Scottsdale stockbroker fights deluge of complaints

Customer complaints can be damaging to the career of a securities broker. Eddie Dulin knows that.

“If a broker has four, five or six complaints, he’s probably a bad guy,” said the Scottsdale resident. “You won’t find anyone with 39.”

Except for Dulin himself.

Investors routinely are cautioned to check the disciplinary record of investment advisers before doing business with them. Prospective clients are told to look especially closely for punitive measures taken by regulators against a broker or monetary awards or settlements lodged against them.

These reviews now can be done easier than ever through BrokerCheck, a free online-verification service available at finra.org, run by the Financial Industry Regulatory Authority. Dulin’s record is extraordinarily bad.

“I have the most complaints of anyone in the country,” he said.

His unusual story began in 2008, when Dulin and other brokers at UBS Financial Services recommended and sold investments known as principal-protection notes or, alternatively, as structured products. As economic storm clouds gathered and the stock market swooned, these investments were viewed as a haven.

They touted “100 percent principal protection” for investors willing to hold for varying periods, anywhere from 18 months to 15 years. The portfolios typically consisted of a mix of zero-coupon bonds and stock-market options. If stocks recovered, the options would soar in value, generating a profit. Otherwise, the zero-coupon bonds would mature at a predictable value, providing a floor below which prices of the notes couldn’t fall.

This type of packaging wasn’t especially unusual and might have worked out fine, except that the entity backing the notes was Lehman Brothers. It didn’t have investor dollars walled off in a separate account. Rather, when the investment bank imploded in September 2008, it took the structured notes with it.

“The brokers thought there were assets to return (investors’) principal after 18 months or whatever,” Dulin said. “But they weren’t backed by anything — it was a complete fabrication.”

Dulin said his clients ultimately got back 80 cents on the dollar on average from UBS and Lehman’s bankruptcy proceedings. But at the time, he said UBS instructed him and his colleagues to write off the debacle and tell clients it was tough luck that they got stuck with a loser.

“Hundreds of UBS brokers marketed these to thousands of clients across the country,” said Dulin, who worked for the company from 2000 to 2008. “I waited a bit for UBS to fix things and make investors whole. I soon realized they wouldn’t.”

What really irked Dulin was the lack of disclosure specifying that the notes were backed only by Lehman and the money wasn’t invested properly.

Investor complaints began to pour into FINRA, which eventually issued a general alert or warning about structured notes featuring a principal guarantee. In April 2011, the regulatory group also fined UBS $2.5 million and ordered $8.25 million in restitution to investors over sales of Lehman’s principal-protection notes. A FINRA spokesperson declined comment for this article.

Some of the complaints under Dulin’s name cited him as the culprit. Others blamed UBS, and still others were vague on culpability. At any rate, they all went on his permanent record. Although brokers are allowed to include comments and Dulin did in a few cases, UBS controlled how the reports were worded and which of his comments got in, he said.

“The firm has the discretion over the wording,” Dulin said of the process. “They let some of my comments go in, but only the ones they wanted to let in.”

Fighting back

Dulin sought damages against UBS and requested that all the complaints on his record be removed. UBS retaliated with a $3.9 million counterclaim against him, reflecting what the firm said it paid to his former customers.

His battle against UBS went to arbitration, which is the routine arena for broker/firm disputes. After a three-week hearing in Phoenix, a three-member panel last month ruled in his favor.

Arbitrators ordered UBS to pay $5.4 million to Dulin, including $1 million in punitive damages that reflected “injurious falsehoods and omissions,” the arbitrators wrote. “(UBS) deliberately prevented the distribution of material information about Lehman Brothers’ sinking financial condition and continued to recommend the sale of Lehman Brothers structured products despite clear evidence of the company’s rapid decline.”

One of the three arbitrators objected to punitive damages but concurred with the other findings.

The arbitrators also mandated an unusual $4 million payment to Dulin if the complaints aren’t expunged from his record — a move that could be blocked by FINRA or state securities regulators. That’s where the $4 million contingency payment comes in. It’s designed to offset permanent damage to Dulin’s name and career if his record isn’t cleared, along with a loss of income he already has sustained.

The complaints so far remain on his record, and the $5.4 million award hasn’t been paid, either, with UBS planning to contest it.

The company told The Republic that it’s disappointed with the panel’s decision and believes it to be legally and factually incorrect. “The award is inconsistent with standards of practice and industry rules and regulations,” UBS said in a statement. “On these bases and others, the firm has filed a petition to vacate the award.”

Damage lingers

Now employed at Merrill Lynch, also in Scottsdale, Dulin said his career has been harmed. While many of his former UBS clients followed him to Merrill Lynch, he said it’s harder than normal to attract new customers. He said one impediment is a FINRA requirement that companies mail a copy of the disciplinary records of fee-only brokers like him to new customers. For most brokers, that’s a few pages. In Dulin’s case, it’s more than 70.

Customer complaints against securities brokers are actually rare, with 2,334 lodged in 2013 — about one for every 270 brokers nationally. Last year’s total was less than half the 5,067 complaints submitted in 2009, underscoring how rising stock markets tend to clear up problems.

Dulin’s case provides some insight on how the process works, such as who controls the wording of complaints.

Despite his frustration, Dulin said he still considers it wise for investors to check up on the people they entrust with their money.

Scottsdale resident Susan Whitaker said she knew about Dulin’s disciplinary record but decided to hire him anyway as her adviser after he joined Merrill Lynch, starting first with a small investment amount and increasing it gradually. Whitaker said she read the complaints but believed Dulin’s story. She considers him to be hard-working and honest and was happy to learn about the panel’s decision.

Not all prospective clients will be so forgiving. Dulin said the reputational damage shows up in ways such as an inability to handle business from endowments or other institutional investors and his being ineligible to receive certain industry honors.

“I’d rather have the expungement and pass on the $4 million,” he said. “I’m 43 and probably will be in this line of work for another 20 years. I don’t want this following me around forever.”

FINRA’s BrokerCheck

The Financial Industry Regulatory Authority allows investors and prospective customers to check a broker’s disciplinary record. The service:

• Covers current and recently registered investment brokers and firms.

• Includes broker credentials such as licenses and exams passed, plus employment history.

• Discloses customer complaints, settlements, disciplinary events and some personal financial issues.

• Allows for free and confidential checks by people who call 800-289-9999 or visit finra.org/brokercheck.

Reach Wiles at russ.wiles@arizonarepublic.com or 602-444-8616.

Article source: http://www.azcentral.com/story/money/2014/05/10/scottsdale-stockbroker-fights-complaints/8955731/