When At Fault... Countersue!

Schoolyard bullies can often get their way simply with the threat of violence. If you've been punched once, you may just surrender your lunch money the second time without fist ever having to connect with nose.

Apparently, this lesson has been learned in the corporate boardroom as well.

Susan Antilla, in a DealBook article in today's New York Times, reports the case of an unhappy investor who is being countersued by the brokers whom he is suing.

The investing group had sent Reef Securities of Richardson, TX, a total of $90,000 to be placed in the energy industry. An initial payment was received, and then distributions slowly dropped to nothing. The investors sued. And then Reef countersued.

"They said we’d be liable for their legal expenses," which could have been $400,000 or more, Mr. Vaerewyck [one of the investors] said. "That’s a pretty significant piece of change for a group of retired individuals."

This is apparently the new way to deal with an unhappy customer.

Like Mr. Vaerewyck and the other Reef customers, investors who lose money in private placements face a new obstacle when they take their cases to arbitration before the Financial Industry Regulatory Authority, or Finra, as they are required to do in any dispute. The brokers they have sued are suing them back, accusing them of reneging on indemnification agreements.

Thankfully, this response is "not widespread". But the most depressing quote in Ms. Antilla's article came from a lawyer representing the unhappy Reef investors: "Every brokerage firm out there would do it if they thought they could get away with it."

Really? Sigh. 

In private placements, "investors must sign documents that say they indemnify the issuer and its agents for any losses, lawyer fees and case costs in the event the investor makes a misrepresentation. Investors also agree in writing that they are sophisticated and understand the risks of the investment." Which is why they make such appealing targets for countersuits. But isn't the indemnification for the issuer, not the broker? Don't you, as an investor, rely on the broker to steer you towards a good deal?

Finra, of course, insists that intimidating unhappy customers "would violate Finra conduct rules". Ya think? The Finra representative goes on to say that in such circumstances they would certainly "investigate". I feel much better now, don't you?