FOR IMMEDIATE RELEASE

“IT’S A BROKEN SYSTEM”: INVESTMENT FRAUD VICTIMS SPEAK OUT ABOUT INDUSTRY-FAVORED SYSTEM OF RIA-FORCED ARBITRATION

Wronged Investors Sound Alarm on RIA Forced Arbitration System, Demand Changes After June SEC Report Further Confirms Systemic Favoritism Towards RIAs

WASHINGTON, D.C. – JULY 25, 2023 – Victims of investment misconduct perpetrated by their registered investment advisers (RIAs) shared their stories of systemic injustice enabled by the common practice of unregulated forced arbitration, which was confirmed in a SEC report commissioned by Congress back in June, during a press conference held earlier today. The two victims of RIA misconduct, one a disabled elderly former-nurse in California and another a benefactor for a children’s school in Guam, described their experience with the forced arbitration process, which reflects the systemic injustice found in the SEC report and strongly echoes the concerns PIABA members have addressed in recent years.

During the news conference, the investment fraud victims described two primary issues that were confirmed in the June SEC report: fiduciary RIAs using arbitration provisions as a shield against liability; and RIAs failing to pay the awards issued against them.

Marykay Dragovich, the conservator for her cousin Rita Berardelli, described the process of forced arbitration after their trusted RIA lost over $228,000 in principal investments, money that Berardelli had saved as a registered nurse before suffering two life-altering brain aneurisms that left her incapacitated. When Dragovich investigated recovering the losses for her cousin, she learned it would cost up to $202,000 to pay the upfront costs of an arbitration hearing. So even if Berardelli got all her money back, she would have to pay as much as 90% of it to the arbitrators as prescribed by the overlooked forced arbitration clause in the agreement with her RIA.

Dragovich said: “It’s obvious that the RIA and advisor were counting on Rita not having enough money to file a claim in the first place. Rita truly never deserved this.” She added: “We were shocked and completely dumbfounded that this is how the system actually works. It really makes you wonder how many investors can afford to pay thousands of dollars out of pocket, right after getting hit with huge lifechanging losses. Where is the justice?”

The second investment fraud victim, Michael Phillips of Guam (a U.S. territory), recounted what he described as a “cruel lesson” after he was awarded over $4 million in a FINRA arbitration dispute against an investment management firm but has yet to receive the funds. The investment management firm, Asia Pacific, instead of paying their owed restitution to Mr. Phillips, filed bankruptcy in bad faith to escape the financial responsibility of paying the award – a surprisingly legal evasion tactic that was also spelled out as one of the primary issues identified in the June SEC report.

Phillips, stated: “While acting as my fiduciary, Asia Pacific’s advisor exercised unauthorized control over my accounts and engaged in a pattern and practice of trading that I did not approve and was not suitable for me, including wildly speculative bets and risky margin trading.” He continued: “Asia Pacific had no intention to abide by, or even litigate, the arbitration award in Guam superior court. 10 days before filing their motion to vacate the award, Asia Pacific had already begun preparing to file for bankruptcy. The purpose of this bad-faith bankruptcy filing is obvious: to avoid paying the FINRA award.”

Both Phillips and Berardelli have yet to receive restitution for the investment fraud and misconduct perpetrated by their RIAs.

Commissioned by Congress in 2022, the June SEC report echoed what PIABA describes as an “untenable” system for aggrieved investors who seek restitution for improper investment practices by their RIA, which can often dissuade wronged investors, like Berardelli, from seeking compensatory damages for the breach of fiduciary duty.

Hugh Berkson, president, PIABA, said: “For years, PIABA has been sounding the alarm on the unfair and outdated laws surrounding registered investment advisors that both dissuade and prevent wronged investors from seeking restitution against their RIA’s for fraudulent or inappropriate management of funds. For many wronged investors like Ms. Berardelli, this is their life savings and retirement nest egg.”

Joseph Peiffer, incoming president, PIABA, said: “We won’t stop until we achieve some sort of fair process for wronged investors, like Mr. Phillips and Ms. Berardelli, who fall victim to RIA misconduct. If the SEC won’t act, then we’ll turn to Congress. It’s a broken system – let’s fix it.”

Unlike brokerage firms, which must designate FINRA as the arbitration forum, RIAs most commonly require clients to file arbitration claims with privately run dispute resolution forums such as the American Arbitration Association or JAMS, where arbitrators set their own fees – unlike the FINRA forum, where FINRA sets the arbitrators’ rates. According to arbitration attorneys, it is not uncommon for an AAA or JAMS arbitrator to charge $8,000 or more for a day’s work. Arbitration costs can easily exceed $64,000 for five days of hearings and three days of pre-hearing and post-hearing work. The costs can triple if there are three arbitrators hearing the dispute.

Under many RIA-investor agreements, the privately run forums require the expected fees to be deposited prior to the case proceeding. This means that an investor may have to deposit tens of thousands of dollars just to have their claim move forward. RIAs, knowing the forum fees are cost-prohibitive for most clients, use these types of arbitration clauses to shield themselves from liability for their misconduct.

ABOUT PIABA

Public Investors Advocate Bar Association is an international, not-for-profit, voluntary bar association of lawyers who represent claimants in securities and commodities arbitration proceedings and securities litigation. The mission of PIABA is to promote the interests of the public investor in securities and commodities arbitration, by seeking to protect such investors from abuses in the arbitration process, by seeking to make securities arbitration as just and fair as systemically possible, and by educating investors concerning their rights. For more information, go to www.piaba.org.

MEDIA CONTACT: Alex Frank at (703) 276-3264, afrank@hastingsgroupmedia.com.

EDITOR’S NOTE: Streaming video of the PIABA forced arbitration news event can be found here.