Finra arbitrators rarely reveal the reasoning behind their decisions. But this week, a panel went into unusual detail to explain to Latin American victims of a Ponzi scheme why they won’t be able to collect damages against a major brokerage.
More than 100 claimants, most of them from Ecuador, filed an arbitration claim in August 2018 against Raymond James Associates, Raymond James Financial Services and Insight Securities, a Chicago-based independent broker-dealer. They alleged they were ripped off in a financial fraud perpetrated by developers of real estate projects in Florida that sold shares in private placements sold by Biscayne Capital.
The investments took place from about 2013 until 2017. Raymond James was the clearing firm for Biscayne until it relinquished the account in 2016 after ending its Latin American operations in 2015. Insight Securities took over as the clearing firm. Insight restricted purchase of the private placements, and the $150 million Ponzi scheme collapsed in 2017, said Carlos Legaspy, owner of Insight Securities.
In their statement of claim, the investors alleged fraud, gross negligence, breach of fiduciary duty and failure to supervise, among other causes of action, according to the Nov. 1 award document. They sought nearly $30 million in damages.
After 304 hearing sessions involving 93 witnesses — many of whom testified through an interpreter and over Zoom — and reviewing approximately 10,000 exhibits over the course of 2½ years, a panel of three public arbitrators unanimously ruled that the investors failed to meet the burden of proof to show that Raymond James violated Florida laws or Securities and Exchange Commission or Financial Regulatory Authority Inc. rules.
The claimants did not produce evidence that Raymond James was aware that Biscayne Capital was a Ponzi scheme or that the firm was liable for their losses, according to the arbitrators. The hearings concluded in late August in Miami.
Not only did the investors not receive any damages, a group of 85 amended claimants must pay $355,725 of the $487,950 hearing costs.
“It’s a devastating award, or lack thereof, for the claimants and a massive victory for Raymond James,” said Andrew Stoltmann, a Chicago securities attorney who was not involved in the case.
Instead of Raymond James and Insight Securities being at fault, the arbitrators concluded the investors were duped by Edith Hinojosa, a representative of Biscayne Capital who was based in Quito, Ecuador. Hinojosa, who now lives in Florida, was referred to as “E.H.” in the arbitration award.
“The Panel has great empathy for the fact that many of the claimants lost significant portions, if not all, of their life savings because of their relationship with E.H. and her team at B.S. Corp., and their non-SEC and non-FINRA-registered, offshore broker-dealer Biscayne Capital BVI, Ltd., a British Virgin Islands entity, and later entities to which E.H. and her team would steer claimants' accounts,” the arbitrators wrote in the 33-page award. “Some of the original claimants were so distraught and devastated by their significant financial loses that they, unfortunately, did not survive through the final resolution of this matter, for which the Panel expresses its great sympathy.”
The award included a transcript of a video — translated from Spanish — in which Hinojosa responded to a lawyer who said it would be difficult to find a clearing broker liable for a Ponzi scheme. She appeared to be trying to put the blame on Raymond James and Insight Securities because they had deep enough pockets to extract damages.
“We need them to pay, that’s it, and if one cannot afford it, somebody else has to pay,” Hinojosa said in the translated video transcript. “What do we need to make the ones that can afford, like Raymond James, Insight, not recognize these numbers? As the lawyer said, there is not enough evidence.”
Legaspy was pleased with the outcome of the case.
“It was poetic justice,” Legaspy said. “It was such a corrupt endeavor these claimants were pursuing. They worked hand in hand with [Hinojosa] to pin the blame on innocent third parties, Raymond James and Insight.”
Before the hearings started in 2020, Insight was dismissed from the case after the firm sued the claimants’ counsels. Legaspy testified during the arbitration hearings.
The explanation of the ruling ran across 10 pages of the award — a virtual novella in a dispute resolution system where arbitrators rarely comment on their decisions. The arbitrators articulated their reasoning because both parties asked them to do so.
Legaspy felt vindicated by the detail.
“For me, it’s good,” he said. “These accusations did a lot of harm to my firm. We can finally just move on, put this painful story behind us.”
Neither Hinojosa nor the investors’ lawyers responded to requests for comment. Raymond James declined to comment.
Raymond James survived a legal challenge that was fraught with danger given that so many witnesses were called to testify, Stoltmann said.
“It’s a Houdini-like act because these group claims are pretty powerful,” he said. “It was a real legal liability Raymond James faced, and they were able to avoid it.”
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