FINRA Arbitration

Summary of the Case:

Esoteric Advisors represented the claimants, who were older customers that had built their multimillion-dollar net worth through owning, operating, and selling their closely held company. Over the years, their investable assets were managed by well-known firms on a discretionary investment advisory basis. They were private banking clients at several firms. After selling their company, their net worth significantly increased, and they were introduced to a relationship manager at one of the firms. This relationship manager, a licensed Series 7 banker, was trusted by the clients, although he was not their investment advisor but their relationship manager. 

Soon after the clients experienced their significant liquidity event, the relationship manager left the private bank and actively solicited the claimants. He was then hired as an advisor for a new multi-entity investment firm, and both he and the firm became respondents in the FINRA arbitration.

The claimants had a long history of their investments being managed in a discretionary manner but investment advisors or registered representatives. They maintained low-risk, well-diversified, balanced portfolios. During the pandemic, the claimants became concerned about the economy and the safety of the financial system. They had expressed interest in Bitcoin to their advisor while he was still a private banker.

The responded firm, which subsequently employed the claimants’ relationship manager, was a multifaceted digital asset company. This company initially started as a cryptocurrency firm but grew to include numerous entities. As part of the diversification, the firm adopted a Registered Investment Advisor (RIA), a sales service entity, and a broker-dealer. To expand its services, the firm began to offer private placements through their RIA and aggressively recruited advisors from various traditional financial institutions. The respondent advisor was hired by the service entity along with several other advisors.

The advisor solicited the claimants, telling them about the new, exciting digital asset firm and encouraging them to invest in Bitcoin. However, the claimants ended up with several million dollars in private placements that had no direct ownership of Bitcoin or any digital currency. The claimants argued that these investments were wholly inappropriate, resulting in significant loss of investment capital and harm. They contended that this was a clear violation of the tenants of Regulation Best Interest (Reg BI). 

The respondent made several blatantly incorrect arguments, likely due to a lack of understanding of the regulatory elements governing them. They claimed that the claimants, being accredited investors, were not subject to Reg BI guidance. They also argued that since the advisor worked for the service company and not the broker-dealer, neither SEC nor FINRA regulations applied.

Esoteric Advisors pointed out several facts from the FINRA discovery documents and the respondents’ own pleadings that demonstrated the fallacies of these assertions:

1. The employment contracts of the advisors were with the service company but allowed for the employees to work for any part of the firm’s various entities, including the broker-dealer. All advisors were licensed as Series 7 professionals. 

2. The RIA’s ADV explicitly stated that all private placements sold by the RIA would be sold by the broker-dealer.

3. The advisors underwent annual Reg BI training. The firm’s Written Policy Statement (WPS) detailed how and why Reg BI applied to almost all clients, including accredited investors. The WPS even provided sample client “profile” forms to be used to fulfill Reg BI requirements, none of which were implemented. The responded seemed unaware of their own WPS. 

4. The Client Relationship Summary (CRS) also extensively outlined the importance of Reg BI, which the firm again appeared to not understand.

These discrepancies, among others, were thoroughly detailed and submitted to the FINRA panel by the attorney with assistance from Esoteric Advisors. 

Disposition: 

The case was settled in the claimants’ favor by the firm.