Facts

Rick Cooper entered into arbitration with Wells Fargo Advisors, Wedbush Morgan Securities Inc., Edward Wedbush, and Debbie Saleh, regarding multiple investments in variable annuities.

CLAIMANT'S CONTENTIONS:
Claimant contends that Edward Wedbush, as head of his firm, has created a culture of non compliance with securities regulations. Claimant contends that this culture of non compliance permeates the firm's supervisory structure from its Chief Compliance Officers to the supervising managers. The results have been SEC investigations and multiple FINRA Disciplinary Proceedings as well as life altering financial losses to Wedbush's customers. Claimant contends that he was one such customer.

Claimant contends that from 2004 to 2009, respondent Saleh, while employed as a broker for Wedbush, was allowed, unfettered by supervision or oversight from Wedbush, to pursue her scheme to generate significant fees and commissions for herself by purchasing unsuitable variable annuity products and by churning these products over a long period of time. Claimant contends that she concealed her conduct from her client, Mr. Cooper, by creating and sending to Mr. Cooper false monthly account statements on Wedbush letterhead and by forging his signature on virtually every variable annuity contract purchased in his account and on other documents. Moreover, claimant contends that respondents Wedbush and Edward Wedbush either overlooked or recklessly disregarded Saleh's egregious pattern of sales practice violations at the expense of Mr. Cooper, because they also benefitted from the excessively high commissions and fees of 6-8% generated by the unauthorized purchase of variable annuities.

From the outset, claimant contends that respondent Saleh recognized that Mr. Cooper was an unsophisticated investor, elderly, of a trusting nature and therefore vulnerable to her scheme. Claimant contends that in order for Saleh to execute her fraudulent scheme, it was first necessary to obtain the absolute trust and confidence of her victim in order to gain complete control of both assets and the flow of information to Mr. Cooper. Once Saleh achieved this level of trust with Mr. Cooper, claimant contends that she proceeded to systematically deplete the principal of Mr. Cooper's portfolio over the course of several years by means of "SWITCHING" or the unauthorized purchase of unsuitable variable annuities followed, within a few short months, by the surrender of these policies and then the re-purchase of similarly unsuitable products combined with unauthorized redemptions and withdrawals and/or partial withdrawals by repeatedly forging Mr. Cooper's signature.

Claimant contends that respondent Saleh was able to conceal her scheme from Mr. Cooper by creating and sending him fake monthly account statements on Wedbush letterhead. These bogus monthly statements listed securities Mr. Cooper did not own. They listed dividends and/or monthly interest income Mr. Cooper was not receiving and a false account value which was much more than the actual value in his account with Wedbush. Toward the end of the scam, the fake monthly account statements showed that Mr. Cooper's account at Wedbush had a value of $1,856,148, when in fact he had less than one third that amount.

Claimant contends that respondent Saleh's practice of sending out the false monthly account statements, which was critical to furthering her scheme, went undetected over the course of several years by both Wedbush and Edward Wedbush because they recklessly disregarded her conduct in order to benefit from the extremely high fees and commissions generated by her scheme. Respondents Wedbush and Edward Wedbush permitted Respondent Saleh to continue her highly questionable practice of generating her own fraudulent monthly account statements and sending them out on firm letterhead, apparently failing to either audit respondent Saleh or detect this practice in their supervision of Saleh. Furthermore, claimant contends that respondents Wedbush and Edward Wedbush grossly failed in their duty to monitor and supervise respondent Saleh's transactions, as a periodic review of her activity and/or exception reports should have revealed the flagrant unsuitable transactions, excessive trading and switching activity in claimants' accounts.

Claimant contends that respondents conduct is particularly unconscionable given the fact that respondent Saleh came to Wedbush in 2004 with a disciplinary history which should have subjected her to heightened supervision. Furthermore, claimant contends that Wedbush and Edward Wedbush were on actual notice of Saleh's forgeries and fraudulent variable annuity switching in Cooper's and other Wedbush customers' accounts as a result of a Dec. 10, 2007 SEC letter to Edward Wedbush after an extensive SEC investigation of Saleh. Rather than take action against Saleh by firing her or tightening up its supervisory procedures, Wedbush responded to the SEC on Jan. 23, 2008 attempting to justify both Saleh's actions and its own inactions. The Wedbush respondents never fired Saleh. She was permitted to resign in March 2009.

FINRA took action against Saleh, permanently barring her from the securities industry on Aug. 5, 2009 (FINRA Case Number: 2005002169201). On Feb. 2, 2011, FINRA also commenced Disciplinary proceedings against Wedbush and three of Saleh's supervisors for failing to properly supervise her. (FINRA Case Number: 2008012738002). Separately, on Oct. 4, 2010, FINRA also commenced disciplinary proceeding against Edward Wedbush relating to his failure to comply with FINRA regulations while he was the firm's Chief Compliance Officer (FINRA Case Number: 2007009404401).

Claimant contends that if Respondent had properly supervised respondent Saleh, her scheme would have been detected from the outset and Mr. Cooper, along with the other Wedbush client victims of Saleh's sales practice abuses, would have been spared the financial, physical and emotional devastation they suffered. Mr. Cooper was forced to move out of his home, which he could no longer afford, and has suffered severe emotional and physical health problems directly related to the stress and anxiety which ensued when Mr. Cooper was financially ruined by respondents' fraudulent scheme.

Claimant contends that respondents' conduct is all the more insidious as Saleh's fraudulent conduct is not unique to Mr. Cooper alone. Claimant contends that Saleh engaged in the same, and sometimes even more egregious fraudulent conduct with several other Wedbush customers, while being supervised by Wedbush and Edward Wedbush.

RESPONDENT'S CONTENTIONS:
Respondent Wedbush contends that claimant's contention that Edward Wedbush has created a "culture of non-compliance with securities regulations" at Wedbush Securities is specious. The firm's regulatory record compares favorably to those of many other brokerages, some of which have gone out of business or required government assistance over the last several years.

Wedbush contends that any wrongdoing in this case was committed by respondent Debbie Saleh, and not by Wedbush Securities or Ed Wedbush. As noted in the Award, all of the punitive damages were awarded against Ms. Saleh, and not against the Wedbush Respondents.

Wedbush contends that Ms. Saleh's relationship with the claimant began several years before she commenced her employment with Wedbush. The conduct of which claimant complained occurred at both UBS and Wachovia. Neither of those brokerages detected the "scheme" alleged by claimant. When Ms. Saleh transferred her license to Wedbush, Wachovia did not alert Wedbush to any potential problems, and in fact failed to disclose an ongoing investigation into her sales practices at the time of her termination. Wedbush contends that claimant obtained a substantial settlement sum from Wachovia in an amount that far exceeded his actual "out-of-pocket" losses at both Wachovia and Wedbush combined.

Wedbush contends that claimant's contention that Ms. Saleh was "permitted to resign" is misleading. Wedbush conducted an investigation into Ms. Saleh's conduct, and decided to terminate her employment. Apparently aware of her imminent termination, Ms. Saleh managed to submit her resignation before Wedbush could formally notify her that it had terminated her employment.

The Wedbush respondents did not, as a matter of fact or law, defraud claimant. Wedbush contends that claimant chose to ignore the accurate account statements from Wedbush and rely on the statements prepared by Ms. Saleh. Although the cover letters for Ms. Saleh's statements were printed on Wedbush letterhead, the substantive portions of those statements were not printed on Wedbush letterhead, and did not resemble Wedbush statements.

Wedbush contends that claimant's reference to a FINRA disciplinary proceeding concerning Ed Wedbush is highly deceptive. That proceeding, which Wedbush Securities and Mr. Wedbush are contesting, does not involve the supervision of brokers or trading activities; it relates solely to the timeliness of a very small portion of the firm's regulatory reports.

Wedbush claims it feels it is unfortunate that claimant incurred losses on the investments he made through Ms. Saleh. However, as acknowledged by claimant's own expert, his total principal loss in his Wedbush account was less than $125,000, and represented a loss of approximately 25 percent of his investment assets. Wedbush contends that the $470,885 in "compensatory damages" awarded includes more than $200,000 in funds that claimant actually spent elsewhere, but claims he would not have spent had he realized the true value of his accounts. That figure also includes approximately $60,000 in commissions that claimant's expert admitted was double-counted.

Settlement Discussions

An all day mediation before Robert Logan was held, but resulted in no settlement.

Result

After 12 days of hearings, the three member FINRA Arbitration Panel unanimously awarded Mr. Cooper $2,865,885 as follows: 1. Respondents Saleh and Wedbush Securities are jointly and severally liable for and shall pay to Claimants compensatory damages in the amount of $470,885.00. 2. Respondents Saleh and Wedbush Securities are jointly and severally liable for and shall pay to Claimants interest on the amount of $470,885.00 at the rate of 10% per annum from September 30, 2008 until the date the Award is paid in full. 3. Respondent Saleh is solely liable for and shall pay to Claimants $500,000.00 in special damages for emotional distress. 4. Respondent Wedbush Securities is solely liable for and shall pay to Claimants $300,000.00 in special damages for emotional distress. 5. Respondent Edward Wedbush is solely liable for and shall pay to Claimants $200,000.00 in special damages for emotional distress. 6. Respondent Saleh is solely liable for and shall pay to Claimants $1,000,000.00 in punitive damages pursuant to California's Elder Abuse and Adult Civil Protective Act, Welfare and Institutions Code, Section 15600, et seq. 7. Respondents Saleh and Wedbush Secunties are jointly and severalty liable for and shall pay to Claimants attorneys' fees in the amount of $390,000.00 pursuant to California Welfare and Institutions Code Section 15657.5. 8. Respondents Saleh and Wedbush Securities are jointly and severally liable for and shall pay to Claimants costs in the amount of $5,000.00. 9. Based upon the evidence presented at the hearing in this matter, the Panel determined that Respondent Saleh's conduct was premeditated, egregious, and unconscionable and part of a plan or scheme to defraud her customers. Respondent Saleh's actions, including forging the client's signature on various documents, making gross misrepresentations about the securities in the client's account and the value of those securities, providing the client with false monthly account statements and executing unauthorized redemptions and/or partial withdrawals in the client's annuities in violation of her fiduciary duties. Respondent Saleh's conduct certainly borders on criminal misconduct, if not actually elevating her actions to actual criminal misconduct. 10. Any and all relief not specifically addressed herein is denied. 11. The Panel provided an explanation of their decision in this award. The explanation is for the information of the parties only and is not precedential in nature.

Other Information

Neither Wedbush Securities Inc. nor Edward Wedbush were subject to punitive damages in this matter. The Wedbush respondents intend to pursue their appellate options. Arbitrators: Robert Albini (Chairperson), Linda Drummond and Howard Brown