On February 13, 2012, FINRA Dispute Resolution announced the Award in Tarrant v. Kovack Securities, Inc. Case no. 10-03532. Sonn Law Group represents Mr. Tarrant who was a customer of Kovack Securities, while Kovack Securities was represented by Todd Zuckerbrod. While Mr. Tarrant was a customer of Kovack Securities, one of the broker’s for Kovack Securities recommended that Mr. Tarrant invest $100,000 in a promissory note issued by the broker which was related to a real estate development of the broker. After investing in these promissory notes Mr. Tarrant did not receive any interest or the return of his principal.
The broker was engaging in what is referred to as “selling away” which is a violation of industry rules. Selling away refers to the practice of an individual within a firm selling financial products without the permission of the firm for which he works for. It is a violation of the Financial Industry Regulatory Authority (FINRA) rules, in particular rule 3270 and 3040.
The practice of “selling away” has sadly become all to common in the last decade, as firms grew, their mechanism to check and ensure that their brokers where doing what they were supposed to withered away. Compliance departments, which generally dealt with ensuring no fraud occurred, begun to be overshadowed by the fact that larger profits were being chased by firms, and as such they didn’t, and in many cases still don’t, have enough funding given to these departments to keep up with the growth in brokers. What ensures is easy to ascertain, there is simply not enough people to ensure that all brokers are complying with the rules, thus leading to the obvious outcome. Feeling as though they can do as they please with little oversight on top of them, some brokers take advantage of their customers and the brokerages for which they work and engage in this practice in order to increase their own personal wealth.
The evidence presented by our firm in this case convinced the arbitrators that the broker violated his duty to Mr. Tarrant and that Kovack Securities was liable for the broker’s wrongful conduct. The arbitrators also awarded punitive damages in the amount of $200,000 “due to the egregious behavior on the part of the broker and the apparent lack of any system of supervision” by Kovack Securities, which is a rare outcome from a FINRA arbitration panel. In total, the panel awarded Mr. Tarrant $314,317. “We are very pleased that the panel applied the law to the facts and rendered a just award” said Sonn Law Group.
Sonn Law Group continues to zealously represent investors who are victims of selling away. This practice is regrettably widespread as brokers often take advantage of their clients by selling them unapproved investments often for their own enrichment. It has occurred over the years at all major brokerage firms in the country. If you believe that a financial professional has abused your trust and confidence in this manner, please contact us.