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Investors With “Blown-Out” Securities-Backed Credit Line and Margin Accounts: How do You Recover Your Investment Losses?

If you are reading this article, we are guessing you had a bad experience recently in either a securities-backed line of credit (“SBL”) or margin account that suffered margin calls and was liquidated without notice, causing you to realize losses. Ordinarily, investors with margin calls receive 3 to 5 days to meet them; and if that happened, the value of the securities in your account might have increased within that period and the firm might have erased the margin call and might not have liquidated your account. If you are an investor who has experienced margin calls in the past, and that is your only complaint then, read no further because when you signed the account agreement with the brokerage firm you chose to do business with, you probably gave it the right to liquidate all of the securities in your account at any time without notice. On the other hand, if you are an investor with little experience or one with a modest financial condition who was talked into opening a securities-backed line of credit account without being advised of the true nature, mechanics, and/or risks of opening such an account, then you should call us now! Alternatively, if you are an investor who needed to withdraw money for a house or to pay for your taxes or child’s education but was talked into holding a risky or concentrated portfolio of stocks and/or junk bonds in a pledged collateral account for a credit-line or a margin account, then we can probably help you recover your investment losses as well. The key to a successful recovery of your investment loss is not to focus on the brokerage firm’s liquidation of the securities in your account without notice. Instead, the focus on your case should be on what you were told and whether the recommendation was suitable for you before you opened the account and suffered the liquidation. Should either one of those leveraged accounts have been recommended at all by a financial advisor in the first place? Should the broker-dealer have even allowed you to open one of those type of accounts based upon your investment profile and financial condition? Did the financial advisor misrepresent the nature, mechanics, and/or risks of the securities backed line of credit and/or margin account? Once the accounts were opened, did the financial advisor make unsuitable securities recommendations to purchase especially volatile securities in that account? Did the financial advisor recommend that you over-concentrate your investment portfolio in stocks in any particular sector (such as the oil and gas, hospitality, gaming, air travel, and/or cruise industry) in the leveraged account? Those are the facts and circumstances that probably caused losses but may give you an opportunity to recover all or some of your losses from your stockbrokerage firm. The leverage and liquidation to meet margin calls with or without notice probably only magnified and accelerated the inevitable losses. Your stockbroker had a duty to not only understand but explain the nature, mechanics and all of the risks associated with those investments before he/she sold them to you! Your stockbroker also had a duty to make sure they were suitable investments before they were recommended in light of your risk tolerance and financial condition and not over-concentrate investments in volatile emerging market stocks or any industry in your portfolio. Leveraged investments are not suitable for clients with conservative and moderate risk tolerance. All securities-backed lines of credit and margin accounts employ leverage, and leverage is a “speculative” investment strategy. Individuals close to retirement who are depending upon income from their investment portfolio cannot afford to speculate in leveraged accounts. If your financial advisor misrepresented the nature, mechanics, and/or risks of those accounts; or the investments or the risks were not fully explained; or you were over-concentrated (more than 10%) in any investment sector; or if it was not in your best interest (or unsuitable); and your investments were liquidated with or without notice due to margin calls, you may have the right to bring an arbitration claim against your financial advisor and/or the brokerage firm who employed him. One thing is certain, there is no way you will recover your losses in any SBL or margin account case without some legal action. At The Law Offices of Robert Wayne Pearce, P.A., we represent investors in investment disputes for misrepresented and unsuitable investments in FINRA arbitration and mediation proceedings. The claims we file are for fraud and misrepresentation, breach of fiduciary duty, failure to supervise, and unsuitable recommendations in violation of SEC and FINRA rules and industry standards. Attorney Pearce and his staff represent investors across the United States on a CONTINGENCY FEE basis which means you pay nothing – NO FEES-NO COSTS – unless we put money in your pocket after receiving a settlement or FINRA arbitration award. Se habla españolCONTACT US FOR A FREE INITIAL CONSULTATION WITH EXPERIENCED SBL AND MARGIN ACCOUNT INVESTMENT FINRA ARBITRATIONS ATTORNEYS The Law Offices of Robert Wayne Pearce, P.A. have highly experienced lawyers who have successfully handled many SBL and margin account “blow-out” cases and other securities law matters and investment disputes in FINRA arbitration proceedings, and who work tirelessly to secure the best possible result for you and your case. For dedicated representation by an attorney with over 40 years of experience and success in SBL and margin investment cases and all kinds of securities law and investment disputes, contact the firm by phone at 561-338-0037, toll free at 800-732-2889, or via e-mail.

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Regulation Best Interest (Reg. BI): Better But Not the Best!

Finally, ten years after the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) was enacted to bring about sweeping changes to the securities industry, the best regulation the U.S. Securities & Exchange Commission (“SEC”) could pass, SEC Regulation Best Interest, is now the law governing broker-dealers giving investment advice to retail customers. Although the SEC had the authority to impose a uniform and expansive “Fiduciary Duty” standard throughout the country upon broker-dealers and investment advisors, it yielded to the stock brokerage industry demands and enacted Regulation Best Interest (“Reg. BI”), which is better than the Financial Industry Regulatory Authority (“FINRA”) “Suitability Rule,” but not the best that it could have been done to protect investors. Last month FINRA amended its Suitability Rule to conform with SEC Reg. BI and made it clear that stockbrokers now uniformly have duties related to disclosure, care, conflicts and compliance, which are equivalent to the common law “fiduciary duty” standard when making recommendations to retail customers. See, FINRA Regulatory Notice 20-18. 1 The controversy of the standard of care applicable to stockbrokers in a non-discretionary account relationship with their customers has been ongoing for decades. Broker-dealers have long advocated for two standards: one standard being a non-fiduciary standard governing the non-discretionary account relationship and a fiduciary standard only governing the stockbroker with a discretionary account relationship. On the other hand, the investment advisory firms have been crying foul for years and advocating for a level playing field where stockbrokers and investment advisers alike are both held to the same “fiduciary” standard in their entire relationship with customers. The investment advisory industry recognized the importance of working in the “best interest” of their clients all of the time and the damage that stockbrokers (who are held to a lower standard) do to the reputation of “investment advisers,” especially those stockbrokers palming off the name “advisers” when doing business with the public. Stockbrokers were able to take advantage of the goodwill and trust associated with “investment advisers” but not accountable to their clients as “fiduciaries.” At the very least, the public was confused about the kind of “adviser” they were dealing with and the degree of investment professional duties the “adviser” owed to them. The SEC recognized that although Congress, in enacting Dodd-Frank authorized it to impose a uniform “fiduciary” standard on stockbrokers, it was not going to do so. It made that decision after the Trump administration took control. Are you surprised? The SEC’s public rationale was a bogus cost factor consideration; it reasoned if the standard was elevated broker-dealers would have to increase the transaction costs to investors with non-discretionary accounts to offset the increased compliance costs. The SEC supposedly wanted to avoid destroying the commission-based broker-dealer business model but expand broker-dealer and stockbroker obligations when they give advice to retail investors. The compromise was Reg. BI which I will attempt to summarize below. First, it is important to point out the new regulation only imposes new obligations upon broker-dealers and their associated persons when making recommendations to natural persons or their personal representative, such as trustees, executors, etc., who are retail customers (not institutions). It’s unclear whether an individual’s wholly owned corporation or family limited partnership would reap any benefit from the new “best interest” rule even though those entities would probably be relying on recommendations for “personal, family or household purposes.” Second, Reg. BI only applies to broker-dealers and their stockbrokers when they make recommendations of any securities transaction or investment strategy involving securities (including securities account type recommendations) to a retail customer. Next, in general terms, the “Best Interest” rule imposes four obligations upon broker-dealers and their associated persons: Disclosure: to provide disclosures about the type of relationships they will have with their customer before or at the time of any recommendations (which will probably be buried somewhere in their website or the fine print of the 80-100 page customer agreement and disclosure booklets only made available via the internet when the account is opened). Due Care: to exercise reasonable diligence, care and skill in making the recommendation. Conflicts: to establish, maintain, and enforce written policies and procedures reasonably designed to address conflicts of interest, preferably to avoid or mitigate them and if they cannot be avoided to make sure they are disclosed to the retail customer in a way the customer will understand the conflict and appreciate its impact on the recommendation. Compliance: to establish, maintain, and enforce written policies and procedures reasonably designed to achieve compliance with Reg. BI. It goes without saying that the new SEC rule also requires broker-dealers to comply with new recordkeeping requirements to be sure Reg. BI is being implemented and enforced. To retail investors, the “Due Care” and “Conflict” obligations will hopefully have the greatest impact. This is because up until this point in time, broker-dealers and their stockbrokers would say, if we can match an investment recommendation to a customer’s profile, we have done our job and complied with FINRA Rule 2111 (formerly NASD Rule 2310), end of story. For example, in the past, the recommendation of high fee proprietary structured products might fit the customer’s profile and be a suitable recommendation. However, now that type of investment might not be in the “best interest” of the retail customer, particularly if the risk-reward analysis of another non-proprietary, plain vanilla, and less expensive security is the same. To make it clear that Rule 2111 was no longer the rule when it came to future recommendations to retail customers, FINRA amended its rule (effective June 30, 2020) to state that Rule 2111 no longer applies to recommendations governed by Reg. BI because Reg. BI incorporates and enhances the principles found in Rule 2111. Some writers of blogs for the defense bar have focused only on the Due Care obligation and said nothing has changed from the old suitability rule. If that were true, the SEC and FINRA would have said so and the new rule would be meaningless! Instead FINRA said it “incorporates and enhances the...

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FINRA Arbitration: What To Expect And Why You Should Choose Our Law Firm

If you are reading this article, you are probably an investor who has lost a substantial amount of money, Googled “Securities Arbitration Attorney,” clicked on a number of attorney websites, and maybe even spoken with a so-called “Securities Arbitration Lawyer” who told you after a five minute telephone call that “you have a great case;” “you need to sign a retainer agreement on a ‘contingency fee’ basis;” and “you need to act now because the statute of limitations is going to run.” You may want to ask yourself whether that attorney is as bad as the stockbrokers you were concerned about in the first place. Some attorneys will rush you to hire them before you speak to anyone else and not tell you about the clause in their contract that allows them to drop you as a client later on if they cannot get a quick settlement. They will solicit you without a real case evaluation and/or without any explanation of Financial Industry Regulatory Authority (“FINRA”) proceedings. The scenario above is not the way for attorneys to properly serve clients, and it is not the way we do business at The Law Offices of Robert Wayne Pearce, P.A. If you are planning on speaking or meeting with us or any other attorney, let us introduce you to the FINRA arbitration proceeding by giving you some information in advance to help you understand the different stages of FINRA arbitration, what you should expect from skilled and experienced FINRA securities arbitration lawyers, and what you should expect to personally do in order to have the best outcome: 1. CASE REVIEW Before we accept any case, our attorneys conduct a thorough interview of you to understand: the nature of your relationship with your broker; the level of your financial sophistication; the representations or promises made to you in connection with any investment recommendation; and your personal investment experience, investment objectives, and financial condition at the time of any recommendation or relevant time period. We will review your account records, including, but not limited to: account statements; confirmations; new account opening documents; contracts; correspondence; emails; presentations; and marketing materials that you may have received in connection with your accounts and the investments made therein, etc. Investors rarely contact our office without knowing whether they have suffered investment losses, but sometimes that occurs because the particular investor does not have all their records and/or is unsophisticated, inexperienced, and unable to decipher the account records they retained. If you retained your account statements and provide them, we should be able to at least estimate (under the different measures of damages) the amount you may be able to recover if you win your arbitration proceeding. If you do not have those records, we will help you retrieve them without any obligation so that all of us are fully aware of the amount we may possibly recover for you if we are successful in arbitration. In addition, we will spend the time necessary to get to know you and the facts of your dispute to have a good chance of success in proving your case. After all, it does not benefit either you or our law firm to file an arbitration claim that, months or years later, we discover has little chance of success. Ultimately, we want to know, and so should you, whether or not you have a claim with merit and are likely to recover damages if we go through a full arbitration proceeding. The fact is Attorney Pearce does not take cases unless he and his team believe you suffered an injustice and are likely to succeed at the final arbitration hearing. 2. THE STATEMENT OF CLAIM Many of these young and/or inexperienced attorneys with flashy websites and Google Ad Word advertisements (to get them to the top of the page) are more interested in marketing and signing up cases to settle early than they are in going all the way and winning your case at a final arbitration hearing for a just result. Oftentimes, they will insert your name in a form pleading, one that they use in every case, which states little more than if you (the “Claimant”) were an investor with brokerage firm ABC and stockbroker XYZ (the “Respondent(s)”) made misrepresentations, failed to disclose facts, made unsuitable recommendations, and violated laws 123, you are entitled to damages. They are unwilling and/or fail to take the time necessary to study the strengths and weaknesses of your case and write a detailed Statement of Claim (also referred to as the “Complaint”) with all of the relevant facts necessary to inform the arbitrators what happened and why you are entitled to recover your damages. That is not the way Attorney Pearce, with over 40 years of experience with investment disputes, files a Statement of Claim, the first and sometimes the only document that the arbitrators will read before the final arbitration hearing. 3. THE ANSWER After we file the Statement of Claim and it is served, the brokerage firm and/or stockbroker will have forty-five (45) days to file the Answer to your allegations. Oftentimes, the Respondent(s) will ask for an extension of time to file the Answer and we will give it to them provided no other deadline is extended, particularly the deadlines associated with the selection of arbitrators and scheduling of the initial pre-hearing conference, where all of the other important deadlines and dates of the final arbitration hearing are scheduled. Some clients have asked why would you give them extra time to file their best Answer? Well, we believe after 40 years of doing these FINRA arbitrations, that it is better to know the story they intend to tell the arbitrators early on and lock them in so we can come up with the best strategy and all the case law necessary to overcome their best defenses and win your arbitration. In other words, we would rather know about the defense early on than be surprised at the final hearing. Besides, Respondent(s) can always try to file...

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A Stockbroker’s Introduction to FINRA Examinations and Investigations

Brokers and financial advisors oftentimes do not understand what their responsibilities and obligations are and what may result from a Financial Industry Regulatory Authority (FINRA) examination or investigation. Many brokers do not even know the role that FINRA plays within the industry. This may be due to the fact that FINRA, a self-regulatory organization, is not a government entity and cannot sentence financial professionals to jail time for violation of industry rules and regulations. Nevertheless, all broker-dealers doing business with members of the public must register with FINRA. As registered members, broker-dealers, and the brokers working for them, have agreed to abide by industry rules and regulations, which include FINRA rules. In order to check for compliance with industry rules and regulations, FINRA conducts routine examinations or investigations of broker-dealers, which consist of inspections occurring once every one, two, or three years depending on the firm’s business model, its size, and its perceived risks. FINRA may also conduct an examination if it has reason to believe that a rule violation has occurred – an examination may be initiated based on a Form U-4 or U-5 disclosure, a customer complaint, an arbitration claim, information received from another regulator or law enforcement agency, or information received in the form of tip from a competing broker-dealer. The purpose of the examinations is to make sure that a firm is operating with sufficient capital, is properly supervising it employees and business operations, and has proper internal systems and controls in place. The examinations generally focus on unethical sales practice behavior such as conversion of funds, forgery, theft, selling away, undisclosed outside business activities, unauthorized trading, unsuitable recommendations, and misrepresentations or omissions. Consulting an attorney is highly recommended when facing a FINRA examination because all brokerage firm “Members” and stockbroker “Associate Members” of FINRA have agreed to be subject to its jurisdiction, rules, procedures, disciplinary proceedings and sanctions which could have serious consequences. These disciplinary proceedings are like trials in a courtroom but under FINRA’s lopsided rules and procedures to the stockbroker’s disadvantage. You need to be on guard – FINRA can make referrals to the U.S. Securities & Exchange Commission (“SEC”) for injunctions, fines and/or to federal and state prosecutors for criminal prosecution. THE EXAMINATION PROCESS Upon initiating an examination, FINRA examiners will usually send a written request for information to the broker-dealer as well as to the broker, which seeks basic information about a complaint or other disclosure. A request letter to the broker will often ask for a written response to the allegation, and a request letter to the firm will usually seek a written narrative of the complaint or other disclosure and the firm’s findings. A request letter to a firm may also include a request for relevant documents such as communications with customers and account records. Once FINRA has obtained such information, it will determine whether the issue is one over which FINRA has jurisdiction. FINRA will also determine whether there is a potential rule violation or if any other threshold has been met, which would allow it to continue to review the matter at issue. Examiners obtain the vast majority of information needed to conduct an investigation through written correspondence. Letters requesting information and documents and responses to specific questions sent to firms, brokers, and involved personnel are not uncommon. In many cases, FINRA will require the broker to respond to a specific question with a signed, written statement. Brokers tend to receive two to four or more of such letters. In addition, examiners may conduct telephone interviews with brokers, managers, compliance employees, and customers to obtain relevant information. Although these interviews are considered informal, brokers should proceed with caution because anything they say may be used against them. The majority of examinations that lead to a disciplinary action include an on-the-record interview (OTR), which requires the broker or other associated persons of a firm to meet with the regulators. OTRs are similar to depositions taken in civil proceedings as the witness is sworn to tell the truth, a court reporter is present to record the interview, and transcript of the interview is prepared. Seeing as brokers are permitted to have a lawyer appear at the OTRs with them, brokers are encouraged to obtain legal counsel to assist in preparing for an OTR, for the OTR proceeding itself, and for any future enforcement action. As soon as the examiners believe that they have gathered all the relevant information, documents, and other evidence, a report of the examination is prepared and submitted to a supervisor. The supervisor’s role is to review the report and the evidence and make a recommendation to close the file without action, to pursue some type of informal disciplinary action, or to pursue a formal disciplinary action – matters may also be resolved through a combination of the foregoing choices. FINRA JURISDICTION AND IMPORTANT RULES Brokers should know that FINRA does not have jurisdiction over individuals not affiliated with the securities industry. Therefore, since FINRA cannot ask for or force cooperation from non-affiliated individuals, many examinations are never fully completed if such cooperation is necessary to establish evidence of a violation. This does not mean that brokers should encourage customers to avoid or not cooperate with the authorities because this is a violation of FINRA rules itself, which can lead to sanctions, Brokers should also know that they themselves are not obligated to respond to FINRA requests for information, but this decision may come with a significant price, such as a permanent ban from the industry. Still, FINRA makes use of Rule 8210, which serves as subpoena for FINRA examinations. Rule 8210 requires broker-dealers, registered representatives, and any other individuals subject to FINRA’s jurisdiction to cooperate in an examination and provide written, electronic, and oral information when requested. If a broker chooses not to respond, he or she may be barred from association from any FINRA member firm in any capacity in addition to other sanctions. This consequence may seem contrary to one’s 5th Amendment right...

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Kazma Citigroup Arbitration Award

AWARD FINRA DISPUTE RESOLUTION In the Matter of the Arbitration Between: Names of the Claimants Case Number: 09-02697 Gerald J. Kazma Revocable Trust Amzak Capital Management, LLC Names of the Respondents Hearing Site: Boca Raton, Florida Citigroup Global Markets, Inc. f/k/a Citicorp Investment Services Citigroup Alternative Investments, LLC Nature of the Dispute: Customer vs. Member and Non-Member. REPRESENTATION OF PARTIES For Gerald J. Kazma Revocable Trust (“Kazma”) and Amzak Capital Management, LLC (“ACM”), hereinafter collectively referred to as “Claimants”: Robert Wayne Pearce, Esq., Robert Wayne Pearce, P.A., Boca Raton, Florida. For Citigroup Global Markets, Inc. f/k/a Citicorp Investment Services (“CGM”) and Citigroup Alternative Investments, LLC (“CAI”), hereinafter collectively referred to as “Respondents”: Jason M. Fedo, Esq., Greenberg Traurig, P.A., West Palm Beach, Florida. CASE INFORMATION Statement of Claim filed on or about: May 11, 2009. Claimant Kazma signed the Submission Agreement: May 29, 2009. Claimant ACM signed the Submission Agreement: May 29, 2009. Statement of Answer filed by Respondents on or about: August 5, 2009. Respondent CGM signed the Submission Agreement: June 18, 2009. Respondent CAI signed the Submission Agreement: July 19, 2010. Respondents’ Motion for Remedial Action Based on Claimants’ Spoliation of Evidence (“Motion for Remedial Action”) filed on or about: July 1, 2010. CASE SUMMARY Claimants asserted the following causes of action: 1) breach of fiduciary duty; 2) common law fraud; 3) negligent misrepresentation; 4) negligent management; 5) negligent supervision; and, 6) breach of contract. The causes of action relate to the purchase in Claimants’ accounts of ASTA Three Series 2006‑1 and ASTA Five Series 2007‑1A. Unless specifically admitted in their Answer, Respondents denied the allegations made in the Statement of Claim and asserted various affirmative defenses. RELIEF REQUESTED Claimants requested: 1) compensatory damages in excess of $4,000,000,00; 2) interest at the legal rate; 3) costs of this proceeding; 4) punitive damages; and, 5) such other relief as the undersigned arbitrators (the “Panel”) deemed just and proper. Respondents requested that the Statement of Claim be dismissed, with prejudice, and that the costs associated with this arbitration be assessed against Claimants. OTHER ISSUES CONSIDERED AND DECIDED The arbitrators acknowledge that they have read the pleadings and other materials filed by the parties. During the evidentiary hearing, the Panel heard argument on Respondents’ Motion for Remedial Action. The Panel denied the motion. During the evidentiary hearing and at the close of Claimants’ case-in-chief, Respondents moved to dismiss the Statement of Claim on the grounds that Claimants failed to prove their case. Claimants opposed the motion. Following the argument of counsel, the Panel denied the motion. The parties have agreed that the Award in this matter may be executed in coun1hrpart copies or that a handwritten, signed Award may be entered. AWARD After considering the pleadings, the testimony and evidence presented at the hearing, the Panel has decided in full and final resolution of the issues submitted for determination as follows: Respondents are liable, jointly and severally, for negligent management and negligent supervision and shall pay to Claimant Kazma compensatory damages in the sum of $908,648.00, pre-judgment interest specifically denied. Respondents are liable, jointly and severally, for negligent management and negligent supervision and shall pay to Claimant ACM compensatory damages in the sum of $908,648,00, pre-judgment interest specifically denied. Any and all claims for relief not specifically addressed herein, including Claimants’ request for punitive damages, are denied. FEES Pursuant to the Code of Arbitration Procedure, the following fees are assessed: FILING FEES FINRA Dispute Resolution assessed a filing fee* for each claim: initial claim filing fee = $1,800.00 *The filing fee is made up of a non-refundable and a refundable portion. MEMBER FEES Member fees are assessed to each member firm that is a party in these proceedings or to the member firm(s) that employed the associated person(s) at the time of the events) giving rise to the dispute. Accordingly, as a party and member firm, Respondent CGM is assessed the following: Member surcharge = $2,800.00 Pre-hearing process fee = $ 750.00 Hearing process fee = $5,000.00 HEARING SESSION FEES AND ASSESSMENTS The Panel has assessed hearing session fees for each session conducted. A session is any meeting between the parties and the arbitrators, including a pre-hearing conference with the arbitrators, which lasts four (4) hours or less. Fees associated with these proceedings are: One (1) Pre-hearing session with a single arbitrator @ $450.00/session = $ 450.00 Pre-hearing conference: June 2, 2010 1 session One (1) Pre-hearing session with the Panel @ $1,200.00/session = $1,200.00 Pre-hearing conference: September 14, 2009 1 session Eleven (11) Hearing sessions @ $1,200.00/session = $13,200.00 Hearing Dates: July 12, 2010 2 sessions July 13, 2010 2 sessions July 14, 2010 2 sessions July 15, 2010 3 sessions July 16, 2010 2 sessions Total Hearing Session Fees = $14,850.00 The Panel has assessed $7,425.00 of the hearing session fees jointly and severally to Claimants. The Panel has assessed $7,425.00 of the hearing session fees jointly and severally to Respondents. All balances are payable to FINRA Dispute Resolution and are due upon receipt. ARBITRATION PANEL Myron E. Levenson – Public Arbitrator, Presiding Chairperson Joseph Benalt – Public Arbitrator Donald R. McGahan – Non-Public Arbitrator CONCURRING ARBITRATORS’ SIGNATURES /s/ Myron E. Levenson Signature Date Public Arbitrator, Presiding Chairperson /s/ Joseph Benalt Signature Date Public Arbitrator /s/ Donald R. McGahan Signature Date Non-Public Arbitrator August 3, 2010 Date of Service (For FINRA Dispute Resolution use only)

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