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>>>