A messy arbitration case in which former Raymond James & Associates brokers sought $36 million ended in a confidential settlement and an award paying one of them $500.
After a 26-session hearing, a three-member FINRA arbitration panel dismissed all but one of the allegations of defamation, unjust enrichment and other claims filed by financial advisors Lynn Cooper Faust, Michael Anthony Faust and Joe Tom King Jr., according to the Nov. 30 award. The case and a counterclaim filed by Raymond James revolved around the trio’s 2018 terminations over allegations about their sales of unit investment trusts, the same product that later showed up in an SEC enforcement case against Raymond James covering their time with the firm. The Fausts and Raymond James later settled the brokerage’s counterclaim.
The Tampa, Florida-based panel awarded King $500 in costs and assessed all but 4% out of the more than $65,000 in administrative fees for the proceeding to the firm — a small gesture toward advisors who lost a case accusing Raymond James of “burning” their books of business and calling for a referral to FINRA over the firm’s “fraudulent ‘internal investigation’ activities.” Defamation cases rarely lead to significant payments or any victories for brokers, according to Arbitration Insight’s Louis Straney, a former regulator who often serves as an expert witness.
The arbitrators “heard it over a number of sessions, and there was live testimony,” Straney said. “At the end, there was a directed verdict in favor of the defense. It’s really hard for brokers to prevail in these contract-employment cases because the contracts are pretty solid.”
Straney pointed out that the arbitration award document leaves out most details that could help explain why the arbitrators upheld the motion to dismiss the claims under a Nov. 7 order. In its counterclaim, Raymond James requested that the advisors pay the firm back for remediation payments to clients totaling more than $800,000. Lynn and Michael Faust of Faust Wealth Management Group now work for Stifel Financial at a Greenville, South Carolina-based branch, while King of Panama City, Florida-based King Advisory Group has moved on to Ameriprise.
The Fausts didn’t respond to requests for comment, while King referred an inquiry to lawyer Marc Dobin of the Dobin Law Group.
Decades in the industry
The Fausts are related, and they didn’t work in the same Raymond James office as King, Dobin said in an emailed statement. After dismissal of the other claims, King elected to go forward with the remaining allegation that Raymond James violated a FINRA rule on commercial honor and principles of trade. Dobin declined to provide any more information about the settlement of the counterclaim, but he noted that King received a small award for costs and the arbitrators ordered Raymond James to pay tens of thousands of dollars in other fees.
“They believed that they were treated unfairly leading up to and including the time when they were terminated,” Dobin said. “While our clients are obviously disappointed in the outcome and disagree with the conclusions reached by the arbitrators, they accept the panel’s decision and are prepared to move forward with their careers.”
Representatives for Raymond James didn’t respond to requests for comment.
King has been in the industry for 45 years, while Lynn Faust has a four-decade tenure and Michael has been an advisor for more than 20 years, according to BrokerCheck. Lynn Faust had been a grade school teacher before becoming an advisor, her company bio says.
Lynn Faust and her son Michael left the firm as the most prominent names out of at least seven brokers fired in 2018 over UIT sales, the wealth management news outlet AdvisorHub reported at the time. Several unidentified people “inside and outside the company” told the outlet that the terminations likely suggested there was an upcoming enforcement action.
About a year later, Raymond James agreed to pay $15 million to settle an SEC case alleging the firm charged excess commissions in certain UIT sales, among other conduct that violated the rules. Investigators had accused the firm of recommending that brokerage customers roll over their UITs to new ones without any determination about whether the exchanges were suitable, resulting in higher sales commissions.
Terminated and arbitrated
The firm discharged the three former registered representatives in October and December of 2018, citing identically phrased allegations on FINRA BrokerCheck that their terminations were “due to concerns relating to the nature of advisor’s UIT activity.” In September 2019, former clients of Lynn Faust with Raymond James received a settlement of $82,000 after alleging she misrepresented UITs at the time of sale, her detailed BrokerCheck file shows. Another client complaint, which is still pending, accuses Faust of misrepresenting exchange-traded notes.
In comments on BrokerCheck, she said she had never even seen a copy of the client complaint leading to the earlier settlement and that the firm agreed to the payment without speaking to her or her attorney. In their responses to the firm’s allegations about their sales of UITs, both Fausts also denied any wrongdoing and quoted a low price for the often-expensive and risky products.
“All trades were made in consultation with the client, were market-driven and made with the client’s best interest in mind,” the Fausts said. “We never made a trade that we believed was not in keeping with that standard. The trading also conformed to the Raymond James policy in effect at the time, including any necessary principal review. Our average cost to clients including fees and commissions was 1.04% annually, including the UIT activity.”
The disappointing arbitration decision for the brokers came more than two years after they filed the case in July 2019. They had named at least seven causes of action against the firm based on its “unwarranted and pretextual termination” of them for the UIT sales. The claimants requested deferred compensation, damages, attorney fees and other costs adding up to a combined $35.95 million, plus expungement of their terminations. In its answer to their case, the firm accused them of unjust enrichment in its own filing while denying their allegations.
The advisors “engaged in numerous short-hold sales of UITs and often reinvested the proceeds in other UITs, thereby increasing their own compensation from UITs without conducting an appropriate reasonable basis suitability analysis for respondent’s clients,” according to a description of the counterclaim included in the award document.
It’s not possible to tell from the document whether the settlement required them to pay Raymond James or vice versa, Straney said. Most FINRA awards contain little to none of the details that would be available in court, though parties sometimes share them after the case or file documents publicly to get a judge’s confirmation of arbitration decisions. Firms must swear that any allegations appearing on BrokerCheck are accurate, while clients use the site to research advisors and brokers are looking for a fair depiction of their records, Straney pointed out.
“Everyone has a lot of vested interest in the information being correct,” Straney said. “When you terminate someone either for cause or terminate them because they’ve quit and gone to another firm, there’s tremendous importance in accuracy and fairness. We just don’t know the background on this situation.”