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Award Date: September 9, 2022
Hearing Site: Seattle, Washington
Respondent Firm: Waddell & Reed
Claimant Representative: Doc Kennedy, MBA, J.D.
Case Objective:
After nearly 25 years in the industry and nearly 20 with the same firm, a financial advisor was terminated by the firm for not having disclosed promissory notes issued by his wife’s start-up company. Not only did the advisor receive a Form U5 termination disclosure — he was also slapped with an internal review disclosure, and regulatory action was taken. With the help of AdvisorLaw, this advisor sought expungement of the termination and internal review disclosures through FINRA Dispute Resolution.
Case Summary:
Our advisor joined the firm in January 2001. Eleven years later, his wife opened a technology firm, which she personally operated. The advisor promptly completed a waiver-of-conflict form to disclose his connection with his wife’s business to the firm, and he received firm approval.
For about three years between 2012 and 2015, the advisor’s wife issued promissory notes to certain friends and family who expressed interest in helping her build her business, some of whom were other financial advisors and clients with the firm. The promissory notes were not tied to any offer of equity. Rather, the purchasers were promised an opportunity to invest at a later date, when the company was ready to issue equity. As he had already disclosed his association with the business to the firm, and as the promissory notes weren’t tied to equity, the advisor did not believe that he needed to disclose the issuance of the notes, specifically.
In August 2018, the advisor’s wife announced that she would be converting the promissory notes into equity, and the majority of the noteholders chose to invest. Our advisor contacted firm compliance right away to disclose the proposed conversion of the promissory notes. No notes had been converted at the time of disclosure.
Compliance looked into the notes and initiated an internal investigation into the advisor’s connection to them. It was determined that the advisor was not an active participant in the business and that he’d had no involvement with any conversations regarding its equity issuances. The advisor was told that he had nothing more to disclose and that no update to his conflict waiver form was necessary.
In October of 2018, the business issued equity to its investors. The following January, our advisor learned that firm compliance had continued its investigation of his connection to the promissory notes. Ultimately, the firm concluded that the alleged nondisclosure of the notes in 2012 had been a violation of the firm’s private securities transaction policy. It then terminated the advisor in April 2019.
Result:
At the FINRA expungement hearing, Doc Kennedy, MBA, J.D. argued that the termination and internal investigation disclosures and the allegations of a violation of the firm’s private securities transaction policy tended to mislead and were therefore defamatory in nature. The firm submitted a document denying the advisor’s allegations and asserting various affirmative defenses.
The Arbitrator reviewed the firm’s response, listen to the advisor’s testimony, and reviewed the advisor’s CRD record and Form U5. Determining that the allegations were misleading and harming the advisor, the Arbitrator recommended the expungement of both the termination and the internal review disclosures.
Soon, this advisor’s record will once again be free of the harmful Form U5 termination disclosure and allegations.
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