Promissory Note Award Hits Broker-Dealer Hard


A Financial Industry Regulatory Authority (FINRA) Arbitration Panel has ordered MML Investors Services LLC to pay $1,137,923 to a California investor in connection with the sale of an unregistered security (a promissory note) issued by Diversity Lending Group, Inc. (“DLG”).  The award includes compensatory damages plus reimbursement for expert witness fees, deposition costs, and the filing fee. It represents approximately 90% of the requested compensatory damages. MML Investors Services LLC (“MML”) is a brokerage firm and FINRA member affiliated with Mass Mutual.

DLG was a fraudulent ponzi scheme and its notes were not an “approved product” sold by MML.  The MML broker, Steven Corzan, sold them to the claimant in a private transaction, presumably with apparent authority, but not actual authority, from MML (“MML Investors Services Ordered to Pay Investor $1.1 Million,” by Caitlin Nish, Wall Street Journal).

Apparent authority essentially means that the circumstances surrounding the sale were such that the customer claimant reasonably believed that MML knew about and approved the sale of the security, even though it actually did not.  One way that could come about would be if Corzan’s dealings with the claimant took place in his MML office.  FINRA barred Corzan from the industry for engaging in this prohibited practice known as “selling away” (i.e., away from the firm and its oversight).

Broker-dealer firms are required by law and FINRA rules to have a system of supervision that is reasonably designed to assure compliance with the securities laws and FINRA rules, and to implement that system appropriately.  Broker dealer firms are also vicariously liable for the acts and omissions of their agents (brokers) committed in connection with their employment with the firm under common agency law.

Brokers are required by FINRA rules to disclose to the firm any outside business activities in which they are involved.  Selling private securities away from the firm is an outside business activity.  It is not clear from the article whether Corzan disclosed his outside business activity to MML.

MML reportedly said it would file a motion to vacate (“throw out”) the award.  Motions to vacate are filed in court and are rarely granted (only in very limited circumstances that basically rise to the level of a fraud in the process of the arbitration).  Groundless motions to vacate can be punished by the assessment of a monetary penalty against the movant.

Although the article did not say so, MML may be taking the position that Corzan’s sale of the DLG notes was done without the actual knowledge and authority of MML, that he was off on a personal mission that was not in connection with his employment, that he concealed the private sales of DLG notes from MML, and, therefore, MML should not be held responsible for his actions.

However, although the FINRA arbitration panel did not give its reasons, one may assume that it found sufficient evidence that MML should have known what Corzan was up to, and should, therefore, have taken steps to prevent the damage that occurred.  It will be interesting to see how the court handles the motion to vacate, if one is actually filed.

Page Perry is an Atlanta-based law firm with over 150 years of collective experience maintaining integrity in the investment markets and protecting investor rights.