Capital Financial Services Inc., a small broker-dealer with a history of selling high-risk alternative investments, is in the process of shutting down, which leaves close to a dozen clients with lawsuits against the firm almost zero chance of getting money back from failed or unsuitable investments.
Arbitration awards, meaning investor lawsuits under the Financial Industry Regulatory Authority Inc. process, go unpaid when investors win lawsuits against broker-dealers that sold them unsuitable, faulty or troubled products only to see the B-Ds go belly up and run out of money before they can pay investor damages.
Unpaid arbitration awards like those on the horizon for Capital Financial Services clients are a stain on the securities industry and Finra, the industry’s primary regulator, one attorney noted.
“Those investors who have pending arbitration claims are dead on arrival,” said Andrew Stoltmann, a plaintiff’s attorney at an eponymous Chicago firm. “The clients are not going to get paid, and Finra knows about it. Finra continues to try to put a Band-Aid over this problem that is clearly a bullet wound.”
Unpaid investor arbitration awards usually involve small broker-dealers like Minot, North Dakota-based Capital Financial Services.
From 2012 to 2016, brokers and firms failed to pay $199 million in arbitration awards to customers that Finra hearing panels had approved, according to Finra.
“Finra has taken many steps — including the [Member Application Process] proposal and Inactive Broker proposal — to use the tools within our power to help customers recover the awards they are owed,” Finra spokeswoman Michelle Ong wrote in an email.
Capital Financial Services is in the process of shutting down, according to its BrokerCheck report. A call to its offices on Friday could not be completed.
The firm is facing 11 Finra arbitration complaints with just $64,000 set aside for liabilities, according to a recent filing with the Securities and Exchange Commission.
“Issuers of certain alternative products sold by the company are in bankruptcy or may have other financial difficulties,” the broker-dealer said in the filing. “As a result of such alleged failings of alternative products and the uncertainty of client recovery from the various product issuers, the company is subject to multiple Finra arbitration proceedings by customers.”
Calton & Associates last year said it was buying the assets of Capital Financial Services, according to a report on WealthManagement.com, an industry news website. Capital Financial Services, which had a history or problems with regulators over product sales, had about 100 advisers, according to that report.
Finra has come under pressure from Congress and investor advocates to help harmed investors collect after they win arbitration cases. The industry’s self-regulatory organization has recently issued a rule proposal that would restrict registered representatives from moving to a new firm and keep brokerages from transferring assets to avoid paying arbitration awards.
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