Ahuja v. Fleming (In re Fleming), No. 19-51611 (JAM) (Bankr. D. Conn. Dec. 9, 2021)
A FINRA arbitration Award was not dischargeable in bankruptcy pursuant to the Bankruptcy Code.
A FINRA Panel issued an Award in Ahuja, finding the individual broker (but not the firm) liable to claimants for over $700,000 in compensatory damages. At issue was whether the debt represented by the Award was dischargeable in bankruptcy.
Nature of the Claim is Key
The Court observes that: “A debt is nondischargeable under [Bankruptcy Code] section 523(a)(19) if two conditions are met: first, the debt must be ‘for the violation of certain federal securities laws, state securities laws or regulations under the federal or state securities laws,’ or for ‘common law fraud, deceit, or manipulation in connection with the purchase or sale of any security.’ Second, the debt must result from a judgment, court or administrative order, consent order, decree, or any settlement agreement entered by the debtor” (footnote and citation omitted).
FINRA Award Meets the Standard
Having defined the standard, the Court applies it to the facts at hand. We will let the Opinion speak for itself: “The Court finds that the undisputed facts establish that the Plaintiffs are entitled to judgment as a matter of law on their section 523(a)(19) claim. First, the FINRA Award arose in connection with the Defendant’s violation of securities law or from common law fraud, deceit, or manipulation in connection with the purchase or sale of a security (emphasis added). Although the Defendant argues that the FINRA Award did not include a specific reference to a violation of a federal or state securities law, that argument does acknowledge that a section 523(a)(19)(A) claim can be established if the debt is for either a violation of securities laws or for common law fraud, deceit, or manipulation in connection with the purchase or sale of a security. The Statement of Claim alleges, among other things, that the Defendant misrepresented material information about the securities he purchased, failed to disclose material information regarding the riskiness of the securities he purchased, failed to disclose a conflict-of-interest with respect to a security he purchased, and breached the fiduciary duty he owed to the Plaintiffs. The FINRA Award, which was issued ‘in full and final resolution of the issues submitted for determination,’ and which was confirmed by the Connecticut Superior Court, established that, at the very least, the Defendant made material misrepresentations and omissions regarding the securities he purchased and that he breached his fiduciary duty to the Plaintiffs in connection with the securities he purchased. As such, the Defendant's actions rise to the level of common law fraud, deceit, or manipulation in connection with the purchase or sale of any security as set forth in section 523(a)(19)” (emphasis in original).
(ed: This is the first such case we’ve seen. **An Alert h/t to Editorial Advisory Board member David Robbins for alerting us to this decision. He was counsel for the Claimants in the arbitration.)
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