Friday, December 17, 2010

Madoff Investor Returns $7.2 Billion to the Bankruptcy Estate

The widow of deceased philanthropist Jeffry Picower has announced an agreement with the Madoff Trustee to return 7.2 billion dollars to the bankruptcy estate, which, according to the press release, represents "every penny received from almost 35 years of investing with Bernard Madoff."

In a press release through her attorneys, Ms. Picower expressed confidence that her husband, who was an extremely successful investor, was not involved in the fraud. She said that his investment prowress allows her to make the payment, which exceeds the estate's legal liability (presumably on a claw back claim), and "return to the philanthropic work that was so important to Jeffry and me."

With estimated cash losses of approximately 20 billion dollars, this 7 billion, together with the 2.3 billion the Trustee has recovered should translate into repayment of half of the investors out of pocket losses. Of course, that does nothing to address the billions in profits reflected on those investors fraudulent brokerage statements.

Tuesday, December 14, 2010 - FBI Investigating Hack

Investigators from the FBI were expected to meet with Gawker Media CEO Nick Denton Monday following the massive weekend hack by a group called Gnosis that paralyzed the media company’s website and temporarily forced it to stop publishing.

Friday, December 3, 2010

Friday Q&A - Are EFLs and Promissory Notes Enforceable?

Friday Q & A – I recently left Bank of America after the ML merger, and they now want me to repay the bonus that I received. BofA killed my business, and ML actually made it worse? Do I have to repay the money? Will they settle or do I have to go to arbitration?

This is almost becoming a daily question in our office, and not only with Bank of America reps. The turmoil in the financial markets has cause turmoil for brokers and firms as well. Add to that the move to become independent, and/or starting your own RIA (finally!) and there is quite a bit going on in broker transition these days.

The short answer is that assuming you have the “standard” promissory note that the firms use you are probably going to have to repay the money. The promissory notes are unconditional promises to repay. In most cases, they are clear that if you do not work at the firm, or any reason, the note is due and payable.

However, that is not the end of the story. Many reps that leave firm have claims against the firm – after all, that is why they left. Those claims may constitute a counterclaim against the firm – for mismanagement, unilaterally changing the terms of your employment (like reducing payouts by 50%), a harassing manager, or even closing your branch. While the counterclaim does not void the note, and award in your favor on the counterclaim may offset, or eliminate, the amount owed on the note, and in some cases, an award on the counterclaim will exceed the amount of the note, resulting in a net payment to the broker, rather than the other way around.

Those cases are not the norm, but they do exist. And like most things legal, the counterclaim depends on the specific facts. I have represented brokers with great counterclaims, and those cases get resolved – that is why you do not see them in the arbitration award database. When the counterclaim is not as viable as it might be, we negotiate the note, enter into a new long term payment agreement, or otherwise settle the case. That sometimes takes some work, but at the end of the day the settlement is typically a better outcome than going to an arbitration and losing for the full amount.

The only way to have an idea of the viability of the claim is to have an experienced securities employment attorney review the facts – and of course your contract and note. Not all employee forgivable loan documents are the same.

And call me for a consultation before you leave your firm, not after. After all of these years it still amazes me how often brokers leave a firm, negotiate a new deal at a new firm, and wait until they are at the new firm to ask for a consultation. Do yourself a favor; call an attorney before you give notice, not after.

Questions? Email me at or call my office at 212-509-6544. We represent brokers nationwide and have been doing so for 25 years. My CV is online at

Saturday, November 27, 2010

36th Annual Securities Law Moot Court Competition Seeks Teams and Judges

When I was a law student Moot Court competitions were a big part of my legal education. I participated in two competitions at our school, authored and co-chaired another, and represented my school at a national competition in North Carolina. I also severed on our Moot Court Executive Board in my third year, and believe that the entire experience enhanced my law school education.

I have participated as a judge in the past at my law school, but was pleased to be asked to participate in Fordham Law School's Securities Law Moot Court Competition. I also learned that the competition is a CLE opportunity. From March 25 to March 27, Fordham Law School’s Moot Court Board will host the Thirty-Sixth annual Irving R. Kaufman Kaufman Memorial Securities Law Competition. The Competition has a rich tradition of bringing together complex securities law issues, top competitors from across the country, and esteemed jurists, academic, and practitioners. This year, the final round will feature an impressive panel: Judge Brett M. Kavanaugh (D.C. Cir.), Judge Paul J. Kelly, Jr. (10th Cir.), Judge Boyce F. Martin, Jr. (6th Cir.), S.E.C. Commissioner Troy A. Paredes, and Judge Richard A. Posner (7th Cir.). If you are a student or affiliated with a law school, there are still a few spots available for competitors – but act fast because registration closes December 6, 2010!

The Moot Court Board is seeking practitioners to serve as preliminary round judges, on March 25th and 26th, and grade competitor briefs, from February 21 to March 7. Participation is welcome from anyone with interest, with all levels of experience, whether in litigation, transactions, securities, finance, in-house, or public service. And CLE credit is available.

Additional information and online sign-up is available at If you have any questions, please contact Gabriel Gillett, Kaufman Editor, at or (212) 636-6882.

Tuesday, November 23, 2010

TSA Workers Complain of Abuse

Great collection of clips and comments from Instapundit. Apparently the gropers are being called “Molester, pervert, disgusting, an embarrassment, creep." While lashing out against a low paid worker for the outrageous policies of his employer may not be fair, what did they expect after conducting an unncessary and fruitless invasion of privacy? A thank you? Read the collection here...

A Sucker's Play -- Each $1 in Higher Taxes Results in $1.17 of New Spending

Linked from the Tax Professor Blog, and interesting reading even if you don't know a thing about taxes. Best line of the article - "Our research confirms what the late economist Milton Friedman said of Congress many years ago: 'Politicians will always spend every penny of tax raised and whatever else they can get away with.'" More...

Tuesday, November 9, 2010

More Merrill Brokers Suing BofA over Deferred Compensation

The fallout from the turmoil created for employees as the investment banks failed in 2008 continues. Brokers, traders, salespersons and other employees are suing over compensation which was denied to them, as the investment banks attempted to balance their books. Chicago Business is reporting that four former Merrill Lynch brokers in Chicago are suing Merrill Lynch, now owned by Bank of America Corp., to pay about $3 million in deferred compensation. According to the article, Merrill Lynch is again withholding deferred compensation from employees who left the firm. The brokers claim that they resigned from Merrill after the Bank of America merger, that the change in control constituted "good cause" under their employment agreements, entitling them to their deferred compensation. More...

Friday, October 29, 2010

65% Favor Getting Rid of Entire Congress and Starting Over

Interesting survey from Rasmussen. I would have thought it would be higher.

65% Favor Getting Rid of Entire Congress and Starting Over - Rasmussen Reports™

A new Rasmussen Reports national telephone survey finds that 65% of Likely U.S. Voters say if they had the option next week, they would vote to get rid of the entire Congress and start all over again.

Wednesday, October 27, 2010

Brokers Still Leaving Wirehouses

Over the last two years our practice has seen a marked increase in brokers who are leaving wirehouses. We have always represented advisers who are changing firms, but with the mergers of Merrill Lynch and Smith Barney into their former competitors, there has been a significant increase in these matters. We are also seeing an increase in the switch to becoming an investment adviser, something which we have been recommending for years, in an article titled Why more than 7K reps left the big brokerages in 18 months takes a look at the broker movement. From poor management decisions to material changes in compensation and business philosophy, its no wonder brokers are leaving their firms and becoming investment advisers.

Starting and operating an investment advisory firm is not difficult, and there are less regulations and red tape than at a large broker-dealer. Still, the move is not for everyone, but with the right mind-set and business model, an investment advisory firm has become the answer for many wirehouse representatives.

Thursday, October 21, 2010

Another Award Against a Firm For Reneging Compensation

Maybe the investment banks will learn that you cannot unilaterally decide not to pay their employees? Another FINRA arbitration panel has just awarded an investment banker, who alleged Barclays used the collapse of former employer Lehman Brothers to seek to renege on a compensation agreement, over $700,000 in compensation. The Panel also ordered Barclay's to pay the entire amount of hearing session fees for the arbitration, and interest.

Just last week a FINRA arbitration panel awarded two Merrill Lynch brokers nearly $1.2 million dollars for allegations that Merrill reneged on its written policy regarding payment of deferred compensation. The brokers left as a result of the merger with Bank of America, and alleged that they were entitled to their deferred compensation. The Panel apparently agreed. Our post on the case is here.

These cases are good news for employees who have been denied compensation from the investment banks in 2008. As far too many financial professionals are aware, many firms fired employees at the end of 2008 in order to avoid paying bonuses, or in order to collect the balance on outstanding promissory notes. Other firms forced brokers to repay significant portions of their notes years ahead of time or face termination, and others simply decided not to honor their commitments to their employees.

We are representing financial professionals in a number of these cases, in some cases to obtain the compensation they were entitled to from their old firms, and in others to obtain damages from the firms for wrongful termination. Time and time again we hear similar stories from brokers and other professionals regarding flagrent mistreatment by some of the investment banks, including trumped-up termination charges, along with dirty U-5s. The firms do not seem to care in the least that they are denying compensation to their own employees, harming their families and in many instances, destroying careers.

Ultimately, the firm does not get away with such conduct, but the employees need to commence arbitration proceedings to recover that which they were entitled to. Isn't it time for these firms to act like responsible corporate citizens and to stop trying to balance the books by reneging on their agreements with their own employees?

The award is available at the FINRA web site - Whalen vs. Barclays Capital

Sunday, October 17, 2010

Merrill Brokers Win $1.167 ML Arb Award For Retained Comp

For those who believe that the wirehouses would not deny compensation to an employee simply to save money, this article from Registered Rep provides some telling information. According to the article, Merrill Lynch's employee policies provide that a broker who resigns for "Good Reason" is entitled to have his deferred compensation benefits vest at the time of his resignation.

According to the article, at the time of its merger with Bank of America, brokers were leaving, and Merrill canceled the deferred comp benefits, and simply refused to pay out any funds for a "Good Reason" resignation, something Merrill Lynch had agreed to in the compensation plans.

Why would Merrill Lynch unilaterally breach an agreement with its employees? We have represented brokers against a number of wirehouses in this sort of situation, and the firm always has an excuse. "Good Reason" doesn't really mean "Good Reason", or we were going to fire him, or his reason wasn't really good, or some technical defense that is obviously a ploy to avoid paying.

When the broker points out the obviously ploy, and claims that they denied benefits or compensation to a particular broker as a cost saving measure , the firm chuckles in a smug way, claiming that the firm is so big that an individual broker's compensation would have no effect on the bottom line, and such a claim was absurd.

Really. According to the article, the value of the stock and cash that Merrill refused to pay its departing brokers was significant - between $100 million and $300 million dollars. Sure, one broker didn't make a difference, but deny all of the departing brokers their compensation, and you are talking about a significant sum of money. The theory is, I suppose, deny all of them compensation, a few will sue, but all of them will not, and we will be ahead of the game even if we lose the arbitrations.

A FINRA arbitration panel just awarded two Merrill brokers over 1.1 million dollars for this conduct. Unfortunately, no interest and no attorneys fees were awarded so perhaps the theory of "let them sue" actually works. The Registered Rep article is here, the award is at FINRA's website.

Wednesday, September 29, 2010

FINRA Proposes to Drop Industry Arbitrator Requirement

FINRA announced on Tuesday that it is going to propose a rule change which will permit investors in all cases filed with the agency to choose to have their claim decided by a panel of three public arbitrators. Currently, arbitration panels at FINRA are comprised of two public arbitrators and one arbitrator that has some connection to the financial industry.

Quite honestly, this is all much ado about nothing. There was a time when an industry arbitrator was beneficial to the process. However, during recent years, as FINRA changed the rules so appease investors, the definition of an industry arbitrator has become so expansive as to be meaningless in many cases. Clerks, runners, and secretaries who work at brokerage firms are considered industry arbitrators, and while they do a fine job, they do not offer any industry knowledge to the arbitration panel because of their industry "affiliation."

The entire concept of an industry arbitrator is a problem. First, it gives a perception of bias, even though there is no restriction on having a customer attorney on a panel. There is simply no reason to require an industry arbitrator. Put out the list, give everyone a choice, and if the parties and their counsel feel that an industry arbitrator would be helpful in a case, they will pick an arbitrator with that affiliation. Or not.

One interesting fact that comes out of the pilot program - 50% of the customers who were given the opportunity to have an all public panel still put an industry arbitrator on the panel.

I have handled hundreds of FINRA/NASD arbitrations. There is simply no benefit in requiring an industry arbitrator, and far too much controversy over the requirement. FINRA should have done away with the concept years ago.

The only problem is, who are investors going to blame when they lose an arbitration if they don't have the industry arbitrator to kick around?  More>>>

Tuesday, September 28, 2010

FINRA Wants More Details When Someone Gets Canned

FINRA's Regulatory Notice 10-39 is getting quite a bit of attention. FINRA is going to require Broker-Dealers to put more detail on termination notices in the future. The reason for the attention is that once again, we are going to have public disclosure of unsubstantiated allegations against brokers. Making matters worse, in NY at least, brokers cannot sue their firms for defamation, since those comments are absolutely privileged.
On Wall Street has more on the issue, with quotes from yours truly. More>>>

Monday, September 27, 2010

Judge Orders Law Firms to Assign Minorities and Women to Case

I have the utmost respect for Judge Baer, but this is a bit bizarre. According to, the Judge has ordered two plaintiff's class action law firms to "make every effort" to assign women and minority lawyers to the class action case. The rationale is that there are thousands of class members, male and female, from diverse backgrounds. According to the article, Judge Baer said that "it is therefore important to all concerned that there is evidence of diversity, in terms of race and gender, in the class counsel I appoint."

Just great. Federal judges are now making staffing decisions for law firms, based on race and gender. Interesting point is that he appointed the law firms two years ago as lead counsel.  More >>

Wednesday, September 22, 2010

Appellate Court Reinstates SEC vs. Cuban

The Fifth Circuit Court of Appeals reversed the District Court ruling which dismissed the SEC's complaint against Mark Cuban. We previously addressed the merits, or rather the apparent lack of merit, to the SEC's claims here.

However, the appellate court found that there were facts that were in dispute, an that the case should not have been dismissed. The case will proceed back in the District Court. More>>>

Monday, August 30, 2010

Court Affirms Arb Award Against Madoff Feeder Fund

We have always been of the opinion that Madoff feeder funds have potential exposure to investor claims for not disclosing or monitoring the feeder funds investments with Madoff. That exposure is heightened in some instances, where the feeder fund simply turned over the funds to Madoff, took a piece of the management fees, and did little else.

A New York court has confirmed a AAA arbitration award against Ascot Partners in favor of an Ascot investor for failing to disclose Madoff's exclusive role in managing the investor's assets.

Professor Jill Gross, at the ADR Blog, has an analysis of the decision. The arbitration panel, which rendered a 23 page decision in the arbitration, was chaired by none other than David Robbins, a well known investor attorney.

Thursday, August 19, 2010

State of NJ Settles Securities Fraud Charges

Well, here is something I have never seen. The State of New Jersey has settled securities fraud charges brought against it by the SEC. But there is a reason why I have never seen it; it has never happened before. According to the NJ Star Ledger, the State was accused of securities fraud for failing to tell bond investors it was underfunding its pension funds. The charges were settled immediately, without fines or penalties. Nice outcome for a securities fraud case. More...

Monday, August 2, 2010

SEC Looking Into Insider Trading in BP Shares

Reuters is reporting that the SEC is investigatingwhether people may have illegally profited from trading on nonpublic information at BP Plc (BP.L) (BP.N) in the weeks and months following the disastrous Gulf of Mexico oil spill.  More>>>

Tuesday, July 27, 2010

Advisors Win $2 Million Award Against NRP

Two financial advisors won $2 million in arbitration from a retirement-plan advisory firm they left Merrill Lynch to join in 2008, only to be let go the following year.

According to this article in FA Magazine, National Retirement Partners sought to have the Indianapolis advisors, Wade Walker and Jeffrey Bafs, return funds the company said they owed through a corporation NRP purchased to buy their practice. It also accused them of violating transition agreements. But a panel of the Financial Industry Regulatory Authority ruled that the claims by the company and two subsidiaries were "frivolous, unreasonable, groundless, and made in bad faith," according to the award document.

The panel awarded a total of $2 million to the two advisors, who had filed their own claim accusing the company, based in San Juan Capistrano, Calif., of defamation, theft of clients, disclosure of confidential information and other offenses. More...

SEC To Distribute $106 Million in HealthSouth Fraud

The Securities and Exchange Commission today announced a Fair Fund distribution of more than $106 million to investors harmed in a financial fraud at HealthSouth Corporation.

The Fair Fund for HealthSouth Corporation fraud victims resulted from an SEC enforcement action in March 2003 after which HealthSouth paid $100 million to settle SEC charges that it falsely inflated earnings to meet Wall Street expectations. The U.S. District Court of the Northern District of Alabama entered a final judgment against HealthSouth in June 2005, and the court approved the establishment of the Fair Fund in April 2006.

This Fair Fund distribution to 67,695 individual investors, pension plans and other victims represents the entirety of the money HealthSouth paid to settle the SEC's fraud charges, plus interest.

Questions regarding the Fair Fund distribution should be directed to the Claims Administrator, Rust Consulting, Inc. at More...

Monday, July 26, 2010

Madoff Trustee Ready to Sue Investors

rving Picard, the court-appointed trustee overseeing the liquidation of Bernard Madoff's investment firm, is preparing to file new lawsuits to recover funds from investors who were also duped by the Ponzi scheme, the Wall Street Journal said.

Friday, July 16, 2010

Goldman Agrees to Pay $550 Million to Settle SEC Charges

The Securities and Exchange Commission today announced that Goldman, Sachs & Co. will pay $550 million and reform its business practices to settle SEC charges that Goldman misled investors in a subprime mortgage product just as the U.S. housing market was starting to collapse.

In agreeing to the SEC's largest-ever penalty paid by a Wall Street firm, Goldman also acknowledged that its marketing materials for the subprime product contained incomplete information. More...

Monday, July 12, 2010

B. of A. says it made deals that hid debt

Bank of America Corp. has told federal regulators that it made six trades from 2007 to early 2009 that led to it hiding billions of dollars of debt, according to a media report Saturday. More at MarketWatch

MA Securities Regulators Leaks SSNs of Advisers

According to advisers in Massachusetts were stunned after receiving a letter from the Massachusetts Securities Division, announcing that the regulator had accidentally leaked personal information on some 139,000 advisers registered in the Bay State.

The regulator, which headed by Secretary of State William F. Gavin accidentally released the social security numbers of 139,000 state registered investment advisers. According to the article a spokesman for the securities division downplayed the privacy breach stating "the important thing is there was no breach and that the material was returned in tact."

More political doublespeak? The release of the social security numbers of over 100,000 individuals is not a security breach? If an adviser made that type of statement to the Massachusetts securities division, they would be filing charges for misrepresentation - not to mention the violation of state privacy acts for the underlying breach - accident or not.

Why do the regulators get a pass for this violation? Is someone being fired and having their permanent record permanently marked?


Friday, July 9, 2010

Open Letter to Fans from Cavaliers Majority Owner Dan Gilbert

I am not a basketball fan, and barely knew who Lebron James was before all of the hoopla this month, but the letter from the Cavaliers' Owner to the Cleveland fans is priceless. He is a bit upset over James leaving the team. Just a bit. But maybe he will take "the curse" with him. More>>>

Tuesday, June 29, 2010

Arbitration Panel Orders Goldman Sachs to Pay $20.58 million

Goldman Sachs has been ordered to pay $20.58 million to creditors of a failed hedge fund to settle claims that the bank helped the fund perpetrate a Ponzi scheme. More>>>

Monday, June 21, 2010

No Fund for States to Oversee Advisers?

If the legislation that is currently moving through Congress passes, state regulators will take responsibility for the oversight of all investment advisers who manage less than $100 million dollars, a change from the current benchmark of $30 million dollars.

While the state regulators have been pushing hard to increase their power through this piece of legislation, there is one small problem - they don't have the funds to regulate all of these additional advisers.

State Advisor Regulation Strains Budgets

Attracting Investors - Movie Industry

Many filmmakers begin their careers by persuading private investors to back them. Indeed, unless you are a star like Kevin Costner or Barbra Streisand, it is rare for a major studio to fi¬nance a beginning filmmaker. Banks will not lend money without substantial collateral. Loans based on pre-sales are difficult to obtain because territory buyers want packages with name actors from an experienced director. That leaves most film¬makers looking to Mom, Dad, and whatever they can scrape up from friends, relatives, and MasterCard. While such resources have financed many films, distributor’s expectations have risen over the years. With a glut of independent motion pictures available, many distributors are not interested in acquiring a feature unless it 1) is shot with name actors; or 2) wins an important film festival.
More at the Entertainment Law Resources Blog

Proposed Rules For Breaking Erroneous Trades

The Securities and Exchange Commission announced that the national securities exchanges and the Financial Industry Regulatory Authority (FINRA) are filing proposed rules to clarify the process for breaking erroneous trades. The rules would make it clearer when, and at what prices, trades would be broken.

SEC to Publish for Public Comment Proposed Rules for Clearly Erroneous Trades

Friday, May 21, 2010

Senate Passes Financial Reform Bill

The Senate passed its version of a financial regulatory bill Thursday evening. Now the process of reconciling the House version with the Senate version begins, but it looks like we will soon see the most sweeping overhaul of our nation's financial regulatory systems since the 1930s.

Score Another For Obama as Senate Passes Wall Street Reform (At Forbes)
Senate Passes Broader Rules for Overseeing Wall Street (At The New York Times)
Senate Passes Finance Bill (At the Wall Street Journal)

Wednesday, May 5, 2010

FINRA Proposes Expanding Arbitrator Lists

FINRA announced today that it will increase the number of arbitrators on each of the selection lists by 2 - bringing each list to 10 potential arbitrators. While the change will increase the number of selections for the parties, the number of strikes for each list will remain at 4, increasing the chances that the parties will have an arbitrator that they do not want.

While expanding the lists is undoubtedly good for everyone, this has the potential to be a significant problem. Far too often there are 5 arbitrators in a list that we need to strike, for whatever reason. Now there might be 7, with very little recourse if one of the three that we could not strike are appointed.


Who You Calling a Tea Bagger?

Apparently President Obama is quoted in a book referring to the supporters of the Tea Party Movement as "tea baggers" and the right is having an absolute fit, claiming the term is disgusting and inappropriate. The feigned outrage is simply amazing.

Please. Let's be honest here. The reason the term has become so popular is that it is demonstrative of the complete lack of understanding. The joke has always been on Fox News - where anchor after anchor used the term "tea bagger" in supportive pieces, and never had a clue what the term meant. The mocking was directed at Fox News, and reporters and anchors who were so eager to support anything that was anti-Obama and so out of touch, that they had no idea that the term referred to a sexual act.

It wasn't only Fox News who used the term, the tea baggers themselves used it to identify themselves well before any "liberal" used the term. If you doubt this, search the news archives at Google for the term "tea bagger" and just scan the headlines. The term has been used by the movement itself, and by the "right" wing news media. Witness the "Proud to Be a Tea Bagger pins."

That is what made the term so appropriate. Clueless news anchors using the term to report about clueless protesters sitting in worn out lawn chairs waiving little American flags proudly referring to themselves as tea baggers, without a clue what they were protesting about, or that they were saying. Check out Teabaggers, You Named YourselvesRise of an Epithet at the National Review, The Slur That Must Not Be Named, for more,

Sort of like the protests over the Czars that the President was appointing, and the woman who wanted to know who they were going to rule over, and how much land the government was giving them.

But the real issue here is the feigned uproar. The press needs some honesty, politicians on both sides need to stop the feigned outrage, and the Tea Party Movement needs to focus on its core mission and getting the nut jobs off the stage.

A New American Tea Party: The Counterrevolution Against Bailouts, Handouts, Reckless Spending, and More Taxes


Sunday, April 25, 2010

Goldman's Defense to SEC Fraud Case

The WSJ has copies of Goldman's Wells Submission and its Wells Supplement on line. While the Wells Submission is not Goldman's answer to the complaint, it does offer insight into Goldman's defense of the SEC's claims. (See my article on Wells Notices at for more background information).

The most interesting part of the submission is the claim that everyone in the transaction knew the facts that the SEC claims were misrepresented or omitted:

There was nothing unusual or remarkable about the transaction or the portfolio of assets it referenced. Like countless similar transactions during that period, the synthetic portfolio consisted of dozens of Baa2-rated subprime residential mortgage-backed securities (“RMBS”) issued in 2006 and early 2007 that were identified in the offering materials (the “Reference Portfolio”). As in other synthetic CDO transactions, by definition someone had to assume the opposite side of the portfolio risk, and the offering documents made clear that Goldman Sachs, which took on that risk in the first instance, might transfer some or all of it through a hedging and trading strategies using derivatives. Like other transactions of this type, all participants were highly sophisticated institutions that were knowledgeable about subprime securitization products and had both the resources and the expertise to perform due diligence, demand any information that was important to them, analyze the portfolio, form their own market views and negotiate forcefully at arm‟s length.

And this:

All participants in the transaction understood that someone had to take the other side of the portfolio risk, and the offering documents clearly stated that Goldman Sachs might lay off some or all of the short exposure to the portfolio that it had taken on. A disclosure that the relatively unknown Paulson was the entity to which Goldman Sachs transferred that risk would have been immaterial to investors in April 2007.

As always, there are two sides to every story, and the other side of this one is still developing.

Wednesday, April 21, 2010

The Problem with Litigation is Losing - Pitt on Goldman

Former SEC Chairman and corporate litigator Harvey Pitt puts forth his views on the SEC's complaint against Goldman Sachs. He raises some interesting questions, revolving more around the impact of an SEC loss in the matter, rather than a win.


Related Book: Chasing Goldman Sachs: How the Masters of the Universe Melted Wall Street Down . . . And Why They'll Take Us to the Brink Again

Sunday, April 18, 2010

Impact of SEC CDO Fraud Case Against Goldman

An analysis of the impact on investor claims of the SEC CDO fraud complaint against Goldman Sachs.


Friday, April 16, 2010

SEC Charges Goldman Sachs in CDO Fraud

In a complaint filed in the Southern District of New York, the SEC has filed civil charges against Goldman Sachs, alleging that it structured and marketed a synthetic collateralized debt obligation (CDO) that hinged on the performance of subprime residential mortgage-backed securities (RMBS). The Commission alleges that Goldman Sachs failed to disclose to investors vital information about the CDO, in particular the role that a major hedge fund played in the portfolio selection process and the fact that the hedge fund had taken a short position against the CDO. The SEC Press Release contains more details and a copy of the complaint.

The Partnership: The Making of Goldman Sachs

Monday, April 12, 2010

Schwab Continus ARS Fight

Charles Schwab Corp. continues its fight with New York Attorney General Andrew Cuomo over its sales of auction-rate securities to investors.

Cuomo claims that Schwab sold the securities fraudulently. Cuomo made similar claims against 14 other securities firms, which settled with him. Schwab is seeking dismissal of the complaint that New York filed last August. More>>>

Wednesday, April 7, 2010

Fifth Third Gives President $2 Million Raise with TARP Money

Fifh Third Bancorp, which received $3.4 billion in TARP funds, which have not been repaid, just gave its CEO a 56% raise, to $5.2 million. I thought this was an April Fool's joke, but no, here it is, in a Reuter's article.

The article also points out that PNC Financial, Regions Financial and KeyCorp, all of which owed billions of dollars to taxpayers at the end of 2009—also increased their chiefs' pay.

I am all for free market salaries, and properly compensating corporate executives, but did the concept of a pay freeze while borrowing money from the US taxpayer even cross their minds?


Monday, April 5, 2010

Facebook Tells Employees Not to Sell Shares

Facebook has an interesting problem - it is in danger of having too many shareholders, an outcome that is being made possible by online trading sites like, which allows shareholders in private companies to sell their shares to others.

There are plenty of issues surrounding these sites for private companies, including not knowing who your shareholders are, and having your shares too widely dispersed. One of the more significant issues however, is Section 12(g) of the Securities Exchange Act of 1934. That section requires a private company with total assets in excess of $10 million and 500 or more record holders of a class of equity security, to register the class of equity security with the SEC, unless it has an exemption from such registration.

(The SEC has a plain English explanation of the rule and filing requirements in "Q&A: Small Business and the SEC - A guide to help you understand how to raise capital and comply with the federal securities laws").

Facebook is concerned that the expansion of its number of shareholders to 500 will force it to go public before management decides that it is time to do so, and has enacted a policy to attempt to forestall that event.

According to a article, the company has enacted a prohibition on the sale of securities by its shareholders to limited periods of time when a "trading window" is opened. Trading windows are commonly found in public companies, and permit sales by employees only during these specific time periods. The policies are designed to prevent insider trading, or more to the point, to limit allegations of insider trading, by preventing trades except has previously designated times, under particular procedures set by the company.

The use of a similar policy by a private company is an interesting development, and one has to question whether it is a legitimate corporate policy - in the private context. Corporations have the ability to restrict transfers or sales of their stock. Those restrictions are commonplace in small corporate entities, and I have written dozens of such policies over the years - typically requiring the selling shareholder to offer the stock back to the corporation, or the other shareholders, either at a pre-determined price, or a price set by some other calculation.

Those policies are a creature of contract - the shareholder agreed to that provision when he acquired his shares. However, the Facebook prohibition appears to be a condition placed on the shares after purchase or acquisition, and could be viewed as a unilateral modification of the underlying agreement.

Obviously an examination of the underlying documents would be required in order to determine the validity of the prohibition and I am confident that Facebook already has restrictions on transfers of its shares. The problem is that the requirement that the shares be offered to the company first can become a financial drain on the company, forcing it to use its capital on purchases at unrealistic prices.

Whether trading blackouts and trading windows are the answer remains to be seen. The article has more on the issues relating to sales of stock by private company shareholders at here.

Mark Cuban Says SEC Tampered With Witness

 We followed the Mark Cuban SEC case with great interest. My thoughts at the time were that it was a lousy case, and the SEC was making a mistake in bringing it. (See my prior Mark Cuban SEC posts.) Many other securities attorneys and commentators expressed the same opinion. Ultimately a federal court judge agreed, dismissing the case finding that the SEC could not win under any circumstances. The SEC appealed, and that appeal is still pending.

During the case, Cuban struck back and filed a suit against the Commission alleging that they violated the Freedom of Information Act. My post about that suit is here. That case is also still pending.

Now he is hitting harder. He is seeking sanctions against the SEC for bad faith in bringing the original charges. According to the WSJ, in the course of that discovery, Cuban learned that senior attorneys at the Commission were snickering about him in emails, swapping  promotional pictures of him from a television show, and negatively commenting on him as a person, as they were investigating and filing charges.

Bad enough. However, there is also an allegation that the SEC attorney handling the case attempted to prevent an employee of a brokerage firm from speaking with Cuban's attorneys. According to the article, the employee's firm's general counsel was told that the SEC "preferred" that the GC not allow the employee to speak to Cuban's attorneys.

Regulators are sometimes accused of improper motive in conducting investigations. Hopefully, such allegations are not true, but in most instances, the defendant does not have the financial resources to investigate the allegation and prosecute a claim.

This case is different, and the SEC has a tiger by the tail. They brought a questionable case, against a public figure, and one has to wonder just what they were thinking in bringing that case. Mark Cuban may well find out exactly what they were thinking, and may just make them pay for bringing a claim in bad faith.

We will have to wait and see what happens, and how much of this is true, but given the fact that it is Mark Cuban, and not some poor unfunded registered representative, it is going to be an interesting case.

The full WSJ article, with attachments, is here.

Logos Multi-Strategy and Donum Fund Managers Plea Guilty

According to an FBI press release five church leaders from Long Island plead guilty to consipracy to commit securities fraud in connection with two hedge funds, Logos Multi-Strategy I, LP and the Donum Fund, LP.

The press release states that the defendants admitted that they conspired to market the hedge funds to prospective investors, including numerous members of their own
church, employing material misrepresentations and omissions contained in private placement memoranda and other marketing materials concerning the management, supervision, and historical and expected trading performance of the funds. In total, the defendants collected approximately $9.3 million in investments in the Logos Fund and approximately $3 million in investments in the Donum Fund.

This is yet another in a series of private placement fraud allegations that are being pursued by regulators. Investors in these funds are undoubtedly seeking securities attorneys to prosecute civil claims to recover their losses. More>>>

Tuesday, March 30, 2010

So that's what they were doing! SEC Staff Viewing Porn

Upfront - this piece is a bit unfair, but the allegations are amazing. A story has been floating around for a few weeks about SEC staffers watching porn on government computers on government time. But Compliancex has a story that claims that no fewer than 16 investigations are currently underway into SEC employees who have spent up to an hour and a half a say viewing online porn

Government employees spending any time viewing porn while at work is bad enough, but what is more troubling is the fact that there are at least 16 investigations into it! What the heck does that mean? Are they investigating 16 SEC staffers, or are there really 16 separate investigations?


Ex-IBM exec Moffat pleads guilty to securities fraud

Lest anyone believe that tipping without trading is not a big deal, a lesson to be learned. Robert Moffat, a senior executive at IBM pleaded guilty yesterday to conspiracy to commit securities fraud and securities fraud, in connection with his involvement in what is being called the largest insider trading case involving a hedge fund fraud in history. (One press report called it the largest hedge fund fraud in history. Unfortunately, it is not even close).

Moffat was not accused of trading on inside information, but rather he was accused, and plead guilty to disclosing inside information to the hedge fund. The press reports indicate that although the charges carry a maximum 25 year sentence, Moffat is expected to receive 6 months in prison.

He is not accused of receiving any financial benefit from the disclosures, and his motives for doing so will remain a mystery. But, his life has been destroyed, and I suspect there will be a SEC civil suit for fines and penalties.

The arrests in connection with the case back in October made significant headlines, (see this Bloomberg article for example) not only because of the scope of the alleged insider trading, but because of the investigative tactics used by the government. The investigation is reportedly the first time that wiretaps have been used in an insider trading investigation. More>>>

Mutual Funds and Social Media

Doug Cornelius has a blog post examing the use of social media by mutual fund companies. I didn't view every example that Doug has collected, but Putnam appears to be doing a pretty good job with Twitter. It looks like they have been at it for at least 6 months, updating with news about the company, webinars and other publicity posts. Now we need the banks to get on board. More>>>

Wednesday, March 24, 2010

GOP to Dems: Will you join us in voting to ban Viagra for sex offenders?

Is everyone as tired of the political games being played by our elected officials? Left, right, Democrat or Republican our government has become a morass of self-interested politicians who don't care about the country, or their constituents. They simply care about keeping their jobs, getting re-elected, and bashing the other party.

The Democrats showed their colors with the legislative games over the health care bill in order to get it passed, and the Republicans are now doing the same to defeat even after it is signed:

The idea is that by securing even a slight adjustment in the language, the Senate will have to send the bill back to the House of Representatives for reconsideration. Drawing out the process makes it more likely for it to be tripped up.

On Tuesday, the GOP put its strategy into action, with Sen. Tom Coburn (R-Okl.) introducing an amendment beyond agreeable. Titled “No Erectile Dysfunction Drugs To Sex Offenders” it would literally prohibit convicted child molesters, rapists, and sex offenders from getting erectile dysfunction medication from their health care providers.

While it will undoubtedly be difficult for Democrats to vote against the measure (one can conjure up the campaign ads already), the party plans to do just that.

How long after they vote on the Viagra amendment before we see a YouTube ad asking, “Why does Harry Reid want to give rapists erections”? Over/under is two days.

From More>>>

Monday, March 22, 2010

Advisors Allowed To Get Social

My article from On Wall Street this month, on use of social media by financial advisers.

There are numerous issues involved, and contrary to the statements made by some, this is not as simple as storing tweets. We are developing compliance and supervisory procedures for firms to use, building on FINRA's social media release, and the issues are numerous. Training, approval, supervision, monitoring, storage are all issue that need to be address before any firm allows their representatives to do anything more than put up a simple LinkedIn profile.

And you can be sure that FINRA is going to start including social media reviews in their next round of examinations. For many firms, it will be a "gotcha" violation, and too many examiners love "gotchas."

Once again, small firms are taking the lead in the use of social media, as expected. We can help your firm, and staff, understand the use of social media, create procedures to deal with these new communication tools, and implement those procedures to avoid costly exams and fines down the road.


Monday, March 15, 2010

Toyota Hybrid Horror Hoax

Forbes looks at a potential bogus story of a stuck accelerator in a Pirus, full of 95 MPH driving, a police chase to stop the car, and a "victim" who is deeply in debt, and who owes Toyota money. More>>>

Sunday, March 14, 2010

Regulators are from Mars, Investors are from Venus?

Interesting post over at The Conglomerate, identifying the differences between the regulators' view of the world and the investors' view of the world. It makes a good point - the financial markets cannot be regulated with more regulation, we need more investor education. More>>>

Friday, March 12, 2010

How Lehman Hid Its Problems While it Collapsed

The New York Times is reporting on a report, complied by an examiner for Lehman, that finds that it failed from multiple causes, including bad mortgages. That is not too much of a surprise, but what is telling is the finding that Lehman used "materially misleading" accounting gimmicks to hide its financial problems. The NYT has the details here.
The full report by Anton Valukas is also online.

Wednesday, March 10, 2010

Keeping Your Signing Bonus May Get Easier?

A recent article at a financial adviser publication ran this headline, without the question mark, reporting on a broker's win on a promissory note case as if it was a major breakthrough in the financial world. It's not.

Certainly the award against the broker of approximately $20,000 on a $142,000 note is a win, but the broker also had to pay $13,000 in forum fees, presumably because he filed a third party claim against two individuals (on which he did not receive any award).

Still, it is a win, but not unusual. I have been representing brokers on promissory note cases for years; decades even. The overwhelming majority of the cases settle, as there are just too many uncertainties in the litigation, and no one wants the risk of loss. I have had instances where my client's note was entirely forgiven, and awards where my clients paid back 20% to 50% of the outstanding balance - which in a case involving a note for over $1 million dollars is a significant win for the broker. In a recent case, the panel awarded my client his attorneys fees, despite the fact that it found for the firm on the promissory note.

The entire concept of structuring a signing bonus as a promissory note in order to keep the new hire at the firm for 5, or 7 or even 9 years is odd, but it certainly has become the standard in the brokerage industry. These  promissory notes have been carefully crafted by the firms to insure that brokers do not leave the firm until the note is completely forgiven, and to insure that the funds are repaid if the broker leaves before the term expires.

In most instances they are completely one-sided affairs - the broker promises to repay the note, and the firm promises nothing except to forgive a percentage of the note on each anniversary date. Firms do not make any representations or promises regarding anything that was said during the recruiting process, and in fact, some firms put language in the compensation agreement that attempts to remove all promises made during the recruiting process.

The promissory note is an unconditional promise to repay, but it does not necessarily stand alone. If the broker had an attorney involved when he was hired, he may have additional clauses in his hiring agreements that provide a defense to the note, or a counterclaim for breach or contract, or the covenant of good faith and fair dealing.

What is going to change these cases is the recent conduct of the wire houses. Firms have always been aggressive in enforcing the notes. Now they are aggressive in attempting to reduce costs by forcing brokers out of the firms, then trying to collect the note. In the last year or so I have seen payout reductions by 50%, removal of all support staff, mysterious re-calculations of payouts, forced changes in business models,  trumped up termination language and a host of other conduct designed to either fire the broker, or force him to leave.

That conduct is resulting in more claims for constructive discharge, as well as breach of contract and related claims, all of which are starting to come to hearing in the next few months.

I expect that we are going to see even more of these cases, where the firms lose on their promissory note claims, and wind up paying the brokers for breach of contract. Firms have been cost cutting off of the backs of brokers for far too long. The recent trend, of forcing a broker to quit, and then aggressively pursuing him for the outstanding promissory note, is going to come back to haunt the firms. The right way to handle a decline in business is to reach an accomodation with the employee, compensate him for the firm's desire to cut his position (or to take his accounts), release him from the promissory note, or some combination of those alternatives, and stop all of this nonsense with forcing brokers to quit, and then suing them because they quit.

If the firms don't act appropriately, you can be sure that arbitration panels will render an award to adjust for what should have been the proper course of conduct. Panels have been doing in in the past, and will continue to do so in the future.


Phony Web Site Targets Madoff Investors

The SEC has issued a press release warning investors of a phony web site that is attempting to obtain information from Madoff victims. The site asks for information in order to obtain a refund from funds allegedly collected by the fraudulent company.

The company's website and name is very close to SIPC's name and web site, and hopefully investors will not be fooled by the scam. Investors who are looking to recover their funds should already have been in touch with SIPC, and an experienced securities attorney.

Tuesday, March 2, 2010

Judge Dismisses Suit Against FINRA for Misleading Members

I am still waiting for a copy of the decision, but according to, Judge Rakoff of the SDNY has dismissed the suit brought by two member firms against FINRA for misleading its members in connection with the merger with NYSE Enforcement.

According to the article, Judge Rakoff held "SROs and their officers are absolutely immune from private damages suits challenging official conduct performed within the scope of their regulatory functions."

There are two obvious problems with this decision. First, FINRA consistently argues, when it suits its purpose, that it is not a government entity, and therefore the proscriptions on its conduct that would apply to a government entity do not apply to it's conduct. Second, the conduct had issue has little if anything to do with the regulatory function of FINRA, it was an organizational matter, and the material put forth to the members in order to vote on a proposal, was allegedly false.

I am certainly not an expert on governmental immunity, but it seems to me that the immunity issue arises, if at all, in connection with the regulatory function. For example, a broker cannot sue FINRA for misconduct in the course of an investigation. If FINRA is a government entity or actor, that is fine. Of course, if it is a government entity or actor, individuals appearing before it have a Fifth Amendment right, which we all know FINRA members do not have, because FINRA is not a government entity or actor. Alice, meet the looking glass.

But now we have a membership organization that has immunity for claims of lying to its membership in connection with a merger with another membership organization?

Something is wrong here. Something is very wrong.


Monday, February 22, 2010

Continued Pursuit of New Defendants for Lehman Losses

The collapse of the financial markets that began in mid-2008 has spawned quite a bit of litigation, and at the forefront of much of that litigation is Lehman Brothers. That is not too much of a surprise, given the fact that the government refused to prevent its bankruptcy. Once Lehman went under, any security that was based on its creditworthiness also collapsed. See,  Investors Filing Claims Against Lehman BrokersLehman Note Sales Under Fire, and Lehman Principal Protected Note Arbitrations On the Rise.

Investors have been filing, and in some cases winning, cases against UBS, who sold a significant amount of principal protected notes to the investing public. Last week, investors scored another victory in Lehman related litigation - a federal court judge in New York denied, in part, a motion to dismiss a class action complaint against Lehman, its affiliates, and certain individuals who signed registration statements for the offering statements for one group of Lehman offerings.

The complaint seeks damages for alleged violations of the Securities Act of 1933 in the issuance, distribution and sale of over ninety separate offerings of mortgage pass-through certificates by affiliates and subsidiaries of Lehman Brothers Holdings, Inc. (collectively, "Lehman") between September 2005 and July 2007. The Certificates are a form of mortgage-backed security ("MBS").

The complaint alleges, in part, that the registration statements for the securities failed to disclose certain material facts, and were therefore misleading. The complaint seeks damages from the individual defendants for these alleged misstatements and omissions under Section 11 and 15 of the Securities Act of 1933, on the theory that they signed the registration statements and on the theory that they controlled Lehman Brothers, Inc., the depositor in the securitization process, and the trusts that issued the Certificates.

The defendants include include certain officers and directors who participated in the registration and sale of these securities. They moved to dismiss the complaint as against them.

Legally, in order to win a claim under Section 11 of the Securities Act of 1933, the plaintiff must allege that (1) it purchased a registered security, (2) the defendant adequately participated in the offering in a manner giving rise to liability under Section 11, and (3) the registration statement "contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading." Section 15 creates liability for individuals or entities that "control[led] any person liable" under Section 11.

The court dismissed the claims in 88 of the subject offerings, since the plaintiffs did not purchase securities in those offerings, and therefore lacked standing to bring those claims. However, the court denied the motion to dismiss as to the remaining 6 offerings, leaving the individual defendants to defend themselves in the class action. We can also reasonably assume that another case will be brought, with investors in the other 88 offerings as plaintiffs.

Investors continue to seek out new defendants in order to recoup their losses in investments that were tied to Lehman, and we can expect to see more of the same in the future.


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