Facts

Former clients of E1 Asset Management, a Wall Street brokerage firm, sued the firm for the loss of over $1.4 million.

CLAIMANTS' CONTENTIONS:
Claimants contended that their money was lost in risky stock picks and options trading that E1's broker claimed were safe. E1's broker steered customers to Nektar Therapeutics and LaserCard Corporation, claiming these investments were safe when they were actually highly risky. The broker also "churned" customer accounts, needlessly trading the accounts so the firm could earn over $500,000 in commissions and fees. E1 marketed these investments as providing safety, security, and liquidity of investor principal, yet these investments were so highly speculative that they contained as much as 14 times as much risk as Vanguard's S&P 500 fund, according to investment expert Dr. Arthur Gooding of AEG Capital Management in Santa Monica.

RESPONDENT'S CONTENTIONS:
Respondent denied claimants' allegation and claimed that the risks were repeatedly told to claimants. Claimants included several successful Los Angeles businessmen, two of whom had master's degrees from prominent universities. Their accounts were non-discretionary trading accounts. The two companies identified by claimants, Nektar Therapeutics and LaserCard Corporation, are California-based entities, whose products and prospects were well-chronicled both in the investment press and in the local press. The risks inherent in both companies were repeatedly told to claimants. Nektar Therapeutics, a biotech firm, as well as several other securities at one point had generated substantial gains for the claimants (in excess of 100 percent in less than a year for the first claimants to open accounts). It was during this run up that the bulk of the commissions, far less than the reported amount of $500,000, were incurred. These profits dissipated as Nektar Therapeutics' price deteriorated. The losses, for the most part, resulted from market deterioration across the portfolio.

Result

The arbitrators found in favor of the claimants granting an award of $2.9 million. The award included an additional $1 million in punitive damages and $300,000 in market adjusted damages, the amount their accounts would have earned if they had been at a well-managed firm. While an appeal was being considered, the parties reached a confidential settlement of their dispute.

Other Information

According to claimant's counsel: The award was one of the largest that a FINRA arbitration panel decided nationwide in 2009. According to respondent's counsel: Earlier this year, FINRA amended its rules requiring arbitrators upon request, to provide a "reasoned rationale" behind their arbitration awards. Regrettably, this rule was not in effect at the time this arbitration was conducted. As a result, both parties lacked any objective basis to understand what was truly behind the award from this arbitration panel.