Tuesday, March 29, 2011

Finally! - Why Excerise Won't Make You Thin

I have been on a health kick since December, in yet another attempt to lose weight. With 20 pounds down, people often ask how much I am excerising. The answer - not much. Practicing law in a small firm does not leave much time for excerise. Sure, I could probably find the time, but my thought has always been, why bother?

I understand the benefits of walking, and I do not doubt those benefits. And I do walk and play golf, but going to the gym and working my butt off for an hour to lose weight? It never made much sense to me.

For me, its pretty simple. To lose weight you need to burn more calories than you eat. That's it. Simple. I burn something in the range of 2,600 to 2,800 calories a day in my no-excerise life style. We need to lose 3,500 calories to lose a pound. This is pretty simple - eat 500 calories less a day, you lose a pound a week. Done.

Now, it is really a bit more complicated than that, and you need to move in your daily life. I also pay attention to my intake of cholesterol, salt and saturated fat, but exercise to lose weight never made much sense to me. Let's see, use a stair machine for a half hour, you burn 500 calories. If you do that every single day, you lose another pound. Not too bad, assuming you can climb stairs for a half hour a day every day. But it is not mind blowing, and forgive me, but slightly unreasonable to sustain.

But this article from Time Magazine points out that when most people excerise for any length of time, the eat more! Think about it. When I was playing raquetball three days a week, each one of those sessions was followed by a Gatorade after, and a corn muffin on the way to the office.

Burn 500 calories playing raquetball, drink a bottle of Gatorade during the match, eat the corn muffin after, and you have given back 400 of those 500 calories. Plus the thought at lunch - "heck, I worked out today I can eat [insert whatever]" and you just negated any calorie burning benefit of the excerise.

But excerise builds muscle which burns more calories than fat? Sure, but again, do the math. Assuming you could add 10 pounds of muscle by excerise, that muscle burns 40 more calories a day. Sure, that is going to help you towards the losing 3,500 calories.

Read the article. It details study groups where the excerise group gained weight (because they ate more afterwards), those who excerise in the AM are less active during the rest of the day, and much more.

And then there is the friend to walked/jogged an hour a day, 7 days a week on a treadmill. She did it for months, lost 20 pounds, and was very happy. But she couldn't continue to walk that long for that many days and ultimately cut down on the walking. And ultimately gained back the weight. Calories in minus calories out.

Don't misunderstand. I understand the heart benefits of excerise, and the overall health benefits of daily excerise and simply moving during the day. But excerise to lose weight? Maybe it is the lazy lawyer in me, but that simply doesn't add up.


Friday, March 25, 2011

SEC Charges Four In Boiler Room Operation

We haven't heard the term "boiler room" in years, but the SEC dusted off the term this week when it announced that it had filed a complaint alleging that a group in Los Angeles were operating a boiler room that defrauded investors who they persuaded to buy purportedly profitable trading systems.
The SEC alleges that representatives of Spyglass Equity Systems Inc. cold-called investors and made false and misleading statements to help raise more than $2.15 million from nearly 200 investors nationwide for two related investment companies – Flatiron Capital Partners LLC (FCP) and Flatiron Systems LLC (FS). However, only a little more than half of that money was actually used for the advertised trading purposes, and much of the trading that did occur failed to use the purported trading systems. FCP and FS wound up losing about $1 million in investor funds. The managing member of the two firms – David E. Howard II – misused almost $500,000 of investor money for unauthorized business expenses as well as personal expenses including travel, entertainment, and gifts for his girlfriend.

Friday, March 18, 2011

Insider Trading Lessons For Executives

I am constantly amazed at the amount of insider trading cases brought by the Commission. While the SEC often goes overboard in their cases, and sues individuals who did nothing wrong, (see, Mark Cuban), the simple fact is there are far too many occasions where an individual, and in particular a corporate executive, is charged with insider trading.

I suppose that there is the thought that the trader will not get caught, and the allure of big profits is simply too much to ignore. However, in this day and age, it is extremely easy to track down insider trading.  The Commission has extensive tools at its disposal to do so. The simple fact is that the Commission will look at every account that purchased a stock prior to the disclosure of the material information. it will then subpoena the brokerage account statements, and then subpoena the individual to provide documents and a deposition.

The Commission will also start matching up that individual with the other accounts who purchased the stock, and investigate any connection between the executive and those other accounts. It will ask the executive about those accounts at the deposition. Keeping in mind that lying to the SEC is itself a crime (see, Martha Stewart) it is simply a matter of time before the SEC finds the executive's account, as well as the accounts of his wife and his buddies.

Many times the individual has made legitimate purchases. On more than one occasion I have been able to demonstrate to the Staff that my client was an active trader, and that he simply made the correct trade at the correct time, or that he had been following the stock and purchased it when he did because of various public information that he obtained, and could demonstrate that he had at the time of the purchase.

If there is any doubt about what I am saying, all one needs to do is to search the SEC press releases for the term "insider trading."   Yesterday brought the latest example. The Commission has filed charges against four executives and four of their families and friends with insider trading in advance of the the acquisitionof their company.

Granted, these are only allegations, but if your company is being acquired, you have to think long and hard about purchasing its stock in the days leading up to the announcement. If that is the case, and if you do that, the SEC will find out about it. They will, it is as simple as that, despite the black eye from the Madoff scandal.

Obviously, the defendants may have explanations and defenses, but why put yourself in that position? Presumably an executive of a public company already has stock in the company, the acquisition will, or should, increase the value of that stock, and there is a legitimate profit to be made. Heck, that is the profit that most entreperneurs are looking for - create a company, sell it to a bigger company, made big money.

The allure of the addtional profit by making additional purchases is certainly real, but the down side is tremendous. Putting aside the embarrassment of having your name in the paper and press as being accused of securities fraud, the Commisison will seek not only a return of the profits, but a penalty equal to three times the profit! And they will get those remedies. You will need to defend that claim, and ven if there is a legitimate business or investment reason to buy the stock during the acquisition discussions, the risk of being named in a SEC proceeding, and the cost of defending that proceeding, are significant.

Not to mention having your wife and friends dragged into the mess.  That will happen, because the SEC will also charge whomever it thinks received the information from you and purchased the stock. In yesterday's example, the Commission charged the executives and the friends and families of three of the four. The Commission is alleging that the group purchased nearly $600,000 in stock in the month prior to the announcement, and had a profit of $320,000.

Again, there are defenses to these claims, and the SEC is not always correct in its allegations, but the question is, is the $320,000 spread over 8 individuals worth the risk, knowing that the odds are that the SEC will in fact look into those transactions?

SEC Charges Hedge Fund Managers with Fraud

The SEC has charged a hedge fund investment advisory firm and its two founders with orchestrating a multi-faceted scheme to defraud clients and failing to comply with fiduciary obligations.

The SEC alleges that the founders misappropriated client assets, inflated assets under management, and filed false information with the SEC and that they looted approximately $1.8 million of assets from a hedge fund they manage. The Commission alleges that they issued promissory notes to conceal a substantial portion of their misappropriation, and misrepresented the amount of capital that some of the partners had invested.

Wednesday, March 16, 2011

Facebook Pre-IPO Stock A Scam

(Bloomberg News) Facebook Inc.’s privately held shares that are trading before an initial public offering may be attracting con artists who exploit investor demand by selling bogus stock, the main U.S. brokerage regulator said.

“While most pre-IPO offerings are legitimate, some are frauds in which con artists sell shares they do not actually have,” the Financial Industry Regulatory Authority said Tuesday in a statement. The watchdog learned of some “potentially fraudulent schemes to sell purported shares” of Palo Alto, California-based Facebook, it said, without elaborating.


Tuesday, March 8, 2011

Tax Consequences of Investments - Broker Duty to Consider?

In my view of the world, a broker has no duty to research or consider areas that are outside of their area of expertise, and tax implications of an investment are one of those areas. Excluding tax motivated investments, where the tax considerations  are the basis for the recommendation, it is the realm of tax attorneys and accountants to consider such issues, not brokers and advisers.

But is is an interesting question, addressed by Chris Lufrano in a recent blog post.

The analysis begins with a FINRA fine against Merrill Lynch for failure to supervise its representatives involved in the recommendation of college-savings products called 529 plans. FINRA’s disciplinary action against Merrill Lynch raises the question: do broker-dealers and their representatives have a duty to research, consider, or even understand the tax consequences of investment recommendations?


More Securities America Arbitrations Stayed in Favor of Class Actions

Securities arbitration claims against broker-dealers who sold shares of Medical Capital Holdings and Provident Royalties were being filed at a break-neck pace after the SEC charged the issuers with fraud in connection with the offerings. At the same time, class actions were filed across the country against the same brokerage firms.

Some of the broker-dealers who sold the securities have been forced to close and others are in danger of closing, as investors in the issuers attempt to argue that the individual brokerage firms are responsible for the fraud of the issuers.

That legal theory is difficult to prove, as the investor would have to prove that the brokerage firm was aware of the fraud, or should have been aware of the fraud. Still, tens of millions of dollars in arbitration claims is enough to force firms to re-think their strategies with dealing with the claims.

On the other side of the coin, securities attorneys  will have their clients opt out of the class actions, since the potential recovery in a class action can often be pennies on the dollar. While class actions can be an excellent way of addressing wide-spread wrongs, the costs in bringing and maintaining a class action that has thousands of plaintiffs are significant. An individual investor with a potential claim should do better in his own arbitration, rather than joining the class.

Those costs are a large factor in decision of firms to attempt to avoid class actions, and to deal with investor claims one on one. Arbitration seems to be where everyone wants to be.

The decisions by one Judge in Texas have twisted this interesting alignment of interests. Judge W. Royal Furgeson Jr. of U.S. District Court for the Northern  District of Texas has stayed arbitrations relating to the two offerings. The media is reporting that the Judge forced the investors into the class action, which is odd, and probably unconstitutional. However, that is not the case.

What Judge Furgeson did was to stay the three pending arbitrations one of which were scheduled to begin the following week and two others, which were scheduled to begin later.

The decision is interesting for a couple of reasons. First, according to my reading of the order, the claimants in the arbitration "would apparently be members of the proposed settlement class." It seems to me that either they are members of the class, or they are not, and I presume that all three claimants opted out of the class action. To my mind there is a problem with staying a proceeding brought in another forum, by someone over whom the court does not have jurisdiction.

However, Judge Furgeson relies on caselaw and the All Writs Act, to support his decision. I haven't done the research, but the cases quoted certainly do support the court's order. He also points out that all he is doing is temporarily restraining the arbitrations from moving forward, until he has the opportunity to consider the questions of jurisidiction and whether such relief is appropriate. The Court's concern is for the class, and the potential for the individual arbitrations to expend funds that could be used to pay the class action settlement.

All well and good, but noble purposes does not make the decision right.

I am certainly not a constitutional scholar, but this one just doesn't pass the smell test for me. Aside from the socialistic aspect of this (please, no political emails), I cannot fathom how a judge can stay private arbitration proceedings because it will expend the defendant's available pool of resources to settle the class action, and will give some investors more money than others. I understand the concept in bankruptcy court, but to my mind it has no application in civil court.

The decision also points out other decisions that hold that staying an arbitration, in order to preserve assets for a class action is "not a sufficient basis to limit an opted-out class member's contractual right to arbitrate." THAT makes legal sense to me. These claimants opted out of the class, they decided to go on their own, spend their own time and money to pursue their own claims, giving up the "benefits" of being members of the class.

It will be interesting to see what happens down the road. Assuming he stays the arbitrations on a permanent basis, does he have the power to force those arbitration claimants into the class action? Do they then bear the burden of having spend their own time and money (or their attorneys' time and money) to see it all washed away without compensation and without any benefit? What about the arbitrations that have already concluded? Doesn't the same rationale apply to the arbitration claimants who have already collected their awards? Under this theory, don't they have to return the money?

At the same time, this is a significant victory for Securities America. Defending corporations in these mass tort type actions is a challenge, as one has to deal with the legal issues, the factual issues, and the practical considerations that the firm does not have the money to pay the alleged losses. Fighting an unlimited war on multiple fronts is a problem for companies who are defending these types of claims.

Judge Furgeson's decision addresses some of that. Assuming his stay is not overturned, the Class Action Settlement will provide for a fixed pool of money to pay all claims against the firm, and we can assume that the broker-dealer will be able to stay in business after the payment of all claims. The brokerage firm gets to cap its costs, which for it is a good thing, under the circumstances.

The second interesting point is the reaction from the claimants bar - the attorneys who represent investors against brokerage firms. For years those attorneys have been beating the drum about how unfair arbitration is, and how customers are being forced to give up their right to sue in court.  I don't agree with the argument, and still believe that despite its flaws securities arbitrations (which are different than consumer arbitrations) are vastly superior in dispute resolution than court proceedings. But I can respect and understand the argument, even though I disagree.

What makes this all very interesting is that now the customer attorneys are claiming that it is unfair for their clients to be in court. Of course, it is the class action they are arguing against, not the court proceedings in general, but I have to chuckle when I see this quote an investor attorney regarding the restraining order -  “It strips the rights of the investors to arbitrate claims and have claims heard by arbitration panels." The quote is usually that arbitration agreements strip the rights of investors to be in court and have their claims heard by a jury.

But that is what I love about securities law. The law is never the same, and neither are the arguments.

We put the decision online here. InvestmentNews.com has a story on the decision as well, here.

BofA In A Panic? Unilaterally Imposes Garden Leave Provisions

It never ceases to amaze me that Bank of America has managed to stay in business. Personally, I always thought they were a terrible bank, with terrible rates, annoying terms and conditions, and really annoying marketing. As a brokerage firm, they have simply bumbled and stumbled their way through the acquisition of Merrill Lynch, turning a unique opportunity into a disaster.

There are too many misteps to detail, but the ones that directly affect brokers makes the point - plus there is a new disaster breaking.

Right after the merger Bank of America had a problem. Its US Trust brokers had some of the same clients as its Merrill brokers, and the two firms were, on a certain level, competitors. The same is true on the retail side, but the problem is what do you do about integrating the brokers and the customers?

There are any number of solutions, but Bank of America decided that brokers who Merrill recruited from US Trust could no longer solicit their US Trust clients to join Merrill. That obviously causes a significant problem for the new US Trust recruits - who are recruited by Merrill to bring their clients from US Trust. Imagine that series of conversations:
         "Bring your business to us, we want your US Trust clients, get them over here."

         "We will give you a huge bonus, as a loan, and you will be able to pay it off with the money that you make with us"
"Great you are here, glad to have you!"

"Oh wait, you can't solicit your old clients to come over here. Not a problem, you can start all over again here!"

A complete disaster for those US Trust recruits, and Bank of America offered no solutions, no enhanced compensation, no additional loan forgiveness. Nothing, it just told its new hires, many of whom were big producers with signficant clients who they had built relationships with over decades, "too bad", "start over."

There was also the 50% pay cut imposed on bank brokers. Yes, those stock brokers who sit in bank branches and provide investment services. Their compensation structure is different from that of a stock broker on the brokerage side of the business. Their payout is lower, but they have some advantages - a build-in client base, and referrals from the branch bankers. For reasons which still remain a mystery to the brokers involved, Bank of America decided one day to stop permitting bankers to give referrals to the bank brokers, and then in order to insure that they really screwed the brokers, they cut their payout in half. A 50% pay cut plus a loss of your largest source of referrals. Many brokers were simply forced to leave because of this flagrant breach of contract, and the reality that you cannot earn a living after a 50% paycut. You have to leave in order to support your family.

Then Bank of America refused to join the Broker Recruiting Protocol, creating the interesting situation where Merrill brokers were covered by the protocol, but Bank of America brokers were not. And just to make sure the process was an entire mess, they began to consolidate the bank brokers with the brokers at Merrill. That created significant problems with the Recruiting Protocol. While those were ultimately addressed, it created additional problems for individual brokers, many of whom were forced back to a branch that they left - brokers who got into a dispute with Bank of America managers and quit to go to Merrill are finding themselves back at their old Bank of America office, with the same manager.

To no one's surprise, Bank of America is having trouble recruiting brokers. Shocker. What would a reasonable firm do in such a situation? There are a ton of choices - increase pay packages, step up recruiting, and otherwise make your firm a place where brokers can bring their clients, with a good platform, favorable employment policies - things like that.

Did Bank of America do any of that? Of course not. Instead of making the firm a place to conduct a securities business, add value to the customers, all to entice brokers to join, Bank of America has done the exact opposite - they have announced unilateral employment terms on their existing brokers, and new hires,  in order to prevent them from leaving!

Some advisors at Bank of America Merrill Lynch's U.S. Trust unit recently received an ultimatum - a demand that they sign a new agreement that would effectively sideline them for up to eight months if and when they decide to leave the firm or else risk losing not only their 2010 bonuses but their jobs, too.

That's the ticket! We can't recruit brokers, so lets make sure the ones we have do not leave. Lets force them to give 60 days notice of termination, with a 6 month non-solicit of their customers! Not only does this move raise employment law questions, contract questions, and more,  it raises questions regarding the Broker Recruiting Protocol and a potential breach of the agreement with 450 other brokers firms.

The Protocol was put into place to stop all of the lawsuits between firms when a broker moved. Firms were spending tons of money suing each other over recruiting and solicitation of clients. Three firms created and signed the Protocol, which is in essence an agreement between the firms to allow brokers to solicit customers when they leave, provided the provisions of the Protocol are met. Bank of America acknowledges that its Merrill brokers are covered by the Protocol, but continues to insist that its US Trust brokers are not.

How Bank of America intends to compete in an industry where over 450 of the firms have signed onto the Protocol remains a mystery, but this latest move is the icing on the cake. Brokers are aware of the existence of the Protocol, and in considering a move, factor the Protocol into their decision making. It obviously makes a significant difference if the new firm is part of the Protocol, as it makes the transition easier, and gives the broker a measure of comfort knowing that he will not be sued if the new position does not work out, and he wants to leave in a year or two.

But now US Trust, which is not part of the Protocol, and already has problems recruiting, has make the situation significantly worse. Any broker who is considering a move to US Trust is going to have to consider that once he goes there, he can never leave, no matter what happens - because if he does leave, he will lose his clients.

A two month garden leave plus a 6 month non-solicit is draconian. Even Bank of America can convince clients not to leave the firm if they get an 8 month head start.

Related Stories:

Prickly BofA slaps "garden leave" restrictions on advisers
US Trust Asks Employees to Confirm Broker Protocol Does Not Apply
BofA to Advisors: Take it Or "Garden" Leave It
BofA Forces "Garden Leave" on Brokers After Defection

Recruiting Bonus to Be Banned?

Last year Mary Shapiro started talking about bonuses on Wall Street and how bad they were. (That's almost funny given the source) and the SEC has finally gotten around to addressing the boss' concern.

On Wednesday, the SEC proposed new rules aimed at reigning in incentive comp. The rules, which stem from Section 956 of the Dodd-Frank Act, would prohibit incentive-based compensation arrangements that encourage “inappropriate” risk-taking or could lead to “material financial loss” at broker-dealers and investment advisers with $1 billion or more of assets.

The current proposal would not affect most investment advisors, and so far, recruiting bonuses are safe - so long as they do not provide additional bonuses for performance, and according to one source, so long as there are no claw-backs based on performance.

However, the traditional recruiting bonus does have a claw-back provision of sorts - if the broker leaves the firm before the term of the note and the additional compensation agreement, he has to pay back the note. In reality, the broker is paying back the bonus, and that is a claw back provision. Couple that with a termination for lack of production, and you have a true performance based bonus, which the SEC is going to ban.

The rule is not final yet, but if it is approved as is, we are going to have an interesting situation. Firms will be forced to restructure their bonus and notes, and are going to have to address the termination for lack of performance issue. There is certainly no way that firms are going to remove that clause, and they cannot realistically remove recruiting bonuses, which puts them in a bit of a bind.

My money is on the third choice - an exemption for repayment of loans on termination for lack of production. I'll update as events move forward.

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Why Is the Financial Services Industry Still Lukewarm About Social Media?

It's the regulators of course. Update on the use of social media by financial firms from Financial-Planning.com