SEC Charges Another Attorney in Insider Trading Scheme

Yesterday the SEC charged another attorney from Ropes & Gray LLP in the agency's ongoing investigation into a $20 million insider trading ring involving Wall Street traders, lawyers, and hedge fund managers. Last month the Commission charged two Ropes & Gray attorneys for tipping information, and charged 6 others in a scheme that allegedly involved $20 million dollars. More>>>

More Private Placements Under Fire

FINRA has announced that it fined Pacific Cornerstone Capital Inc. and its former chief executive, Terry Roussel, a total of $750,000 for making misleading statements and, in some cases, omitting facts in connection with the sale of two private placements.

Private Placements are coming under increased scrutiny. These offerings, with limited registration and regulatory oversight have been the cornerstone of private capital raising for decades. In the past year or so the SEC and FINRA have been investigating numerous private placements  and bringing enforcement actions.

According to press reports Pacific Cornerstone sold two deals, Cornerstone Industrial Properties LLC and CIP Leveraged Fund Advisors LLC, from January 2004 to May 2009. FINRA also says that both offerings were affiliated businesses of Pacific Cornerstone and raised close to $50 million from about 950 investors.

Those investors are undoubtedly looking for securities attorneys to represent them in litigation over these deals, and other broker-dealers should be reminded that due diligence in Reg D offerings is not simply part of the deal, it is the part of the deal that may keep your firm out of the firing line when the business model does not work out as expected.

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House scraps amendment to place B-D advisers under Finra - Investment News

Hopes for a more streamlined regulatory system for dual registered investment advisers and brokers at brokerage firms were dashed today as the House of Representatives has killed the proposal to have FINRA regulate investment advisers who are also registered representatives as a brokerage firm. Congress is exploring other alternatives, and there is no word as to whether yet another regulatory agency will be created, or the current SEC/State system will remain in place for investment advisers. Either way, investment advisers at brokerage firms will continue to have to separate, and duplicative, oversight entities. >>>More

UBS To Reward Reps for Loyalty and Growth

Competition for brokers - or rather their assets - has intensified over the past two years as firms consolidate. My firm has seen a significant increase in the number of broker transition cases we are handling, both in brokers who are being forced out of their positions, and in those who are voluntarily changing firms.

UBS was one of the firms that was aggressively luring brokers from the competition, at one point in time offering over two times their trailing 12 months gross commissions to join UBS. Of course, those checks came with significant handcuffs - promissory notes with up to 9 years of forgiveness.

UBS is apparently trying to insure that they don't lose those reps. Registered Representative is reporting that the firm has unveiled a new compensation program that will reward the firm's biggest financial advisors for loyalty and growth.

The program applies to advisors who have at least $500,000 in revenue in 2010, which apparently applies to approximately 3,000 of UBS’s network of 7,000 advisors. Those brokers would receive 65% of their gross production for 2010, structured as a seven-year forgivable loan.

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SEC Blocks Early-Stage Ponzi Scheme

Sometimes good things come from a massive failure. Ever since the mis-steps of the SEC have come to light, the SEC has been pouncing on various frauds and schemes and taking swift action. It was typical for the SEC to be the last one on the scene, franticly trying to close the barn door after all of the horses had left and were scattered to parts unknown.

In the last few months we have seen at least four cases where the SEC shut down a scheme as it was getting started. Today the SEC announced that it has halted a Ponzi scheme involving a New York firm that solicited investments involving personal injury lawsuit settlements but instead shipped the money overseas. The SEC obtained a court order freezing the assets of the firm, its president, and several companies holding money from the scam that began several months ago.

Kudos to the Commission for taking swift action. Let's just hope that this swiftness is the result of increased market survelliance, retention of experienced and motivated staff and an renewed vigor, and not the result of a rush to judgment and press releases without evidence or foundation. Time will tell.  More>>>

Lehman Note Investor Obtains 1/2 an Award

A FINRA arbitration panel has awarded damages against UBS in favor of an investor who purchased Lehman principal protected notes.

While the WSJ is presenting the award as a significant win for the investor, and an indicator of the outcome of other cases relating to the Lehman notes, I am not so sure this is that big a win. According to the details contained in the article, the investor obtained 1/2 of the claimed damages, plus interest, costs and an undetermined amount for attorneys fees.

Some would say that any recovery is a good recovery, but is this really a win for the investor? The Lehman notes are worthless.

As in most arbitration awards, the three-person arbitration panel didn't give reasons for its findings. According to the WSJ, the investor argued  that the notes were "speculative derivative securities" and were "unsuitable" for unsophisticated investors. Investors, and brokers, need to be careful in these cases.

I addressed these issues in my column, Lehman Principal Protected Note Arbitrations. While 1/2 the loss is better than a total loss for the customer, it is not necessarily a win for the customer, nor should it be the standard for the other Lehman Note cases that have been filed.

I do not know the details of the case, but if the investment was unsuitable, then it was unsuitable, and the investor should receive compensation for the loss. In addition, suitability cases are fact specific and investor specific. You simply can't attribute the parameters of an award in one case to other cases.

I will continue to update the blog as new awards become available.

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[Edited and updated 12/8/09]

FINRA Execs Pockets Millions

I knew about the issue of FINRA executive compensation, as it came out in a case that I am marginally involved in, but did not have the time, or resources to verify the information that I was given. However, the story of the multimillion dollar salaries for FINRA executives is starting to gain momentum.

InvestmentNews.com ran the story on Thursday, and it is being picked up by other outlets.

FINRA paid its top executives tens of millions of dollars last year, and is spending untold millions on advertising campaigns to promote it's newly minted image as an investor advocate. Isn't it a self regulatory organization? There is a difference, and those millions of dollars would be better spent hiring staff and investigators so that exams and enforcement actions don't take years and years to complete.

Black Box Options Backdating Case Settled

The SEC's options backdating cases are not over yet. The Securities Law Professor Blog's recent post, Black Box and Two Former Officers Settle Back Date Charges with the SEC, and notes that the Commission announced that it filed a civil action in the United States District Court for the Western District of Pennsylvania against Black Box Corporation ("Black Box"), a Lawrence, PA technical services provider, its former Chief Executive Officer Frederick C. Young, 53, of Silver Point, Tennessee, and its former Chief Financial Officer Anna M. Baird, 52, of Bridgeville, PA, alleging violations related to stock-options backdating.

Without admitting or denying the Commission's allegations, all three defendants agreed to settle the matter. More>>>

Hackers Liable for Insider Trading?

I posed a question in an earlier post as to the liability of computer hackers for insider trading when they break into a company's computer systems, obtain material non-public information, and then trade on that information. There are a number of problems with that legal theory, as there is no fiduciary relationship between the hacker and the company. While the courts have eviscerated the legal underpinnings of 10(b)5 over the years, there is no support for the concept that a thief, a complete corporate outsider, has any liability under 10(b)5. His theft is a theft, it is not a fraud, and should not give rise to a securities fraud case, and certainly not an insider trading case.

A commenter pointed out a recent Second Circuit decision, in SEC vs. Dorozhko, where the Court did find that such liability existed. The decision, handed down this summer, finds liability under 10(b)5 for a computer hacker. The decision is not surprising, since the Second Circuit has been at the forefront of the expansion of insider trading liability since the 1980s, going back to the first civil use of the misappropriation theory in SEC vs. Materia, a case that I handled with one of my former partners in 1987.

The Dorozhko decision has been widely criticized for expanding 10(b)5 beyond all reasonable limits. Profession Bainbridge posted an outstanding analysis of the decision at his corporate law blog, titled "The Second Circuit’s Egregious Decision in SEC v. Dorozhko" which is well worth reading.

None of this is an argument that the hackers should not be punished. Many will agree that the criminal penalties for breaking into a computer system are more severe than the penalties for insider trading. After all, prison time is certainly worse than a financial penalty; even if that penalty is three times the profits of the trading.

FBI Says Hackers Targeting Law Firms

According to the NYT, hackers are increasingly targeting law firms and public relations companies with a sophisticated e-mail scheme that breaks into their computer networks to steal sensitive data, often linked to large corporate clients doing business overseas. This might be an interesting test of our insider trading laws.

Hacker steals material, non-public information from law firm, trades. Is he liable for insidert trading violations? More>>>

Technorati Tags: insider trading

New AIG Chief Threatens to Quit Over Pay

It's tough working for the government, with politicans making business decisions.

Unhappy over constraints imposed by U.S. government overseers, AIG Chief Executive Robert Benmosche told the company's board last week that he is considering stepping down, according to the Wall Street Journal. Benmosche is said to be unhappy over a recent compensation review by Kenneth Feinberg, the Treasury bailout program's special master for compensation. More>>>

Bear Stearns Hedge Fund Managers Not Guilty

n a stunning defeat for the Justice Department, a federal jury in Brooklyn, N.Y., found two former Bear Stearns hedge fund managers not guilty of fraud charges Tuesday, only a day after jurors received the case.

According to The New York Times, the jury found that Matthew Tannin and Ralph Cioffi did not lie to investors in painting a rosy picture of the health of two funds backed by subprime mortgages which later collapsed and cost investors $1.6 billion.

The jury also acquitted Cioffi on an additional charge of insider trading, as prosecutors had accused the former portfolio manager of moving $2 million he had invested in one of his failing funds to a less risky fund while telling investors he was adding to his position. More>>>

Former SEC Attorney Pleads Guilty in Dreier Case

A lawyer pleaded guilty Monday to impersonating representatives of both a hedge fund and a pension fund in order to assist disgraced ex-attorney Marc S. Dreier in selling a phony promissory note.

The surprise plea and the lawyer's agreement to cooperate with prosecutors raised the possibility there might be more arrests in the investigation of Dreier, the former sole equity partner of 250-lawyer Dreier LLP who is serving a 20-year sentence for peddling hundreds of millions of dollars in bogus notes to investors. More>>>

Rep. Frank Vows to Limit Expansion of FINRA Power

Barney Frank, chairman of the House Financial Services Committee, said he will defeat a controversial measure that would expand the Financial Industry Regulatory Authority's power over financial advisers. Investment advisory groups, as well as consumer advocates and state regulators, praised Frank's promise. More>>>

Congress to Give FINRA Authority over RIAs

According to InvestmentNews.com, there has been an amendment to the Investor Protection Act which gives FINRA authority over the advisory activity of any broker-dealer that it regulates.

The bill would affect anyone who is dually registered as an investment adviser and a broker, and would greatly expand FINRA's authority over the financial markets.

On one level the proposal makes sense. In recent years we have seen the distinctions between brokers and advisers blurr, and in the retail area, there often is no substantive difference between the two. At least not to the investor, who often does not know, nor does he care, whether his financial adviser is a stock broker or an investment adviser.

The most notorious example is Madoff, who, although presenting himself and his firm as a brokerage firm, was actually acting, or purporting to act, as an investment adviser. In that example, a distinction without a difference, and giving FINRA authority over the RIA side of the BDs business might have made a difference.

That is not to say that FINRA should have authority over all RIAs. There are thousands of investment advisers who are not brokers and who do not work for broker-dealers. Those adviser are now regulated by the states, or by the SEC, depending on how much money they manage.


The committee is scheduled to vote on the Investor Protection Act Nov. 4. According to InvestmentNews.com, it is likely to approve the bill. More>>>

Technorati Tags: finra

Getting Arbitration Facts Wrong

Litigation 2009 - Home Court Disadvantage at American Lawyer attempted to put together an article about the large cases being won before FINRA arbitration panels, but in doing so demonstrates a marked bias in the media against arbitration. Or, perhaps just an abject failure to fact check.

The article correctly points out that there have been some significant cases won in arbitration, multimillion dollar verdicts in favor of investors, but in the course of reaching that conclusion makes a number of flagrantly wrong, and significantly misleading, statements regarding FINRA arbitration.

For example

FINRA's reputation for siding with the securities industry was long lamented and well-known to even casual investors

Long lamented? Perhaps. At least one party to every litigation proceeding is unhappy with the outcome. Sometimes even both sides. But "well-known?" Hardly. Ask any experienced securities attorney, and the key word is "experienced" and they will agree that while their might be a panel here and there over the thousands of arbitration panels that have decided cases, there is no institutional bias in favor of the industry, and certainly no reputation for siding with the industry. There are no statistics, studies or reports which demonstrate any bias in securities arbitrations for the industry. Customers settlement rates and “win” rates are well over 75%, and “win” rates are consistently higher in arbitration than in comparable court proceedings.


Attorneys for investors point out that from 2003 to 2008, customers won damages in only 27 percent of cases filed

I don't know which attorneys for investors they spoke to, but the statement is simply wrong. Incredibly wrong. According to FINRA’s statistics, over 50% of the cases that are concluded are resolved by a settlement. Of the remaining 50% that go to a hearing, customers won 44% of the time from 2003 to to 2008. That puts a customer win rate at something on the magnitude of 70%, assuming of course that a customer did not settle a case without getting some compensation.


FINRA and its predecessors have long been the financial services industry's preferred venue for claims.

FINRA requires, by regulation, that all members of the financial services industry arbitrate all claims against them at FINRA arbitration. It is not the firms preferring the venue, it is the venue forcing firms to use its forum; by force of law.

FINRA arbitrations don't provide for discovery, which could also be a challenge for investors' lawyers, due to the complexity of the products at issue

Incredibly wrong again. FINRA arbitration procedures have virtually unlimited document discovery. FINRA arbitration proceedings do not have depositions, which at a cost of a couple of thousand dollars a day, are a significant cost for an investor in a court litigation. Further, the parties have the ability to request depositions, and whatever other discovery devises they need. And, if justified, the arbitration panel can order depositions.

…nonpublic arbitrator--the slot that, according to investors' lawyers, usually favors securities firms.

In 25 years of representing parties in securities arbitration I never heard an investors' attorney make this claim. "Usually favors securities firms" is a libel of the thousands of nonpublic arbitrators, and there are no studies or reports to support such an outrageous claim. In fact, there are reports that show that there is no difference in a customer award rates between public and nonpublic arbitrators.


FINRA arbitration certainly isn't perfect, but repeating misstatements without fact checking, in a legal publication, does nothing to correct the problems that do exist, and actually hampers the efforts of those who are attempting to make the process better for all participants.

Hedge Funds On Wall Street Talent Hunt

From Financial Planning.com - Less than a year after the credit crisis forced the closure of some 1,000 hedge funds, these firms are back out looking for capital and hiring professionals from Wall Street firms. In addition to poaching from investment banks, the funds are bringing in professionals from endowments, foundations, and traditional asset managers, according to a recent report More>>>

Merrill Exec to Head UBS Wealth Management

After months of speculation, UBS today named Robert McCann as its new head of wealth management in the Americas.

Mr. McCann, the former head of the brokerage business at Merrill Lynch & Co., left Merrill in January after the acquisition by Bank of America. More>>>

Branch Managers Being Forced to Produce

There are hundreds of producing branch managers at the wirehouses, and over recent years, the wirehouses have been pushing their BOMs to drop production and concentrate on supervision. There is some appeal to using a non-producing manager, but the firms seemed to miss an important issue - compensation.

As firms pushed managers out of production there was a disconnect on the compensation side. After all, firms were asking managers to give up a business that many of them had spent years building.

There is of course nothing wrong with having producing managers. If you staff the branch properly, a BOM can service his own clients while running a branch. It happens all over the country all the time, without incident.

But the key is staffing the branch. The BOM needs an assistant, and an ops manager, and maybe a compliance officer. You simply cannot force a BOM to supervise a branch on his own, without proper support, regardless of his personal production.

But after years of forcing managers to drop their own clients, some of the wirehouses are putting managers back into production. Why? To save costs. The firms have figured out that a non-producing manager is an expense. Shocker.

According to Registered Rep Magazine, in an effort to cut costs, some brokerage firms such as UBS and Morgan Stanley Smith Barney are restructuring their branch office organization and changing the rules about which managers must generate production. 

Putting aside the turmoil that this creates for the managers ("no more production" and then "do more production") the move is a complete upheaval of the branch dynamics and creates a conflict between the BOM and the reps in his office.

Brokers like having a non-producing manager because it removes a number of conflicts. Putting non-producing managers into production creates those conflicts, and will undoubtedly increase costs in the long run, as staffing needs to be increased, and brokers feel the effects of the newly created conflicts.

Check out the full article at Registered Rep.

SEC Charges Broker for Manipulation Using Internet

Once again, the SEC is moving quickly. It is a welcome change, as they have always been known for closing the barn door after the horse has bolted.

Only three weeks after an alleged fraud began, the SEC charged a securities broker with securities fraud for repeatedly creating and then distributing fake press releases to manipulate the stock prices of multiple publicly traded companies.

The SEC alleges that the broker created press releases, including one that claimed that Google was buying the target company. He then  posed as an investor on Internet message boards, touting the announcements he had fabricated. In one instance, his scheme caused the stock price to increase by nearly 80 percent within a few hours of the issuance of his phony press release.

Moving a stock 80% on an Internet posting is pretty amazing, and raises another question. Just how greedy, and gullible, are some investors? Someone posts news in an Internet forum, linking to a press release, and they buy the stock?

Investing is not that easy. There is due diligence that needs to be performed, and analysis that needs to be done. That is why investors use financial advisers, and not Internet investment forums, to make investment decisions.


 More>>>

Morgan Stanley Plans to Double High Net Worth Advisors

Morgan Stanley Smith Barney announced the integration of Smith Barney’s Citi Family Office into its own ultra-high-net-worth division, which will now be called Morgan Stanley Private Wealth Management. Unlike the old family office, the newly combined unit will exclusively serve clients with a minimum of $20 million in assets. Morgan said it plans to add more advisors to PWM through a combination of “organic growth and selective acquisitions.” More>>>

Schwab Receives Wells Notice For Mutual Funds

In an 8-K filed today, Charles Schwab Corp. disclosed that it has received a Wells Notice from the SEC. Accordign to the filing, the Company has been responding to civil litigation claims and regulatory investigations regarding two fixed income mutual funds, the Schwab YieldPlus Fund(R) and the Schwab Total Bond Market Fund(TM). The Wells Notice reflects that the SEC staff intends to recommend the filing of a civil enforcement action against Schwab Investments, Charles Schwab Investment Management, Charles Schwab & Co., Inc. and the president of the funds for possible violations of the securities laws with respect to the two funds.

A Wells Notice is a device used by the SEC to advise a prospective defendant that the Staff is going to make a recommendation to the Commission to commence proceeding. The notice is designed to provide the prospective defendant with the opportunity to inform the Commission as to why an action should not be commenced. The notice is simply that; a notice. It is not a finding of wrongful conduct.

The use of a Wells Notice is something of a unique procedure, and one that is sometimes beneficial to a prospective defendant.  I have represented numerous parties in SEC and FINRA investigations over the years, and wrote a column, "The Wells Notice in SEC and NASD Investigations" for those who are interested in learning more about the process. provides additional information. The column is at SECLaw.com, at http://www.seclaw.com/docs/wellsnotice.htm.

Schwab's 8-K reflects that the company intends to respond to the Wells Notice. More>>>

SEC Continues Mark Cuban Fight

The SEC is in trouble. We all know that, and they need to show that they are active, aggressive and enforcing the securities laws. So, we get surprise examinations, a flurry of press releases and other assorted activity. Good for them, they need to regroup and recover from their recent failures.

But do you gain respect and reputation by pursuing bad cases? Of course not,and someone needs to tell the decision makers at the Commission. In August the SEC announced that it would not refile a complaint against Cuban, and yesterday the SEC annouced that it will appeal the court decision which tossed out their complaint against Mark Cuban.

The decision was not much of a surprise. The Commission was on thin ice, and stretching the law in the Cuban case, which is why the Court dismissed the complaint. Our analysis is here, and all of our posts related to Mark Cuban are here. The WSJ story on the appeal, with background information is here.

FINRA Seeks Further Erosion of Broker Rights - BrokerCheck Forever

FINRA has proposed rule SR-FINRA-2009-050 under which it would permanently disclose a condensed record for any broker who has been fined, suspended or barred by securities regulators on its Internet based Broker-Check system. The proposed rule was published in the Federal Register on August 17, 2009 and the SEC solicited comments for submission on or before September 8, 2009.

Broker-check has been a significant intrusion into the private and personal lives of employees of the brokerage community for years. Is there any other industry or profession where such detailed information regarding allegations (not proof; allegations) of wrongful conduct are available to the public?

Broker-check was designed to allow the investing public to review information regarding their broker and potential broker. Therefore there is no reason to keep making this information public after the broker has left the industry.

That is not to say that a broker's record should be removed forever. A broker's CRD record is always available from FINRA, and all 50 state securities regulators, it is just not available on the Internet for the entire world to view.

Customer allegations are simply that - allegations. Unproven, unsworn, untested allegations by customers against brokers should never be publicly disclosed, and help no one. Why in the world would anyone want to continue the damage caused by this continued violation of broker's privacy rights?

Supremes Will Not Hear Manifest Disregard Cases

The United States Supreme Court declined to hear the appeals of three cases, all of which involve the concept of manifest disregard of the law as a grounds for vacating an arbitration award.

Manifest disregard of the law has evolved over the years as an alternative justification for vacating an arbitration award. However, the concept is not contained in the arbitration statutes of the various states, nor is it in the Federal Arbitration Act. Rather it was judicially created, to address the situation where an arbitration panel is aware of a controlling legal principle, but refuses to apply it.

While such an event is rare, it does happen from time to time, and the courts have vacated awards when it is clear that that the arbitrators were aware of the law, that the law controlled the issue before the panel, and the panel simply refused to apply the law.

However, the concept has been called into question of late, and some courts have refused to consider manifest disregard as a grounds for vacature, taking the position that the only grounds to vacate an award are those set forth in the statutes - typically fraud, bias on the part of the arbitrators, arbitrator misconduct, or where the the arbitrators exceeded their authority.

There has been a split in the Circuit Courts, which should have resulted in a granting of a review by the Supreme Court. The Court's denial of the cert petition means that the split will continue, with some jurisdictions applying manifest disregard, and others holding that it is not grounds to vacate an award. For the near future, the ability to use the concept is going to depend on the court deciding the issue.

One question that is being raised that has some merit - isn't the refusal of an arbitrator to apply a controlling law to the facts before him a form of misconduct? And if so, then the concept of manifest disregard of the law is simply a form of arbitrator misconduct, and is in fact a grounds for vacating an award.

Thanks to Philip Loree for alerting us to the denial of cert.

Pay Czar Targets Salary Cuts

The Obama administration's pay czar is planning to clamp down on compensation at firms receiving large sums of government aid by cutting annual cash salaries for many of the top employees under his authority, according to people familiar with the matter.

Instead of awarding large cash salaries, Kenneth Feinberg is planning to shift a chunk of an employee's annual salary into stock that cannot be accessed for several years, these people said. Such a move, the most intrusive yet into corporate compensation, would mark the government's first effort to curb the take-home pay of everyone from auto executives to financial traders. More>>>

Beware of Auction Rate Securities Settlement "Phishing" Scam

FINRA has issued an Investor Alert to warn the public about a recent auction rate securities (ARS) “phishing” scam that promises compensation from ARS settlements in exchange for personal information. Follow the link to the FINRA web site. The email looks like it originated from FINRA—although it did not. It purports to inform the recipient of regulatory actions, including fines imposed by FINRA related to ARS, and states that the recipient is due $1.5 million regardless of the amount of their ARS investment or loss. The email then “phishes” for personal information including occupation, address and phone number. More>>>

No More 50% Pay Cuts?

Sallie Krawcheck, Bank of America Corp.’s head of wealth management, said she won’t do “stupid things” to pay policies that might spur financial advisers to leave the bank. I guess we don't be seening any more 50% pay cuts or insulting retention bonuses from BofA/Merrill that caused so many brokers so much harm.  More>>>

No More 50% Pay Cuts?

Sallie Krawcheck, Bank of America Corp.’s head of wealth management, said she won’t do “stupid things” to pay policies that might spur financial advisers to leave the bank. I guess we don't be seening any more 50% pay cuts or insulting retention bonuses from BofA/Merrill that caused so many brokers so much harm.  More>>>

Report Cites Finra Lapses in Fraud Probes

FINRAhas repeatedly denied that it had any responsibility for the Madoff Mess, claiming earlier this year that  "[n]one of the fraudulent activities that have been alleged deal with the activities of the broker-dealer or come under the jurisdiction of FINRA" according to Reuters. But today a special FINRA committee has release a report that addresses teh failure of FINRA to uncover the Stanford CD program issues, and yes, the Madoff Mess. The report states "FINRA examiners did come across several facts worthy of inquiry with the Madoff scheme that, with the benefit of hindsight, should have been pursued."
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RIA Assets Fall But Their Numbers Grow

A recent report has confirmed what we suspected - brokers and groups of brokers are moving to the investment advisory side of the business, leaving FINRA and its regulatory nightmare behind them. FA Magazine is reporting that while total assets under management for advisers declined by more than 20%, which is no surprise, the total number of advisers has increased. More>>>

The IAA Favors Banning Mandatory Arbitration

I am constantly amazed at the positions people take on issues when they haven't thought the entire issue through. The Investment Adviser Association, a trade association of investment advisers,  supports the Obama's administration's efforts to ban mandatory arbitration clauses in securities contracts.

That is an easy position to take when it doesn't affect you, and when it damages your competitors. Arbitration clauses are so widespread in customer agreements because the government forces broker-dealers and individual brokers to arbitrate their disputes with customers. In order to level the playing field, firms started including arbitration agreements in their customer agreements, so that they had the ability to force a customer to arbitration.

Of course, the government does not force investment advisers to arbitrate their disputes with their customers; yet.

If pre-dispute arbitration clauses are banned, there will be no impact on the members of the IAA - no one will be able to force them to arbitrate a claim, since there is no rule that requires them to do so; yet. However, banning pre-dispute arbitration clauses, without addressing the government-forced arbitration clause for brokers, creates a one way street - customers can force brokers to arbitrate, but brokers cannot force customers to arbitrate.

How is that fair, just, or equitable? Clearly it is not.

The IAA thinks it is a good idea to ban such agreements and to create a one way arbitration agreement for their competitors? I'll be here to remind them of this position when the government combines the regulations for advisers and brokers, and forces investment advisers to arbitrate their disputes, as they currently force brokers and broker-dealers to arbitrate.

If arbitration is unfair, then let's ban it. It if is unfair  then the rule should be that no one can be forced to arbitrate a dispute before it arises. Ban pre-dispute arbitration agreements, and ban agency rules which force over 650,000 employees to arbitrate their disputes with their employers and their customers.
 
The Investment News article on the IAA position is here.

Advisors’ Job Attitude, Outlook Improves

A new survey reveals that independent RIAs have seen their level of job satisfaction rise 10% and the number with an optimistic outlook for the U.S. economy has climbed by 25% over the past three months, according to a survey released by TD Ameritrade Institutional. Half of the 500 RIAs surveyed gave a top rating (9 or 10) to their satisfaction with their job, up from about 40% three months ago. More>>>

Registration and Regulation of Investment Advisers

Increased regulation, and a push for more regulation by FINRA and the States is causing brokers and small firms to move the to investment advisory side of the business. While regulations are going to change here too, there are benefits to the adviser registration, rather than dealing with FINRA. More>>>

How BofA Used Merrill To Bully the Government

Some members of Congress and others have accused federal regulators of pressuring Bank of America into going through with its merger with Merrill Lynch. But records suggest it was the bank, not regulators, doing the bullying. Law.com has an analysis of this view of the issue. More>>>

EXCERPT: 'The Madoff Chronicles'

If you simply can't get enough Madoff, ABC News correspondent wrote a book which examines the personal and business life of the Madoff Family. More>>>

Due Diligence Failure Leads to SEC Enforcement Action?

Did a failure of due diligence cause a broker to assist a fraud? The SEC has charged Detroit-area stock broker Frank Bluestein with fraud, alleging that he lured elderly investors into a $250 million Ponzi scheme.

The complaint reflects that the broker was a top salesman for the Ponzi scheme, raising $74 million from more than 800 investors over a 5 year period. The broker is not charged with running the Ponzi Scheme. In fact, he is charged with not knowing enough about what he was selling - the Commission alleges that he failed to conduct proper due diligence on the investments that he was selling, and thus breached his fiduciary duty to his clients.

There is a whole lot more to the allegations than a simple failure to do due diligence, but we are seeing more and more noise, and some cases, from the Commission regarding the failure of firms and brokers to conduct proper due diligence on the investments that they are presenting to their clients. The work is not being properly performed, or it is being farmed out to third party "due diligence" firms who are not doing their jobs.

The last thing a firm or broker needs to be named in a SEC proceeding alleging misrepresentations that arise from a failure to perform due diligence and therefore becoming an unwitting participant in a fraudulent scheme.  The SEC's press release is here, the securities fraud complaint is here.

Due Diligence Failure Leads to SEC Enforcement Action?

Did a failure of due diligence cause a broker to assist a fraud? The SEC has charged Detroit-area stock broker Frank Bluestein with fraud, alleging that he lured elderly investors into a $250 million Ponzi scheme.

The complaint reflects that the broker was a top salesman for the Ponzi scheme, raising $74 million from more than 800 investors over a 5 year period. The broker is not charged with running the Ponzi Scheme. In fact, he is charged with not knowing enough about what he was selling - the Commission alleges that he failed to conduct proper due diligence on the investments that he was selling, and thus breached his fiduciary duty to his clients.

There is a whole lot more to the allegations than a simple failure to do due diligence, but we are seeing more and more noise, and some cases, from the Commission regarding the failure of firms and brokers to conduct proper due diligence on the investments that they are presenting to their clients. The work is not being properly performed, or it is being farmed out to third party "due diligence" firms who are not doing their jobs.

The last thing a firm or broker needs to be named in a SEC proceeding alleging misrepresentations that arise from a failure to perform due diligence and therefore becoming an unwitting participant in a fraudulent scheme.  The SEC's press release is here, the securities fraud complaint is here.

Trouble Brewing for Small Broker-Dealers?

Trouble Brewing for Small Firms?

Having spent the last 25 years representing small and mid-sized brokerage firms, I completely understand the issues facing these firms. It always seems that FINRA and the SEC fail to pay attention to the ramifications of their rules and regulations on the smaller firms when new regulations are considered.

Those concerns are coming to the forefront again, as the latest economic crisis generates calls for additional rules and regulatory overhaul. SIFMA has taken notice, and is speaking out.

E. John Moloney, the chairman of SIFMA’s small firms committee provided written testimony to the House Committee on Small Business this week, and spoke to On Wall Street magazine afterwards. Moloney, who is the president and chief executive officer of Moloney Securities Co., said that Congress and regulators need to be mindful of unintended consequences in their zeal for regulatory reform.

There are any number of proposals that could negatively impact the small broker-dealer, and Moloney hit a few. He addressed the issue of pre-dispute arbitration agreements, which the NASAA has suddenly decided is a terrible way to resolve disputes. (See my post on their latest position on the topic here). Moloney’s point is that before the use of such agreements are prohibited; the entire process must be examined. As I noted in my discussion, arbitration is often the best way to protect the consumer, as it is not only faster than a traditional court proceeding, it is less expensive.

Today aggrieved investors with smaller claims are able to retain attorneys to represent them, precisely because of the lower cost of arbitration. If pre-dispute arbitration agreements are banned, not only will consumers be able to opt-out of arbitration, brokers and firms will be able to do so as well. The end result: consumers who cannot afford to prosecute their claims in court will have no recourse at all, and “would likely result in a complete denial of justice for individuals with smaller claims” in Moloney’s words.

On Wall Street’s story contains more detail regarding the issue and SIFMA’s concerns, and is available here.

Friday Q&A - LLCs for Independent Reps

Question: I recently went independent and intend to operate my business as an LLC. We setting up the relationship with my BD, they insist that all the paperwork will be in my name and not the LLC. Is this normal? How do I protect myself from liability?

Answer: The reason the BD insists on having the registration and agreements with you rather than your LLC is simple – securities regulations require it. Firms are not permitted to pay compensation to unregistered persons or entities. Your LLC is not registered, YOU are registered, and therefore the paperwork is with you, not the LLC.

As to liability, first, an LLC will not protect you from liability to your clients should they sue you for negligence or fraud. That is what insurance is for, and a corporate entity does not provide protection from your own wrongful conduct. You can insulate yourself from other liabilities, such as rent, premises liability, vendor suits and all non-work related hazards by using the LLC. Set up the LLC as you would for any other business, and pay the LLC a fee for rent, phones, etc. from the check that you receive from the BD.

All of the legal caveats apply, this is not legal advice. If you need assistance with this give us a call.

SEC Alleges Pump and Dump Scheme Involving ConnectAJet. com Stock

From The Securities Law Prof Blog:

The SEC announced today that on September 18, 2009, it sued several individuals and entities, alleging that the defendants implemented a scheme to funnel ConnectAJet.com, Inc. shares into the public market at great profit to themselves when no registration statement was filed or in effect.

According to the complaint, ConnectAJet.com, Inc., of Austin, Texas, issued 30 million shares of stock in an illegal, unregistered offering to certain penny stock promoters, including Testre LP and Verona Funds LLC, companies owned and controlled by Page, a resident of Malibu, California. To pump up demand for the stock, Cantu and ConnectAJet.com, Inc. launched a nationwide advertising campaign, issued false press releases and published misleading web content. The complaint further alleges that the press releases falsely stated that ConnectAJet.com. Inc. had created a real-time, online booking system for private jet travel. Testre LP, Verona Funds LLC, and an entity owned by Martin M. Cantu, Firenze Funds, LLC, then allegedly sold their stock into the public market at grossly inflated prices for millions of dollars in profits. Fayette, of Sarasota, Florida, allegedly facilitated the scheme by liquidating ConnectAJet.com, Inc. shares on behalf of multiple clients.

More>>>

A Tax on Cadillac Health Plans May Also Hit the Chevys

This is just outrageous. Senator Max Baucus is proposing to put a "luxury tax" on companies who provide the most expensive health insurance policies to their workers. Unfortunately, Senator Bacus is pegging that tax at policies that cost more than $21,000 a year.

The NYT does a great analysis of this outrageous proposal, but misses the mark. Most business owners in New York and New Jersey with small groups pay more than $21,000 a year for their policies. I do. In fact, I had to increase our deductibles because my new health insurance policy was going to cost $30,000  a year! I have the basic 40/40 coverage, with $40 co pays, no dental, no eyeglasses, I pay for hospitalization on a daily basis for 5 days, etc. It is certainly not a cadillac policy. It is a policy for a small group of employees.

And you are going to increase my cost by 35%? Are you out of your mind? More>>>

A Tax on Cadillac Health Plans May Also Hit the Chevys

This is just outrageous. Senator Max Baucus is proposing to put a "luxury tax" on companies who provide the most expensive health insurance policies to their workers. Unfortunately, Senator Bacus is pegging that tax at policies that cost more than $21,000 a year.

The NYT does a great analysis of this outrageous proposal, but misses the mark. Most business owners in New York and New Jersey with small groups pay more than $21,000 a year for their policies. I do. In fact, I had to increase our deductibles because my new health insurance policy was going to cost $30,000  a year! I have the basic 40/40 coverage, with $40 co pays, no dental, no eyeglasses, I pay for hospitalization on a daily basis for 5 days, etc. It is certainly not a cadillac policy. It is a policy for a small group of employees.

And you are going to increase my cost by 35%? Are you out of your mind? More>>>

SEC Files Insider Trading Charges Only 5 Days After the Trade!

Wow, this has got to be a record. The SEC announced today that it charged Richardson, Texas resident Reza Saleh with insider trading around the public announcement of Dell Inc.'s tender offer for Perot Systems earlier this week.

The trades occurred between September 4 and September 18 OF THIS YEAR! Just 5 days ago.

The press release says that the "overwhelming evidence in this case allowed the SEC to move quickly." That must be some mound of evidence. I am involved in insider trading investigations where the trades took place years ago.

Maybe the Madoff Mess has a silver lining afterall. An Enforcement Division that has the resources to move quickly?  More>>>

What the SEC Might Look Like If It Did Its Job

Bloomberg's Susan Antilla has an interesting article on the SEC. While I am not an advocate of putting investors in control of the SEC, which would undoubtedly do more harm than good, the idea of removing the Enforcement Division and putting it into the Justice Department deserves some consideration. More>>>

SEC About Face on BofA Suit

After having its questionable settlement with Bank of America rejected by the Court, the SEC has now said that it will press its case that Bank of America Corp. misled investors, and said additional claims may be added.

“We will vigorously pursue our charges against Bank of America and take steps to prove our case in court,” the agency said yesterday in a statement, a week after U.S. District Judge Jed Rakoff set trial for February. The SEC said it will use the pretrial process to obtain information and “determine whether to seek the court’s permission to bring additional charges.”

Are we supposed to forget that the Commission agreed to settle the claims in an agreement that was of questionable merit, and did not include any individual defendants? More>>>