Did Schwab serve 2 masters? Firm must pay $347K for alleged disloyalty
Where did Charles Schwab’s loyalties lie?
Not where they should have, according to a Los Angeles-based FINRA arbitration panel.
The three-member panel ruled in favor of an RIA owner who accused Schwab, his former custodian, of secretly helping his chief compliance officer siphon off clients for a competitor. The panel ordered Schwab to pay $347,000 in damages and legal fees to Joseph Ziomek, who accused the firm and Purshe Kaplan Sterling Investments of breach of contract; aiding and abetting breach of fiduciary duty; and intentional infliction of emotional distress among other misconduct.
“We think the message should reverberate around FINRA member firms that there are conflicts in the custodial space, that you can’t just claim to be Switzerland, and that conflicts of interest will not be tolerated — especially if you favor one client over another,” says Omar Bengali, an attorney representing Ziomek at Los Angeles-based law firm Girard Bengali.
The arbitration panel — which at one point had to replace an arbitrator who died — also ordered Schwab to pay $27,000 of the $36,000 hearing session fees.
“While we disagree with the outcome of this case, we are pleased to have this matter behind us,” a company spokesman said in a statement.
Ziomek reached a separate settlement with Purshe Kaplan Sterling Investments, according to a copy of the arbitration award.
The ruling caps off a long-running saga for Ziomek, owner of Laguna Financial Group, an independent firm based in Laguna Beach, California. Ziomek started using Schwab as a custodian in 2010 when he left LPL Financial. In 2013, his chief compliance officer, Katie Hewell, quit to open her own firm. At the time, Laguna had approximately $75 million in client assets.
Hewell allegedly had assistance in setting up her competing RIA from Schwab, according to Ziomek’s suit. The firm’s agents “were more than passive witnesses to the scheme, as they actively supported, aided and abetted Hewell in her efforts to betray claimants and launch her own RIA firm,” his arbitration claim states.
Ziomek “was kept in the dark and a former employee of his was at an advantage,” his attorney says.
Ziomek only learned of Schwab’s role in Hewell’s departure during the ensuing litigation between the two former colleagues, his attorneys say. Ziomek allegedly discovered emails showing Hewell had been in contact with Schwab regarding her departure and setting up a competitor RIA — all while she was serving as Ziomek’s chief compliance officer.
“The evidence established that Schwab knew that this new RIA firm would be competing with Laguna for which Schwab was already serving as a custodian,” Robert Girard, another attorney representing Ziomek, says.
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Schwab never disclosed to Ziomek that Laguna Financial’s chief compliance officer had been in contact with its employees about setting up her own RIA, thus concealing essential information from Ziomek, Girard says. This represented an ethical violation.
“With the arbitration panel we looked really closely at the compliance manuals … and I believe that those conflicts of interest were not disclosed, nor inventoried nor mitigated,” Girard says.
Schwab ended its relationship with Ziomek in 2016 for unspecified reasons, according to his attorneys. He filed his arbitration claim later that same year.
“It appeared that Schwab took the position that the contract allows us to terminate it and we don’t need to give you an explanation so we’re not,” Bengali says.
A company spokesman declined to go into detail about the matter. “Schwab made a business decision to terminate its relationship with this firm under the terms of our contractual agreement. We do not publicly discuss the details of our business reviews.”
Today, Ziomek uses TradePMR for brokerage and trade execution services and participates in the TD Ameritrade Institutional program, according to regulatory filings.
Ziomek and Hewell reached a settlement in their case, according to his attorneys.
Ziomek’s practice specializes in comprehensive asset management and financial planning. His AUM was listed at $32 million as of Dec. 31, 2018, according to regulatory filings. He now serves as chief compliance officer as well as chief executive officer.
Hewell’s independent firm, Hewell Financial Group, had approximately $33 million in client assets as of 2016, according to regulatory filings. She ended the firm’s registration in 2016, SEC records show, and she is now an advisor at Focus Financial, an independent practice affiliated with Securities America. She could not be reached for comment.