Facts

Kay Family Revocable Trust UAD 02/07/90 FBO Lenore Bleadon Under Trust filed a claim against Stone & Youngberg LLC in connection to Kay's investment in the FutureSelect Prime Advisor II Fund.

The investors claimed that Stone & Youngberg failed to conduct adequate due diligence before it recommended that the clients invest their money in the Fund. The Fund was a feeder fund which invested approximately 94% of its assets into Ryle Broad Market Funds, which then turned the money over to Bernard L. Madoff Securities, LLC.

CLAIMANT'S CONTENTIONS:
Claimant alleged breach of fiduciary duty, professional negligence, negligent misrepresentation, breach of contract, and common law fraud and deceit. Further, claimant alleged that respondent engaged in violations of the FINRA Rules of Fair Practice, such as Rule 2210, which bars misstatement or omission of material facts in communications with the public. Also, claimant alleged violations of Rule 3010 concerning a failure to supervise, and Rule 2110, which requires the observation of high standards of commercial and honor, as well as the principles of trade.

RESPONDENT'S CONTENTIONS:
Respondent rejected claimant's claims of wrongdoing in their entirety. Respondent argued that claimant made her hedge fund of funds investment directly with FutureSelect Advisors, the independent third-party fund manager with which claimant contracted to manage her funds. Respondent asserted that Stone & Youngberg was not a party to the investment contract and it did not have the right or the responsibility to control how the third-party fund manager ultimately invested investor funds.

Further, the third-party manager invested 90% of the fund's money in a Madoff feeder fund. Respondent contended that claimant's losses were entirely caused by the fraudulent Ponzi scheme perpetrated by Bernard Madoff and not by any act or omission by respondent, who had neither the duty nor ability to detect Madoff's fraud - something which no one in the financial industry, including the SEC or FINRA,
was ever able to uncover.

Damages

Claimant sought $750,000, or rescission with prejudgment interest, costs, and punitive damages.

Result

The FINRA arbitration panel found Stone & Youngberg liable for the entire $750,000 invested and lost by its clients as a result of the firm's recommendation to invest in the Fund. Respondent intends to file a petition to vacate the arbitration award, which respondent contends is neither supported by the evidence nor by the law.

Other Information

The award is believed to be the first arbitration award against a securities brokerage firm for its recommendation to invest in a Madoff feeder fund. ARBITRATORS: Michael L. Garcia, Barbara M. Anscher, Robert M. Greber. FILING DATE: May 5, 2009.