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 Hotair.com 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 InvestmentNews.com, 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.