Former clients of a failed RIA lost their bid to win $68 million from C.L. King & Associates, the adviser's one time clearing and custodial firm, an arbitration panel ruled.
After a lengthy arbitration process that lasted for 78 hearings, three arbitrators denied all of the client's claims earlier this month, according to a copy of the arbitration award.
"It's been the longest [arbitration] I've ever done," says Christopher Robertson, an attorney at Seyfarth Shaw who represented C.L. King.
Though the firm beat back these claims,
"This particular case involved one of the larger accounts," Robertson says of the sizable claimed damages.
In the latest case, five former clients alleged that C.L. King breached its duty as a custodian, had been negligent and breached its contracts.
The increasingly popular Section 351 process offers many low-basis investment portfolios an exit ramp — without incurring any capital gains.
Regulators discovered Julie Darrah had been siphoning millions from elderly clients after WEG bought her practice in 2021.
As a subscriber to Financial-Planning.com, you can earn up to 12 hours of CE credit from the CFP Board and the Investments & Wealth Institute.
They became clients of NSB Advisors in 2009. The Fishkill, New York-based firm, which was not named in this case, used C.L. King as its clearing and custodian until 2012. The RIA pursued an investment strategy that relied on margin calls and which ultimately failed.
Regulators have revealed what kind of issues advisors must address if faced with a review.
The five clients sought damages from C.L. King because the Albany, New York-based firm "departed in significant ways from the normal 'back office' relationship of a custodian and clearing broker to advised accounts in order to gain substantial compensation," according to arbitration documents.
They further claimed that C.L. King enabled NSB Advisors to "drastically" over leverage their accounts through "excessive margin lending and other wrongful practices."
C.L. King denied all the allegations, saying that the firm did not depart from its prescribed custodial and clearing roles.
"Our argument was that factually we did nothing wrong, that there was no violation of FINRA rules or anything like that," Robertson says.
Ross Intelisano, a New York-based attorney at Rich, Intelisano & Katz who represented the clients, declined to comment.
Most of the arbitration hearings for the case, first filed in September 2014, occurred during 2016 and early 2017. The arbitrators signed off on their decision May 5.
"I think it is a confirmation of the importance of understanding what the roles are between clearing/custodial firms and the RIA," Robertson says. "We need to be careful not to extend those responsibilities to a clearing firm that is providing more ministerial clearing functions unless there is evidence of fraud."
