"This case is an example of a brokerage firm using the courts to harass and intimidate customers because the firm did not like an arbitration award," said Mary L. Schapiro, NASD Vice Chairman and President of Regulatory Policy and Oversight. "The firm's frivolous claims have caused these customers to incur significant legal fees and court costs over the three years that they have been forced to protect their rights in state court.
"This kind of behavior is in clear violation of NASD Rules and the firm's own agreement with its customers, and it will not be tolerated," Schapiro said. "Any firm found abusing the arbitration process, including misusing lawsuits in the civil courts, will face disciplinary action."
According to NASD's complaint, Sigma Financial and its president, Jerome S. Rydell, were the subjects of an arbitration claim filed on July 21, 1999 by a couple who had lost money in investments they had made through the firm. Following seven days of hearings, on April 3, 2001, an NASD arbitration panel entered an award in the customers' favor in the amount of $318,096, which included attorneys' fees and costs. Shortly after the award was rendered, however, on April 23, 2001, Sigma filed two lawsuits in Michigan Circuit Court against the customers.
The first lawsuit was an attempt to vacate the arbitration award. In the second lawsuit, Sigma claimed, for the first time, that it was entitled to damages as a third-party beneficiary to agreements the customers signed with the issuer of the investments, which they purchased through the firm. Sigma did not seek to arbitrate this claim despite its agreement to arbitrate any controversy and waive its right to seek remedies in court.
On September 26, 2001, the Michigan Circuit Court confirmed the NASD arbitration award in favor of the customers, dismissed the second lawsuit and sanctioned the firm $500 for filing a frivolous claim. Despite these rulings, Sigma continued to litigate against the customers in state court, filing numerous motions and pleadings from November 2001 through April 2002. In May 2002, after finding Sigma's latest series of motions to be in bad faith, the Michigan Circuit Court again sanctioned Sigma. This time, the court ordered the firm and its counsel to pay the customers $1,000 and took the unusual step of requiring Sigma to obtain the Circuit Court's permission prior to filing any other motions.
Sigma appealed the Michigan Circuit Court's rulings to the Michigan Court of Appeals, in filings made on January 22, 2002 and February 19, 2002. On February 19, 2004, the Michigan Court of Appeals upheld the Circuit Court's confirmation of the NASD arbitration award, dismissal of the second lawsuit and imposition of sanctions. Three years after the NASD Arbitration award was issued, Sigma continues to pursue its claims against its former customers in Michigan courts: on April 1, 2004, Sigma filed an appeal with the Michigan Supreme Court.
Under NASD rules, the individuals and the firms named in the complaint can file a response and request a hearing before an NASD disciplinary panel. Possible sanctions include a fine, suspension, bar, or expulsion from the NASD.
Investors can obtain more information about, and the disciplinary record of, any NASD-registered broker or brokerage firm by calling NASD's BrokerCheck. NASD makes available BrokerCheck at no charge to the public. In 2002, members of the public used this service to conduct more than 2.5 million searches for existing brokers or firms and requested almost 200,000 reports in cases where disclosable information existed on a broker or firm. Investors can link directly to the program by going online to www.nasdbrokercheck.com. Investors can also access this service by calling 1-800-289-9999.
NASD is the leading private-sector provider of financial regulatory services, dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. NASD touches virtually every aspect of the securities business—from registering and educating all industry participants, to examining securities firms, enforcing both NASD rules and the federal securities laws, and administering the largest dispute resolution forum for investors and registered firms. For more information, please visit our Web Site at www.nasd.com.
