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Ebbe v. Concord Investment Services, LLC

United States District Court, D. Massachusetts

July 18, 2019

KENNETH EBBE, Petitioner,


          Hon. Patti B. Saris Chief United States District Judge.


         Petitioner Kenneth Ebbe brought claims in a Financial Industry Regulatory Authority (“FINRA”) arbitration proceeding against his former investment brokers, Richard and Jill Cody;[1]Richard Cody's former employer, Westminster Financial Securities, Inc. and Westminster Financial Advisory Corp. (collectively, “Westminster”); and both Codys' former employer, Concorde Investment Services, LLC (“Concorde”). Ebbe alleged that Richard Cody falsely reported an inflated value for his investments for over a decade, which caused him to withdraw more money than he otherwise would have and miss the opportunity to seek employment to replenish his losses. After a four-day hearing, the FINRA arbitration panel issued an award for $286, 096 in compensatory damages against the Codys jointly and severally but denied relief against Westminster and Concorde.

         Ebbe moves to confirm the award against the Codys. He also seeks to vacate the denial of relief against Westminster and Concorde on the basis that the panel acted in manifest disregard of the law by not finding the companies liable for the Codys' misconduct via respondeat superior. In response, Westminster and Concorde both cross-move to confirm the panel's denial of relief against them. In a pro se answer, which the Court construes as a motion to vacate, Jill Cody alleges she did not receive notice of the arbitration until after the panel issued its award.

         After hearing and supplemental briefing concerning Jill Cody's notice of the arbitration, the Court ALLOWS Ebbe's motion to confirm the arbitration award against Richard Cody and Jill Cody (Docket No. 1), DENIES Ebbe's motion to vacate the award against Concorde and Westminster (Docket No. 1), DENIES Jill Cody's motion to vacate (Docket No. 34), ALLOWS Concorde's motion to confirm (Docket No. 36), and ALLOWS Westminster's motion to confirm (Docket No. 40).


         I. Kenneth Ebbe and Richard Cody

         Ebbe is a resident of Rockland, Massachusetts. He worked for Verizon from 1969 until he accepted an early retirement in 2002. Upon retirement, he cashed out the entirety of his pension and 401k, a total of $498, 000. He hired Richard Cody, an investment professional at Leerink Swann who was recommended by a friend and former colleague at Verizon, to manage the money. Ebbe maintained his investments with Cody after Cody moved to GunnAllen Financial in 2005.

         Starting in 2002, Ebbe received monthly distributions from his account of around $3, 000 after tax withholding. Once he began receiving Social Security benefits in 2009, he reduced his distributions to around $2, 500 per month. He also made withdrawals totaling approximately $22, 000 for one-time expenses.

         Throughout their relationship, Ebbe and Cody met a few times a year for an account review. During these reviews, Cody told Ebbe his investments were holding their value at around $500, 000 and that he was only withdrawing interest from his account. In reality, Ebbe's account principal steadily declined while Cody was advising him. Although Ebbe received periodic account statements from Cody's employers with accurate information about his account value, he did not understand them and told Cody he was relying on him to provide an accurate picture of his financial situation. Cody told Ebbe that these account statements did not include all of his investments.

         On January 11, 2008, FINRA's Department of Enforcement suspended Cody for a year and imposed a fine for failing to recommend suitable investments to his clients and providing them with misleading monthly statements. Cody v. SEC, 693 F.3d 251, 256-57 (1st Cir. 2012). Ebbe did not know about these penalties until late 2016.

         II. Westminster

         In 2010, Cody began working at Westminster, a broker-dealer and financial advisory firm headquartered in Ohio. Ebbe's account value, which Cody transferred to Westminster, was around $144, 000 at the time. Ebbe alleges that Cody continued to misrepresent the value of the principal while his account was with Westminster, but he did not produce documentary evidence at the arbitration hearing of any misrepresentations during this period. Ebbe never spoke with anyone from Westminster except for Cody, even though he noticed discrepancies between Westminster's periodic statements and Cody's representations about his account value. Westminster did not have any issues with Cody during his employment but terminated him when his FINRA suspension began in early 2013.

         III. Concorde

         Cody moved Ebbe's account to Concorde, another broker-dealer and financial advisory firm headquartered in Michigan, in January 2013. Ebbe's account had a value of around $59, 000 at the time. Cody began his one-year FINRA suspension the same month, so Jill Cody, his wife and also a new investment professional at Concorde, took over management of his accounts, including Ebbe's. Since Concorde knew Jill Cody was managing her husband's accounts during the suspension, the company investigated to ensure she was qualified to do so and conducted a surprise inspection of her office. Concorde found no issues with her management of her husband's accounts and received no complaints from clients.

         Despite his suspension, Richard Cody communicated with Ebbe about his investments throughout 2013, and they met multiple times during the year. Cody formally joined Concorde once his suspension ended in February 2014. Nevertheless, Jill Cody continued as the listed investment professional on Ebbe's account during the entire period it was managed by Concorde. Ebbe was unaware Jill Cody was his listed investment professional, although the periodic statements he received from Concorde included her name. Ebbe only spoke with Jill Cody once, when she answered the telephone on behalf of her husband.

         During this period, Richard Cody produced a number of false documents that inflated the value of Ebbe's account. For example, he gave Ebbe a false 1099 tax form for the year 2015. In the spring of 2016, Cody visited Ebbe at his home and showed him the top corner of a piece of paper in his briefcase listing an account value of around $489, 000. Ebbe requested a copy of the document, but Cody never gave it to him. The actual value of Ebbe's account at this time was less than $100.

         In 2015, Concorde received an unrelated complaint about the Codys that triggered an investigation of their business. Concorde discovered that Richard Cody had contacted clients during his suspension and that Jill Cody likely knew about it and did not report it. Concorde terminated the Codys in July 2016. In September 2016, after receiving a late distribution from his account, Ebbe called Concorde and was informed his account value was $0.

         IV. FINRA Arbitration

         Ebbe initiated an arbitration with FINRA against Richard and Jill Cody, Concorde, Westminster, and others on August 1, 2017. His statement of claim alleged negligence, breach of fiduciary duty, and violations of various securities laws and regulations. It did not specifically allege that Westminster and Concorde were liable via respondeat superior. Pursuant to the rules for FINRA customer arbitrations, FINRA sent a letter to Jill Cody on August 7, 2017 notifying her that she had been named as a respondent and explaining the process for defending herself. FINRA used the address listed on her “Central Registration Depository” (“CRD”) record: 409 Captain's Way in Neptune, New Jersey.[2] On August 23, 2017, FINRA notified Ebbe's attorney that it had not perfected service on Jill Cody at the Captain's Way address, likely because she had moved elsewhere in Neptune. Ebbe's attorney attempted to locate her new address but, as she had changed her last name, was unable to do so. Neither of the Codys responded to the statement of claim or appeared at the evidentiary hearing.[3]

         A panel of three arbitrators presided over a four-day evidentiary hearing from October 16 to 19, 2018. During the hearing, Ebbe argued that Concorde and Westminster were liable on a number of grounds, including for Richard Cody's misconduct under the doctrine of respondeat superior. He noted that communicating with clients about their account values was part of Cody's job responsibilities and therefore his misrepresentations were within the scope of his employment. He also briefly mentioned in his closing argument that Concorde should be held vicariously liable for Jill Cody's conduct as well.

         Both Westminster and Concorde responded that Cody's conduct was outside the scope of his employment because he was subject to heightened supervision at both companies and was not authorized to misrepresent account values to clients. Westminster also argued that Ebbe presented no documentary evidence of any misrepresentations while it managed his account and that all the statements it provided Ebbe accurately reflected his account activity and value. Concorde argued that it was not liable because Jill Cody, not Richard Cody, was the listed representative on Ebbe's account and Ebbe suffered most of his financial losses before Cody transferred his account to Concorde in 2013.

         Ebbe requested compensatory damages of $144, 000, the amount he continued to withdraw after his account moved to Westminster on the false assumption his withdrawals were not reducing principal; lost opportunity damages of $374, 400 based on the income he could have earned over six years if he had not falsely believed he had half a million dollars ...

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