A FINRA arbitration panel last month ordered Ensemble Financial Services, the former broker-dealer for bank holding company Tompkins Financial Corp., to pay $1.2 million in damages to the trustees of a wealthy family in Rochester.
The trustees claimed that the family matriarch, Christine Samuel, an "elderly, infirm woman" who was the sole income beneficiary of the family's fortune, received bad advice from the broker at Ensemble, according to the trustees lawyer Robert Pearl, an attorney with The Pearl Law Firm in Pittsford, N.Y.
The broker, Richard Charles Oaster, "got his hands on the trust instruments and he interpreted them, even though he wasn't a lawyer," Pearl said, adding that Oaster failed to run the documents by the compliance department. According to Pearl, Oaster unwisely told his client that she could use the money in the three family trusts as she pleased, even though the trusts had no "right of invasion of principal," meaning she could not withdraw money from the principal amount of the trusts.
On Oaster's advice, Samuel took millions of dollars out on margin not to generate more income for the trust, Pearl said, but to use it in any way she chose. Over a period of three and half years, she spent $6 million to $7 million on things for the house, Pearl said.
A surrogate court judge ruled that she wasn't allowed to withdraw the money and was ordered to pay it back, Pearl said.
"Because she was advised by Mr. Oaster that she could essentially treat these monies as if they were her own, she invaded trust principal, a no no," Pearl said.
According to Pearl, what happened at Ensemble could never happen in a bank trust department. If these accounts had been handled by the trust department at Tompkins, this never could have occurred," he said.
Brokerage Firm at Fault
Pearl argued that even though Samuel did something wrong, she was not at fault because she was merely following Oaster's advice. "In our view, it was the fault of the brokerage firm because their broker was the one who was facilitating this. It would have been impossible without his assistance and his direction," Pearl said of Samuel withdrawing money on margin. "He's the one who told her she could do it."
Samuel was in her late 60s and suffered from mental illness her whole life, said James Metzler, a lawyer with Boylan Code in Rochester, who represented Samuel. "She was a very vulnerable person who could easily be taken advantage of. She trusted her consultants and advisors and followed their advice," he said.
Oaster's lawyer, George Sullivan of Greenberg Traurig in New York, vehemently disagreed, saying that Samuel had been borrowing from the trusts long before she met Oaster. He argued that Samuel, not Oaster, was at fault as she had her own lawyers and knew that she couldn't rely on Oaster for legal advice.
"The family had trouble controlling spending even before they ever met Oaster," Sullivan said.
Rare Consumer Win
In the end, the arbitrators held Ensemble liable for damages. All three agreed that Oaster did not have to indemnify Ensemble, a fact that Sullivan said helped vindicate his client.
Luigi Spadafora of New York law firm Winget Spadafora Schwartzberg and the attorney for Ensemble did not return voice and email messages seeking comment.
The trustees for the Samuel family sought compensatory damages in the amount of $12.6 million, as well as no less than $2.5 million in commissions and fees generated from the accounts and no less than $3.5 million in lost opportunity damages, according to FINRA's filing.
The $1.2 million award, while significantly less than the amount the claimants sought, was nevertheless a big win for the Samuel family as FINRA arbitrators rarely side with consumers, Pearl said. One arbitrator wanted to award more.
Since the arbitration panel rendered its decision in February, Tompkins Financial has replaced its broker dealer with LPL.
Inadequate Compliance Systems
Ensemble was underfunded and did not have adequate compliance systems and personnel, Pearl said, blaming the bank for not giving the brokerage the tools it needed. In fact, he added, the former president, CEO and chief compliance officer of Ensemble testified that he cried out to the bank for support, asking for more compliance people, but was stonewalled.
The chief compliance officer, Pearl said, was no more than a business development executive, brought in to grow the broker-dealer multifold. He was not, in reality, a compliance officer at all.
For banks with brokerage operations, the lessons from the arbitration were straightforward, according to Pearl. If youre going to own a broker-dealer as a bank you better make sure it operates correctly. Otherwise, youre going to be left holding the bag, he said.
- Fifth Third Securities to Pay $100K to Settle Customer Complaint
- J.P. Morgan Securities Ordered to Pay Clients $485K for Aggressive Investments
- HSBC's Swiss Private Banking Unit to Pay $12.5 Million to Settle U.S. Charges