at 4.
Question 7F on the Form U5 asked:
[d]id the individual voluntarily resign from your firm, or was the individual discharged or permitted to resign from your firm, after allegations were made that accused the individual of:
1. violating investment-related statutes, regulations, rules or industry standards of conduct?
2. fraud or wrongful taking of property?
3. failure to supervise in connection with investment-related statutes, regulations, rules or industry standards of conduct?
FINRA, Form U5 at 3 (Pl.'s Ex. I) (emphasis in original). Ameriprise answered "no" to all three questions. Ameriprise never publicly disclosed the existence of the settlement agreement. Nor did it inform FINRA that it suspected that the Ohio Bonds were not valid instruments.
On August 7, 2003, FINRA, after receiving notification of Southard's termination, requested from Ameriprise "a brief written explanation, including all pertinent dates, of the circumstances surrounding [Southard's termination]." See Letter from Debrah S. Winterstein, FINRA, to Beth E. Weimer, Ameriprise (Aug. 7, 2003) (Pl.'s Ex. 0145). Carol Rostad, a member of Ameriprise's compliance department responded on August 19, 2003:
Mr. Southard was suspended on July 11, 2003 for his involvement in selling non-AEFA investments. He admitted to selling three AEFA clients Ohio Notes. We asked Mr. Southard to provide us with documentation on the Ohio Notes, but he has not provided us with anything that would suggest these are legitimate notes. We are still in the process of conducting our investigation.
See Letter from Rostad to Winterstein (Aug. 19, 2003) (Pl.'s Ex. 0146).
On October 17, 2003, FINRA sought more information from Ameriprise with respect to Southard's sale of Ohio Notes. See Letter from Karen A. Tustin, FINRA Senior Compliance Examiner, to Rostad (Oct. 17, 2003) (Pl.'s Ex. 0147). On November 6, 2003, Ameriprise provided the additional information requested by FINRA. See Letter from Rostad to Tustin (Nov. 6, 2003) (Pl.'s Ex. 0152).
In late 2003, Southard applied for a position at GunnAllen Financial. Before hiring Southard, however, FINRA regulations required GunnAllen to confirm certain facts about Southard's employment history. Accordingly, GunnAllen wrote to Ameriprise to ask, in relevant part, whether Southard's termination had been voluntary. Letter from Bradley A. Fay, GunnAllen Financial, to Ameriprise Human Resources Department (Sep. 13, 2003) (Pl.'s Ex. J). Ameriprise verified that Southard's termination had indeed been voluntary. See id. The same letter asked whether Ameriprise had "any additional relevant information regarding this applicant[.]" Id. Ameriprise declined to provide any additional information. Id. It did not inform GunnAllen of Mlynarczyk's investigative findings.
GunnAllen hired Southard on December 8, 2003 as an independent contractor.
See GunnAllen Financial, Inc. and Independent Broker Network (IBN) Independent Registered Representative Agreement (Dec. 8, 2003) (Pl.'S Ex. 0133). Over the course of the following year, Southard sought registration with the State of Florida's Office of Financial Regulation as an "associated person" with GunnAllen. See Letter from David Tucker, Financial Analyst with the Florida Office of Financial Regulation, to Southard (Nov. 22, 2004) (Pl.'s Ex. 0153). The Office of Financial Regulation requested from Southard "all documents pertaining to disciplinary matters whether disclosable on the U-4 or not." Id. Specifically, the Office requested a copy of the Form U5 and a statement from Southard describing "all customer complaints filed against him, whether disclosable on the Form U-4 or not . . . ." Id. Southard responded on December 10, 2004. See Letter from Southard to Tucker ...