Customer Receives $12 Million in Arbitration Against Banking Unit

Castelein vs. Corporate Securities Group

CASTELEIN v. CORPORATE SECURITIES GROUP, INC., NASD ID #99-04213 (Charlotte, NC). Our copy of the Award does not reflect an issue date, but the decision, we understand, was rendered this month. The decision refers to the brokers criminal plea agreement in federal court, in assessing a compensatory award of $4,118,779, plus 8% interest, so the employing broker-dealer, CSG, nka as Wachovia Securities Financial Network, Inc., and the clearing broker-dealer, Bear Stearns, faced an uphill battle. In three months during 1997, according to an excellent “Case Summary” by the Arbitrators, a deposit of $12.5 million into a CSG account dwindled dramatically, as funds were transferred by wire from the account and losses occurred from heavy trading activity. Claimant charged that he was led to believe that Bear Stearns was his broker, not CSG, but the Panel clearly focuses on the broker and CSG. Among the remarks made by the Panel in the “Other Issues” section, with respect to a change of counsel, was this observation: “[i]t became apparent during the fifth day of the [nine days of] hearings that counsel for Respondent CSG had not been provided complete information by his client, resulting in such counsels making untrue statements both in Respondent CSG’s answer to the Statement of Claim and in Respondent CSG’s opening argument and eliciting false testimony from a witness. After six days of hearings counsel withdrew from the case, requiring the corporate Respondent Bear Stearns [there was joint representation at that point] and Respondent CSG to retain new [and separate] counsel for the balance of the hearings.” The “Panel’s Findings” on the merits of the claims run six pages and carefully dissect the allegations and the responsibilities of various individuals and the parties. Bear Stearns was relieved of the claims for punitive damages before the hearings closed. The Panel acknowledged that Bear, as the clearing agent, had no contact with Claimant, could not supervise the broker, “nor did it have any obligation to do so.” Still, it had a role in effectuating the wire transfers from the account and, there, the Panel finds fault. Inadequate controls “permitted Respondent Reid to disguise transfers from Claimant’s account to third parties by using Claimant’s name as both sender and receiver, but with an account number [that belonged to a third party].” It is fairly clear that this deficiency provides the limited basis for the $200,000 assessed against Bear Stearns as compensatory damages. CSG and Mr. Reid are held jointly liable for the $4.1 million and for a thrice-compensatory award of $12.3 million in punitive damages. $36,450 in forum fees are split between Bear and CSG. (ed: A quick scan of SAC’s Award Database reveals no prior punitive damages awards against a major broker-dealer above $5 million; of course, CSG was not viewed as a national house and was not part of First Union/Wachovia when these events occurred.) (SAC Ref. No. 03-04-01)

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Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.

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