SECURITIES AND INVESTMENT BLOG-COSGROVE SIMPSON

Plaintiff Escapes Arbitration

2026-03-23T13:07:00.000-05:00

In Michael Waller v. Commerce Bank, et al., Commerce Bank appealed the interlocutory order of the Circuit Court of Jackson County, Missouri (“circuit court”), denying Commerce Bank’s motion to compel arbitration of Mr. Michael Waller’s (“Waller”) claims under the Missouri Human Rights Act (“MHRA”). Because there was an unambiguous exclusion clause within the arbitration provision that was applicable to the undisputed facts of the underlying lawsuit relevant to this appeal, the Court of Appeals affirmed the circuit court’s denial of Commerce Bank’s motion to arbitrate.

[Waller] brought this action for Race Discrimination in Public Accommodation and Retaliation in Public Accommodation under the Missouri Human Rights Act after his request to open two business accounts was denied after several visits to two separate locations of Defendant Commerce Bank. [Waller] claims he was denied the opportunity to open the business accounts because he is Black.

[Commerce Bank] filed a Motion alleging that “[Waller] agreed to the terms of a Deposit Agreement when opening his personal account with Commerce [Bank], and the Deposit Agreement require[d] Waller to arbitrate all claims related to or concerning his relationship with Commerce [Bank].” However, the Dispute Resolution – Arbitration section of the Deposit Agreement contained a provision which stated “[t]his agreement to arbitrate shall not apply to any Claims or other disputes relating to business accounts or other non-personal accounts as such accounts are defined in Section II.I of this Agreement. According to the Court, claim was related exclusively to [Waller’s] attempts to open business accounts.

On appeal, Commerce Bank contended the circuit court erred in denying its motion to compel arbitration.

According to the Court of Appeals “Motions to compel arbitration generally present two central issues: (1) whether the parties to the lawsuit entered into an enforceable arbitration agreement; and (2) whether the scope of that agreement encompasses the disputes raised in the lawsuit.” Maune v. Raichle, 721 S.W.3d 865, 869 (Mo. banc 2025). “The parties, however, may agree to arbitrate either or both of these threshold issues by including in the arbitration agreement a delegation provision broad enough to encompass them.” Id. (citing Brown v. GoJet Airlines, LLC, 677 S.W.3d 514, 521 (Mo. banc 2023)). Here, neither party argues that either of these threshold issues have been delegated to arbitration and the arbitration agreement makes clear that those issues are not delegated to arbitration.

“Determining the scope of an arbitration agreement requires application of ‘the usual rules of state contract law and canons of contract interpretation’ in order to ‘ascertain the intent of the parties through the plain and ordinary meaning of the contract terms and give effect to that intent.’” Nelson Trucking, LLC v. K&M Translogic, LLC, 696 S.W.3d 407, 417 (Mo. App. W.D. 2024) (emphasis added) (quoting Mackey, 640 S.W.3d at 798); see also Triarch Indus., Inc. v. Crabtree, 158 S.W.3d 772, 776 & n.5 (Mo. banc 2005) (collecting cases supporting the proposition that, “in determining whether the parties have entered into a valid agreement to arbitrate, the usual rules of state contract law and canons of contract interpretation apply”).

Here, the relevant provisions of the arbitration agreement that the parties entered into when Waller opened a personal banking account with Commerce Bank are plain, ordinary, and unambiguous terms.

The Court of Appeals agreed with Commerce Bank that the arbitration agreement defines “Claim” to have “the broadest possible meaning,” but noted that the same arbitration provision very plainly excludes from the definition of “Claim” any dispute “relating to business accounts.” And, in this litigation, the entire dispute revolves around discrimination claims that “relate” to Waller’s attempt to open a “business account” with Commerce Bank and Commerce Bank’s refusal to open such business account, allegedly for a discriminatory reason.

In sum, because Waller’s claims related solely to his attempts to open business accounts with Commerce Bank, the claims brought in Waller’s petition fell within the scope of the exception to arbitration clause. Thus, the circuit court did not err in denying Commerce Bank’s motion to compel arbitration.

ARE YOU LOOKING FOR A ST. LOUIS BASED SECURITIES FRAUD LAW FIRM?

2026-03-12T12:00:00.004-05:00

If you are, look no further. Indeed, if you use Google for your law firm search you will probably find about 10 law firms that actually have little or nothing to do with St. Louis. Are you getting the best firm for your needs, or the firm that paid to play on the internet?

Cosgrove Simpson began representing investors and members of the industry in 2006. Some cases have gone to court, while others have gone to an arbitration forum such as FINRA, JAMS, or AAA. If you are seeking experienced counsel regarding claims of fraud or negligence related to an investment, please call and ask for one of our St. Louis attorneys. 314-563-2490

FINRA Discloses Its September 2025 Disciplinary and Other Actions

2025-10-07T11:25:00.003-05:00

The self-regulatory body that monitors the conduct of financial professionals just issued its results for last month. The following are just a sampling of the summaries it provided:

Greenbird Capital, LLC (CRD #306692, Boca Raton, Florida)

July 24, 2025 - An AWC was issued in which the firm was censured and fined $50,000. Without admitting or denying the findings, the firm consented to the sanctions and to the entry of findings that it lacked a system reasonably designed to supervise solicitations of private placement offerings. The findings stated that the firm’s written procedures did not prohibit registered representatives from engaging in a general solicitation of such offerings or provide any guidance on what constituted a pre-existing, substantive relationship. In addition, the firm did not have a system to reasonably monitor and document when the firm had established a substantive relationship with a prospective investor, or to confirm, before a prospective investor was solicited for an offering, that the firm had such a relationship with that investor. In connection with the offerings, registered representatives made hundreds of thousands of calls to prospective investors without a reasonable system to ensure that the firm established substantive relationships with those individuals prior to soliciting the individual for a specific investment. The findings also stated that the firm failed to establish, maintain, and enforce a system reasonably designed to achieve compliance with FINRA’s telemarketing rules. The firm had no system or procedure to monitor outbound calls made by the firm’s registered representatives for number on the national do-not-call list. In addition, although a principal of the firm occasionally checked whether registered representatives called customers during the times permitted by FINRA Rule 3230, the firm did not specify when, or how often, such reviews took place. Subsequently, the firm implemented the use of a pre-existing relationship form, revised its WSPs to include language addressing general solicitation and the pre-existing relationship form, and stopped engaging in cold calling. (FINRA Case #2023077022001)

Noble Capital Markets, Inc. (CRD #15768, Boca Raton, Florida)

July 29, 2025 – An AWC was issued in which the firm was censured and fined $45,000. Without admitting or denying the findings, the firm consented to the sanctions and to the entry of findings that it failed to establish, maintain, and enforce a supervisory system, including WSPs, reasonably designed to achieve compliance with provisions of the federal securities laws related to the general solicitation of private placement offerings. The findings stated that the firm’s WSPs failed to address Rule 506(b) of Regulation D of the Securities Act of 1933, and incorrectly permitted the general solicitation of all private placements sold in reliance on Rule 506(b) as long as the prospective investors met certain suitability qualifications. The firm’s WSPs also failed to provide guidance on the need to establish a pre-existing, substantive relationship with prospective investors or address how designated supervisors should ensure the firm had established such a relationship. In addition, the firm also had no process to check whether private placement investors had pre-existing, substantive relationships with it even in the case of investors who first opened accounts at the firm after its participation in the offering. The findings also stated that the firm failed to reasonably supervise a registered representative who, in connection with two private offerings, cold-called more than 40 prospective investors who did not have substantive relationships with the firm prior to its participation in the offerings. Seven of the investors invested a total of $775,000 in one of the private placement offerings. The firm later revised its WSPs to provide updated guidance to the firm’s registered representatives and supervisors on the requirements of Regulation D. (FINRA Case #2020065533402)

Eric Anthony Dupre (CRD #2174456, San Antonio, Texas)

July 17, 2025 – An AWC was issued in which Dupre was barred from association with any FINRA member in al capacities. Without admitting or denying the findings, Dupre consented to the sanction and to the entry of findings that he borrowed at least $2,236,000 from two customers without providing prior notice to, or obtaining written approval from, his member firm. The findings stated that Dupre borrowed $65,000 from a married couple, who were his customers, which Dupre repaid. Dupre also borrowed at least $2,171,000 through a series of loans from a senior customer. Dupre told the senior customer that he would pay back the principal of the loan plus an additional amount. Dupre needed the loans because he was experiencing financial difficulties. To loan a significant portion of the funds to Dupre, the senior customer borrowed funds on margin from his account, which he transferred to a personal bank account before loaning to Dupre. As a result, the senior customer incurred substantial margin debt. Given Dupre’s financial circumstances at the time he borrowed the money from the customer, he did not have a reasonable expectation of repaying the loans, and to date, he has not repaid any portion of the funds loaned to him by the senior customer. (FINRA Case #2023079280501)

Calvin Lee Gray (CRD #7575351, Salem, Missouri)

July 21, 2025 – An OHO decision became final in which Gray was barred from associating with any FINRA member in all capacities for failing to produce information and documents requested by FINRA during its investigation. The sanctions were based on the findings that Gray’s member firm informed FINRA that he had been indicted in June 2024 in the United States District Court for the Eastern District of Missouri for conspiracy to commit bank fraud, fraud in connection with identification documents, aggravated identity theft, and other chargers. The findings stated that the indictment alleged that, using account information that he stole from the firm, Gray obtained credit and debit cards that he used to make fraudulent purchases and transfer money to his control. FINRA’s investigation included trying to determine whether Gray had committed fraud or had engaged in identity theft since August 27, 2024, in a county jail in Salem, Missouri. On April 21, 2025, Gray pled guilty to the criminal charges and is scheduled to be sentenced on July 29, 2025. (FINRA Case #2024083063101)

Donald Franklin Spivey (CRD #847360, Camden, South Carolina)

July 21, 2025 – An AWC was issued in which Spivey was barred from association with any FINRA member in all capacities. Without admitting or denying the findings, Spivey consented to the sanction and to the entry of findings that he refused to appear for on-the-record testimony requested by FINRA in connection with its investigation into whether certain recommendations were suitable for or in the best interests of retail customers. The findings stated that Spivey initially cooperated with FINRA’s investigation but ceased doing so. (FINRA Case #2023078794801)

Meredith Archer Webber (CRD #2435263, Cobleskill, New York)

July 28, 2025 – An Order Accepting Offer of Settlement was issued in which Webber was barred from association with any FINRA member in any capacity. Without admitting or denying the allegations, Webber consented to the sanction and to the entry of findings that she failed to provide documents and information or appear for on-the-record testimony requested by FINRA as part of its investigation into whether she misappropriated funds from two elderly customers. The findings stated that the information and documents and on-the-record testimony requested by FINRA were material to its investigation because they directly related to whether Webber misappropriated funds and were necessary for FINRA to complete its investigation. Webber’s failure to provide the requested documents and information or provide testimony impeded FINRA’s investigation into her potential misconduct. (FINRA Case #2024082788802)

Devin Lamarr Wicker (CRD #4228250, New York, New York)

July 28, 2025 – The U.S. Court of Appeals for the District of Columbia Circuit dismissal of Wicker’s appeal of an SEC decision became final. Wicker was barred from association with any FINRA member in all capacities and ordered to pay $50,000, plus interest, in restitution to a customer. The SEC had sustained the findings and sanctions imposed by the National Adjudicatory Counsel (NAC). The sanctions were based on the findings that Wicker converted a customer’s funds. The findings stated that the customer hired Wicker’s member firm to serve as the underwriter for its anticipated public offering and transferred $50,000 to the firm for the sole purpose of paying a retainer to a law firm, but Wicker used the funds for other purposes. Wicker never used these or any other funds to pay the law firm, and he never returned the funds to the customer, even though he received at least seven written requests from the customer and the law firm to do so. Instead, after the customer wired the $50,000 to the firm’s bank account, essentially all of that account’s funds were used to pay the firm’s other expenses, as well as to transfer approximately $440,500 into Wicker’s personal bank account. Wicker controlled the firm’s bank account into which the retainer was wired, and he authorized withdrawals and payments from the account for other purposes, including substantial payments to himself. To date, Wicker has not repaid the customer or sent the money to the law firm. (FINRA Case #2016052104101)

Brian Richard Baine (CRD #1355980, Rye, New York)

July 1, 2025 – An AWC was issued in which Baine was assessed a deferred fine of $5,000 and suspended from association with any FINRA member in all capacities for three months. Without admitting or denying the findings, Baine consented to the sanctions and to the entry of findings that he signed or caused a third party to sign non-securities customers’ signatures, including senior customers, on insurance-related documents without the customers’ permission. The findings stated that Baine did so to expedite the insurance application process and not in furtherance of other misconduct. The underlying transactions were authorized and none of the customers complained. The suspension is in effect from July 7, 2025, through October 6, 2025. (FINRA CASE #2023080198401)

Michael Ciro Colletti (CRD #4577898)

July 10, 2025 – Colletti appealed a NAC decision to the SEC. The NAC affirmed the findings and sanctions imposed by the OHO. Colletti was fined $10, 000, suspended from association with any FINRA member in all capacities for eight months, ordered to pay $5,417, plus interest, in restitution to a customer, and required to requalify by examination as a General Securities Representative before again serving in that capacity. The sanctions were based on the findings that Colletti executed unauthorized trades in the customer’s account and engaged in quantitatively unsuitable trading. The findings stated that Colletti selected the security that was traded and determined the volume and frequency of the trading in the customer’s account. As a result, Colletti exercised de facto control over the account. In addition, Colletti’s trading was inconsistent with the customer’s investment objectives and investment profile. The customer was in his 60s at the time he opened his account with Colletti, nearing retirement, his account was an individual retirement account (IRA), and he listed his risk tolerance as “moderate” and his objectives as income and growth. Colletti engaged in a pattern in the account of buying a stock, holding it a short time, and selling it to buy another stock, which was also sold after a short time, until the customer closed his account. Colletti’s trading resulted in losses of $5,417. For these traders, Colletti charged $5,081 in commissions. The sanctions are not in effect pending review. (FINRA Case #2019061942901)

Daniel Michael Roper (CRD #6188279, Omaha, Nebraska)

July 17, 2025 – An AWC was issued in which Roper was assessed a deferred fine of $15,000, suspended from association with any FINRA member in all capacities for two years, ordered to pay deferred disgorgement of unlawful profits in the amount of $80,747, plus interest, and required to requalify by examination as a General Securities Representative prior to associating with any FINRA member. Without admitting or denying the findings, Roper consented to the sanctions and to the entry of findings that he entered more than 14,000 equity trades and 6,300 options trades in his customer’s self-directed retail account for a share of the customer’s profits. The findings stated that Roper did not disclose to his member firm that he and the customer had entered into an oral profit-sharing agreement related to the trading, and the firm did not provide authorization to him to share in the profits in the customer’s account. Rather, Roper took numerous steps to conceal his conduct from his firm. In total, Roper received $80,747 in profit-sharing payments from the customer. The findings also stated that Roper exercised discretion without prior written authorization in connection with the equity and options trades in the account of the customer with whom Roper had a profit-sharing agreement. The customer orally authorized Roper to exercise discretion in his account, but never provided him with prior written authorization to exercise such authority, and his firm never accepted the customer’s account as discretionary. In addition, Roper attested in his firm’s annual compliance questionnaires that his disclosures were complete and account maintained with the firm over which he exercised discretion. The findings also included that Roper exchanged thousands of text message and emails with the customer with whom he had a profit-sharing agreement using his personal mobile device. These messages and emails included, among other things, communications about account performance information, the trades that Roper entered in the customer’s account, and profit-sharing payments that the customer made to Roper. Roper did not provide his firm copies of the text messages or personal emails, which caused the firm to maintain incomplete records of business communications. The suspension is in effect from July 21, 2025, through July 20, 2027. (FINRA Case #2023079598001)

Chad Michael Rogers (CRD #4029698, Tuttle, Oklahoma)

July 22, 2025 – An AWC was issued in which Rogers was assessed a deferred fine of $5,000 and suspended from association with any FINRA member in all capacities for 45 days. Without admitting or denying the findings, Rogers consented to the sanctions and to the entry of findings that he impersonated customers during phone calls to his prior member firm. The findings stated that Rogers impersonated the customers to facilitate the transfer of their accounts to his employing member firm, or, in some instances, to transfer funds to the customers’ bank accounts. Although the customers consented to transferring their accounts or funds, none of them gave Rogers permission to impersonate them during these calls. The suspension is in effect from August 4, 2025, through September 17, 2025. (FINRA Case #2023079833901)

Andrew Steven Mack (CRD #5932062, New York, New York)

July 23, 2025 – An AWC was issued in which Mack was assessed a deferred fine of $10,000 and suspended from association with any FINRA member in all capacities for three months. Without admitting or denying the findings, Mack consented to the sanctions and to the entry of findings that he exercised discretion without written authorization in connection with trades in customer accounts. The findings stated that although the customers understood that Mack was conducting trading in their accounts, none had given him prior written authorization and his member firm had not accepted the accounts as discretionary. For six months during the relevant period, Mack was on a heightened supervision plan that prohibited his exercise of discretion, yet he placed discretionary trades without written authorization in customer accounts during that time. Furthermore, Mack inaccurately stated that he did not exercise discretion in customer accounts on three of the firm’s annual compliance questionnaires. The suspension is in effect from August 4, 2025, through November 3, 2025. (FINRA Case #2023077059101)

Charles Scott Burford Sr. (CRD #1658201, Dallas, Texas)

July 28, 2025 – Burford appealed an SEC decision to the U.S. Court of Appeals for the Fifth Circuit. The SEC sustained the findings and sanctions imposed by the NAC. Burford was fined $10,000 and suspended from association with any FINRA member in all capacities for six months. The sanctions were based on the findings that Burford executed unauthorized trades in, and facilitated unauthorized withdrawals from, his deceased customer’s account. The findings stated that Burford did not submit the customer’s death certificate to his member firm until over 14 months after his death. Further, Burford executed the trades and facilitated the withdrawals in the account on instructions from the customer’s widow. Burford did not submit the death certificate to the firm until it was necessary to permit the customer’s widow, who was named beneficiary, to take the required minimum distribution from the customer’s beneficiary IRA by year’s end. When Burford submitted the death certificate for this purpose, he failed to inform the firm that the customer’s account remained open and active. Burford executed additional trades and withdrawals in the account. In all, at the widow’s request, Burford executed nine sales transactions totaling nearly $130,000 and facilitated eight withdrawals totaling nearly $85,000. After learning that the customer’s daughter planned to contest the customer’s will, Buford asked the firm to freeze the customer’s account. Even then, Burford failed to inform the firm that he had improperly effected any transactions in the customer’s account until the daughter’s attorney informed Burford that she had challenged the will and warned him that the firm might be liable for the distributions from the customer’s account. The sanctions are not in effect pending review (FINRA Case #2019064656601)

Venugopal Ramakrishnappa Reddy (CRD #5125813)

July 29, 2025 – An AWC was issued in which Reddy was assessed a deferred fine or $5,000 and suspended from association with any FINRA member in all capacities for six months. Without admitting or denying the findings, Reddy consented to the sanctions and to the entry of findings that he participated in private securities transactions without providing prior notice to his member firm. The findings stated that Reddy and a partner formed an investment fund and several affiliated entities for the purpose of raising capital to invest in early-stage technology companies. Reddy timely disclosed his role as co-owner and co-manager of these entities to his firm. Among other things, Reddy disclosed that the entities would engage in “investment related” activities, including offering interests in the fund to investors, and that he would be entitled to receive a share of carried interest under certain circumstances. Reddy also provided draft offering materials to the firm. Ultimately, the firm approved Reddy’s involvement in these entities as outside business activities (OBAs). 36 accredited investors committed a total of $9.2 million in capital to the fund and affiliated entities. Reddy participated in transactions involving nine of these customers and approximately $5 million in capital by helping to solicit investments and by executing subscription agreements on behalf of the fund and affiliated entities. To date, Reddy has not received any carried interest. Once the firm became aware of the transactions, its chief executive officer signed forms documenting the firm’s approval of them. The suspension is in effect from August 4, 2025, through February 3, 2026. (FINRA Case #2022076766202)

If you are an aggrieved investor or a professional dealing with FINRA, we are here to provide you with experience-based assistance. Please give one of our attorneys a call today.

COURT OF APPEALS REFUSES TO ENFORCE ARBITRATION PROVISION

2025-07-16T13:00:00.012-05:00

Earlier this year, the Missouri Court of Appeals affirmed a trial court’s refusal to enforce an arbitration provision within an operating agreement. Now we all know that arbitration agreements are difficult to circumvent, so what happened in this case?

The case is Disruption 8, LLC v. Vertical Enterprises, LLC. To keep it simple, the parties executed three contracts, and only one of them contained an agreement to arbitrate. The plaintiff alleged that the defendant breached one of the three contracts. But the contract breached did not contain an arbitration provision.

The Court of Appeals set forth a lot of great law for anyone litigating the enforceability of an arbitration provision, stating in part:

“When faced with a motion to compel arbitration, the motion court must determine whether a valid arbitration agreement exists and, if so, whether the specific dispute falls within the scope of the arbitration agreement… Whether or not a dispute is covered by an arbitration agreement is a question of law for the courts… Arbitration agreements are tested through a lens of ordinary state-law principles that govern contracts[.]…[a] party cannot be compelled to arbitration unless the party has agreed to do so… Policies favoring arbitration are ‘not enough, standing alone, to extend an arbitration agreement beyond its intended scope because arbitration is a matter of contract’…Therefore, “any curtailment of the right to a jury trial, which is what arbitration agreements do, “should be scrutinized with utmost care.”… Thus, to be a valid waiver of a party’s right to a jury trial, an arbitration agreement must be “clear, unambiguous, and conspicuous.”…When the contract at issue contains no express arbitration clause, arbitration may be compelled only if the circumstances demonstrate a clear agreement to arbitrate… “[m]ere reference” to another contract “is insufficient to establish that [a party] bound itself to the arbitration provision of the [other] contract”… If the parties contemporaneously execute documents “relating to the same subject,” and one of the documents contains an arbitration clause, arbitration may be compelled in a dispute involving a related document “unless ‘the realities of the situation’ indicate that the parties did not so intend.”… Contracts do not relate to the same subject, however, when they cover “distinct aspects of the parties’ transaction.” … When the claim is “independent of the contract terms [in the contract requiring arbitration] and does not require reference to the underlying contract, arbitration is not required.”

[Citations omitted]

Applying these principles, the Court concluded that the lawsuit alleging a breach of a loan agreement did not implicate the arbitration agreement in the parties’ operating agreement.

Cosgrove Simpson is frequently confronted with motions to compel arbitration, particularly when dealing with entities such as registered investment advisers. A party’s right to have their matter heard by a jury is obviously critical, so be sure to carefully evaluate if and how to challenge any effort to thwart that right.

Are You A Financial Advisor With A Wrongful Termination or Defamation Claim?

2024-07-18T15:19:00.004-05:00

Advisors terminated by their broker-dealer should immediately retain experienced legal counsel.

The broker-dealer has 30 days after termination to file the mandatory U-5. Legal counsel can help you negotiate fair and accurate language for this critical and potentially public disclosure. Moreover, how the U-5 is completed above and beyond the narrative “reason for termination” can be pivotal.

Many advisors fail to appreciate that, for the most part, their broker-dealer can terminate them without cause. But there are contractual and public policy exceptions to this general rule that must be evaluated. Cosgrove Law Group has extensive experience working with financial advisors who have been terminated, including not just U-5 issues, but also issues such as promissory notes and other compensation matters.

It’s 10 O’clock – Do You Know Who Your Beneficiaries Are?

2024-06-05T14:22:00.000-05:00

Having a will is an important step in directing what is to happen to your assets when you die. Ensuring all of your accounts have current beneficiary information properly submitted is also key. Financial accounts and insurance policies provide the option to list beneficiaries. Even if you do not have a will (Call us!), you have the opportunity to add beneficiary information to your financial accounts.

Estate of Finley v. Allen, 2024 WL 2484466 is a good reminder that the step of adding or updating beneficiaries should be made thoughtfully and sooner rather than later. In Finley, the Appellate court concurred with the trial court in finding for the listed beneficiary despite Ms. Finley sending an email three days before her death requesting the grandson be removed as beneficiary. According to the Court:

“On January 19, 2022, Ms. Finley designated her grandson, William C. Finley, II, (“William”), as the sole beneficiary of her … retirement plan accounts (collectively referred to as “the accounts”) held by the investment firm Morgan Stanley Smith Barney (“Morgan Stanley”). The beneficiary designation was accepted by Morgan Stanley after Ms. Finley completed the proper paperwork and it was received by Morgan Stanley per the terms of the TOD agreement.

On May 9, 2022, Ms. Finley emailed her Morgan Stanley financial advisor, Rick Morgan (“Mr. Morgan”), seeking to revoke William’s designation as sole beneficiary, and designating in his place her daughters Ingrid Allen (“Ingrid”) and Ilse Dehner (“Ilse”) as beneficiaries. Mr. Morgan attempted to contact Ms. Finley to discuss her request, but was unsuccessful. Ms. Finley died three days -2- later on May 12, 2022, having not submitted the TOD beneficiary designation form to Morgan Stanley.

Ilse was designated as executrix of Ms. Finley’s estate. She presented a proposed final settlement to the Scott County probate court, in which she designated herself and Ingrid as beneficiaries of Ms. Finley’s Morgan Stanley accounts. According to her counsel, she did this to carry out her mother’s wishes as evinced in Ms. Finley’s email to Mr. Morgan.

As a result, Ingrid and William filed the instant action … against Ilse, the estate, and Morgan Stanley seeking a declaration of rights. They asserted in relevant part that Ms. Finley’s apparent attempt to change the beneficiaries on her account was not successful because she did not comply with Morgan Stanley’s requirement that a change of beneficiary form must be properly submitted and received before it is given effect. Ilse counterclaimed, arguing that Morgan Stanley breached its contract with Ms. Finley by failing to carry out her request to change the beneficiaries.

The matter … [culminated] in the order granting William and Ingrid’s motion for a declaratory judgment. The court ruled in relevant part that Morgan Stanley had specific requirements to change beneficiaries; that Ms. Finley was aware of those requirements and had complied with them when designating beneficiaries in the past; that her email to Mr. Morgan did not substantially comply with the requirements; and, that the failure to comply resulted in William remaining as beneficiary at the time of Ms. Finley’s death.”

Despite Ms. Finely’s attempts to change the beneficiary back to her daughters, the courts held that the proper process was not followed and that “although the disposition in her will could constitute evidence of her subjective intentions, the making of the will was not enough to comply with the policy’s procedures.”

While the standard of review for this matter relied upon Kentucky and New York law only, it is a good reminder to double-check who you have listed as the beneficiary on your financial and insurance accounts. Putting thought into this now and making sure you understand the beneficiary change process at your respective financial and insurance providers may very well save loved ones from contentious legal wrangling and ensure your wishes are properly recorded and followed.

DOES YOUR FINANCIAL ADVISER HAVE PROFESSIONAL LIABILITY INSURANCE?

2024-02-28T11:06:00.001-06:00

Believe it or not, your trusted financial adviser is only human. He or she can make a very costly mistake despite his or her best intentions. Perhaps you have taken comfort in the fact that your adviser, whether a registered representative or an investment adviser representative, has a company with whom they are affiliated. Surely the company has insurance, right? Well, I have more bad news for you – that company might not have an errors and omissions policy either, particularly if they are a small outfit.

Our advice is that you ask to receive a copy of your advisor’s policy at the beginning of your relationship. If your advisor does commit a negligent or even fraudulent act – consult with an attorney experienced in such matters. You may wish to confirm that an insurance policy is in place before you proceed with expensive litigation. And if you are an uninsured adviser that made a mistake, you should seek legal counsel immediately. Food for thought.

CAN A FINANCIAL ADVISER BE SUED BY A NON-CLIENT FOR NEGLIGENCE?

2024-02-27T16:39:00.004-06:00

The answer to that question is “probably.” At least in Missouri, New York, and Iowa.

Missouri courts apply a balancing test when determining if a “non-client” intended beneficiary of professional services can sue for negligence despite a lack of privity. The leading case in Missouri, at least as to accountants, is Aluma Kraft Manufacturing Co. V. Elmer, 493 S.W.2d 378(1973). The Aluma court stated:

“The determination of whether in a specific case the defendant will be held liable to a third person not in privity is a matter of policy and involves the balancing of several factors: (1) the extent to which the transaction was intended to affect the plaintiff; (2) the foreseeability of harm to him; (3) the degree of certainty that the plaintiff suffered injury; and (4) the closeness of the connection between the defendant’s conduct and the injury suffered. Westerhold, supra, 419 S.W.2d at 81. We believe that these policy factors are satisfied with this case.”

Aluma at 383. The court relied in part upon a New York accountant case, quoting the infamous Justice Cardozo.

The same principles of non-privity professional liability have been applied to attorneys in Missouri. See Donahue v. Shugart, 900 S.W.2d 624 (Mo. 1995). In Donahue the intended beneficiaries of a decedent’s trust that was declared invalid brought a legal malpractice and breach of fiduciary duty claim against the decedent’s attorneys. Id. At 626. Prior to the decedent’s death he directed Stamper, his attorney, to ensure that a specified sum of monies from his trust account be paid to Mary Donahue and Sundy McClung upon his death. Id. at 625. Donahue and McClung were not beneficiaries of Stockton’s trust. Id. Stockton also directed Stamper to prepare a deed to his home transferring a fifty percent interest in the home to Mary Donahue, effective on Stockton’s death. Id. Upon learning that Stockton’s death was imminent, Stamper sought advice from others in his law firm on how to make the checks and deed effective in accordance with Stockton’s wishes. Id.

Stamper attempted to effectuate the transfers, but they were later declared to be invalid by the Missouri Court of Appeals. Donahue, 900 S.W.2d at 625. The Court determined that the plaintiff’s breach of fiduciary duty claim was properly dismissed as being “dependent on the existence of attorney negligence, not on the breach of trust” because the conduct complained of was merely negligence in the performance of legal services. Id. at 630.

But the Donahue court stated that the “Determination of whether attorney owed legal duty to non-clients so as to be liable to non-clients in legal malpractice action is determined by weighing factors in balancing test, including: existence of specific intent by client that purpose of attorney’s services were to benefit plaintiffs, foreseeability of harm to plaintiffs as result of attorney’s negligence, degree of certainty that plaintiffs will suffer injury from attorney misconduct, closeness of connection between attorney’s conduct and injury, policy of preventing future harm, and burden on profession of recognizing liability under circumstances. Pleadings were sufficient to establish that attorneys owed duty to non-clients who were intended recipients of client’s gifts causa mortis.”

Finally, the Supreme Court of Iowa applied these same basic principles to an insurance agent to allow a non-client to proceed against the agent. There is no reason to believe that the courts would not apply the same public policy to financial advisers and the intended beneficiaries of their services. Food for thought.

Missouri Securities Division is Investigating new Missouri Limited Liability Companies

2023-07-24T13:51:00.005-05:00

A membership interest in a limited liability company is a “security” as broadly defined under the Missouri Securities Act of 2003.[1] Now the Missouri Commissioner of Securities, through its Enforcement Section of the Securities Division (“Enforcement Section”), is sending letters to specified companies that have newly filed with the Missouri Secretary of State as limited liability companies or as foreign companies, which state it has received information of participation in prohibited conduct by these companies.

Section 409.6-602(b) of the Missouri Revised Statutes[2] provides the Enforcement Section with extremely wide latitude to compel the production of written statements and documents regarding any matter that it considers relevant or material to its investigation. Some of these letters require the compulsory production of documents and written responses:

· In narrative form detailing the objectives of the limited liability companies;

· Listing all individuals/entities with investments in the limited liability companies to include names, addresses, telephone numbers, email addresses, and dates and amounts investments;

· Name and address of all financial institutions where investors’ money was/were deposited; and

· In narrative form detailing how the investors’ funds are/were used.

In seeking claims of exemption from registration or exception in these letters, the Enforcement Section seems to have assumed that these new limited liability companies are operating in Missouri as an unregistered investment adviser, broker-dealer, investment adviser representative, or broker-dealer agent, whether operating as an investment company or not. Consequently, these letters should be taken extremely seriously because the costs of defending against Enforcement Section enforcement proceedings that assert these assumptions can be extreme, whether warranted or not.

If you receive one of these letters, you may not want to act alone and wish to consult with one of the experienced attorneys at Cosgrove Law Group, LLC. Call us at 314-563-2490.

Author: Brian St. James

[1] §§409.101 to 409-7-703, RSMo 2016 (Cu. Supp. 2022).

[2] §409.6-602(b), RSMo 2016 (Cum. Supp. 2022).

The Evolution of a Wells Process and the Anticipated SEC Sweeps

2023-05-24T14:06:00.004-05:00

The Wells Process has a long history dating back to 1972 when SEC Chairman William J Casey appointed John Wells along with two others to the “Wells Committee.” The SEC is charged with the compliance and enforcement of the federal securities law to protect citizens from fraud and theft while maintaining a fair and efficient market. Before the Wells Committee, the SEC could investigate, as it does today, but did not bring forth any notice as to what they were investigating or even who they were investigating. Attorneys who were specialized in this field could formally write to the SEC, ask what charges were being brought against their client, and file a rebuttal. Veterans of this process knew how it worked and used that to their advantage, but the vast majority of the population had no idea about any investigation until the formal charges were made. Then in January of 1972, the Wells Committee saw this as an opportunity to change just that.

The start of the Wells Process was born. The Wells Process starts with a written letter made near the end of an SEC investigation known as a “Wells Notice.” A Wells Notice is made up of three things. It informs the person(s) or business of the intent of the SEC to file an action against them. It identifies the exact laws allegedly being violated. And finally, it provides notice on how to make a submission for your own defense called a “Wells Submission.” The Wells Submission will have parameters on length and time set by the Wells Notice. According to the notice, one has 180 days to enter a submission. The SEC can choose to extend that time, but the one submitting cannot. It is important to note that the Wells Notice has never been a formal rule in the SEC, and the SEC is not required to give a Wells Notice to begin the Wells Process. In fact, if they deem it as a public safety issue, they can completely forgo the Wells Process, and the 180 days is strictly an internal time frame. The SEC can still file a complaint after 180 days has passed.

After a Wells Notice is made, the next step is a “Wells Call” and finally a “Wells Meeting.” The call is an informal call to gather information and ask questions, while the meeting is a bit more formal which includes the Wells Submission. These Wells Submissions are written documents that need to be very carefully written. There is no formal charge at this time, but the submission can be used in discovery later. At this time in the process, the meeting is conducted by the Director or Assistant Director of the SEC’s Division of Enforcement. This is the last chance for one to give their best defense. It is at this time, the Staff can: settle the case, drop the case, or formally file charges. There are not many statistics about the Wells Process, but we do know in 2012-2013, 20% of Wells Notices ended with the case being dropped and no charges ever filed. While 20% sounds promising, Wall Street Journal financial reporter Jean Eaglesham thinks the percentage was higher the decade before and is dwindling the decade after due to how the, “SEC stockpiles significant ammunition before issuing a Well.” Still, the 20% does give hope. The ultimate goal of the SEC is to settle these cases with the best outcome for all involved, not waste time and resources.

That brings us to Gurbir Grewal, the current director of the SEC’s Division of Enforcement. Grewal is now taking the Well Process to the next evolutionary step. The Wells Process typically takes up to 2 years. That is a long time to be under investigation and requires a fair amount of resources. As mentioned, the Wells meeting used to be conducted by the Director or Assistant Director, but Grewal’s next step is opening the meetings to be conducted by regional directors. Grewal claims everyone will get a meeting, just not with him. “Unless there’s really a real factual dispute, a novel legal issue or an area of programmatic concern, you’re not going to get a meeting with the director or the deputy,” says Grewal. While some may not appreciate this, it will quicken the pace of investigations, but also quicken the pace of the number of investigations, famously known as SEC sweeps.

Author: Hanna Sprigg

Wells Fargo Advisors, LLC wins FINRA Award sum of $15,300,000.00+ in Damage

2023-02-23T12:04:00.006-06:00

On February 2, 2023, a FINRA arbitration panel awarded the Claimant, Wells Fargo Advisors, LLC a sum of 15,300,000.00 in Compensatory Damages and over $4,000,000.00 in additional costs and attorney fees.

Case Summary:

In October 2018, Kent Jackson Rhoades left his job at Wells Fargo Advisors, LLC in Mountain Home, Arkansas to start an independent financial consulting firm with Raymond James Financial Services, Inc. Rhoades not only left the corporate company to venture out on his own but also hired on a 12- person team, all of which worked under Rhoades at Wells Fargo, and named them the Financial Services and Investment Strategies Group. It is important to note that the Wells Fargo branch is no longer in business.

In August of 2020, Wells Fargo filed a complaint alleging Raymond James Financial Services and Kent Jackson Rhoades led a “coordinated raid.” What is a raid you might ask? A raid is poaching another financial advisor’s team or clients with the intent of harming that firm’s business. One might not see a case regarding “coordinated raids’ because they don’t happen frequently and are difficult to prove. FINRA rule 2010 states, “A member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.” While a little vague, under this rule, a financial firm cannot ethically poach a significant portion of another firm’s team and/or clients, and in October 2018, Raymond James Financial Services did just that.

Wells Fargo claimed Raymond James took the entire financial advisor team, as well as clients that Rhoades had been working with over the 20 years he worked at Wells Fargo. Wells Fargo sought damages, costs and fees against Raymond James Financial Services, Kent Jackson Rhoades and the 12-person team that collectively moved from Wells Fargo to Raymond James Financial Services. Rhoades claimed that the clients at Wells Fargo moved to his firm due to the “untruths and/or deception [which] caused clients to sever their relationships.” Rhoades and the 12 pursued a counterclaim award against Wells Fargo as well. However, on August 25,2022, Wells Fargo dropped the claim against the 12, and the 12 dropped the counterclaim against Wells Fargo, leaving just Rhoades and Raymond James Financial.

After multiple hearings, FINRA awarded Wells Fargo Inc. $15.3M in compensatory damages (with a 6% annual interest rate), $3.5M in attorneys’ fee, $847,000 in costs, $1M in punitive damages, a $500 non-refundable claim filing fee, and $53,775 in hearing session fees totalling over $20M. The counterclaim was completely dismissed and all claims for relief for Raymond James Financial Services were denied.

+ Awards are rendered by independent arbitrators who are chosen by the parties to issue final, binding decisions. FINRA makes available an arbitration forum—pursuant to rules approved by the SEC—but has no part in deciding the award.

Additional sources:

https://www.advisorhub.com/wells-fargo-advisors-wins-nearly-20m-in-raiding-claim-against-raymond-james/

https://www.advisorhub.com/wp-content/uploads/2019/08/Good-Moves-Bad-Moves-Bad-Move-Being-part-of-a-raid-1.pdf

Missouri Legislature Proposes Investment Adviser Disclosure of Social Objectives

2023-02-20T17:23:00.004-06:00

On January 8, 2023, Representative O’Donnell introduced a bill to the 102^nd General Assembly that adds to the disclosure obligations of Missouri-registered investment advisers. If enacted, Missouri House Bill No. 824 will amend Chapter 409 (Regulation of Securities) of the Missouri Revised Statutes to require these investment advisers and investment adviser representatives to disclose any socially responsible criteria included in any recommendation to a client or solicitation of a prospective client. Then, before acting on any such social objective, the proposed law would require client written consent, such as:

“I, (NAME OF CLIENT), consent to my adviser or adviser’s representative incorporating a social objective or nonfinancial objective into any discretionary investment decision my adviser or adviser’s representative makes for my account; any recommendation or advice my adviser or adviser’s representative makes to me for the purchase or sale of a security or commodity; or the selection my adviser or my adviser’s representative makes, or recommendation or advice my adviser or my adviser’s representative makes to me regarding the selection, of a third-party manager or subadvisor to manage the investments in my account. Also, I acknowledge and understand that incorporating a social objective or nonfinancial objective into investment decisions, recommendations, advice, and/or the selection of third-party manager or subadvisor to manage the investments in my account will result in investments and recommendations/advice that are not solely focused on maximizing a financial return on my account.”

This bill’s proposed effective date is August 28, 2023, which is very timely considering the U.S. Securities and Exchange Commission’s similar recently proposed amendments to rules and reporting forms that would establish disclosure requirements for funds and investment advisers that market themselves as having environmental, social, and governance (ESG) strategies.

Since matters such as investment adviser client disclosures are complicated, it can be helpful to hire an attorney that specializes in such areas. Cosgrove Law Group has experience dealing with these questions. If you are a client or a prospective client of a Missouri-registered investment adviser that has questions about these or other investment adviser disclosure obligations and would like to speak with one of our Missouri-licensed attorneys, call 314-563-2490.

Jury Trials in Missouri Securities Division Administrative Enforcement Actions

2023-01-20T09:43:00.005-06:00

The Enforcement Section of the Missouri Secretary of State Securities Division (the “Enforcement Section”) brought 35 administrative enforcement actions between 2020 and 2021 pursuant to Section 409.6-604, RSMo.,[1] which assessed $7.5 million in civil penalties.[2] Some of these administrative actions alleged securities fraud in violations of Section 409.5-501(1), Section 509.5-501(2), and Section 509.501(3). The administrative procedures allow the Missouri Secretary of State appointed Commissioner of Securities (the “Commissioner”) to issue an interim order finding that the respondent has committed securities fraud, which order becomes final unless the respondent requests a hearing. The administrative procedures also authorize the Commissioner to conduct the hearing, in effect serving as both the prosecution and the judge, which may be why only 5 hearings were requested in these 35 enforcement actions.[3]

Section 409.6-603 also authorizes the Missouri Securities Division to file civil actions to enforce alleged securities fraud violations to be tried by a neutral judge in the Circuit Court of Cole County, Missouri. But the Division does not.[4] And why would it when the Commissioner whose job it is to enforce the Missouri securities laws also gets to determine whether those laws have been violated?

But administrative enforcement proceedings for alleged securities fraud cases are not the only play here in Missouri. The case can certainly be made that the Missouri Constitution, art. I, section 22(a) applies to securities fraud enforcement claims, which states: “the right of trial by jury as heretofore enjoyed shall remain inviolate; …”[5] “Quite simply, the words of the provision are intended to guarantee a right, not restrict a right. The choice of words, particularly the use of the words ‘remain inviolate,’ is a more emphatic statement of the right than the simply stated guarantee written some 30 years earlier as the 7th Amendment of the United States Constitution that ‘…the right of trial by jury shall be preserved…’” State ex rel. Diehl v. O’Malley, 95 S.W. 3rd 82, 84 (Mo. Ct. App. 2002).

Credit the U.S. Court of Appeals for the Fifth Circuit for first coming up with this idea in the context of securities fraud administrative enforcement actions in Jarkesy v. Securities and Exchange Commission, 34 F. 4^th 446 (5^th Cir. 2022), which ruled on May 18, 2022, in a 2-1 decision, that the U.S. Securities and Exchange Commission (“SEC”) may no longer use its own administrative proceedings framework to enforce SEC securities fraud cases. Instead, the SEC must bring such actions in federal district courts where respondents may exercise their rights to civil jury pursuant to the 7^th Amendment. The same principle applies to Missouri’s administrative proceedings framework to enforce Missouri securities fraud cases, even though there is also gratuitous language in Diehl and Goodrum v. Asplundh Tree Expert Co., 824 S.W. 2d 6, 11 (Mo. banc 1992), which appears to state otherwise. We disagree. The key is that the rights the Enforcement Section seeks to vindicate in securities fraud administrative enforcement actions are analogous to fraud causes of action at common law brought at the time of Missouri’s 1820 Constitution.

Cosgrove Law Group has experience dealing with these questions. If you are served with a securities fraud administrative enforcement action by Missouri Securities Division and would like to speak with one of our licensed attorneys, call 314-563-2490.

Author: Brian St. James

[1] All statutory references are to the 2020 Revised Statutes of the State of Missouri.

[2] Committee Meeting Materials, “Administrative Practice Before the Missouri Commissioner of Securities,” 2022 MoBar Fall Conference, Office of the Missouri Secretary of State Securities Division.

[3] Id.

[4] Id.

[5] Article, I, Section 22(a), the Missouri Constitution.

ARE YOU A FINANCIAL ADVISOR WITH A WRONGFUL TERMINATION OR DEFAMATION CLAIM?

2022-06-28T14:55:00.006-05:00

Advisors terminated by their broker-dealer should immediately retain experienced legal counsel.

Two New Arbitration Cases

2022-06-01T11:44:00.000-05:00

April 26, 2022, brought us two new arbitration rulings to sink our teeth into. One ruling was issued by the Supreme Court and the other by the Court of Appeals. I think the court of Appeals decision might get reversed.

In Car Credit, Inc v. Pitts, the Supreme Court considered a challenge to a judgment confirming an arbitration award. The appellant claimed that the award should be vacated because the arbitration forum designated in the arbitration clause was not utilized because it was unavailable. In my opinion, the Supreme Court (and Federal courts) go out of their way to confirm arbitration awards. This case was no different, but it relied upon a rule that the Supreme Court has repeatedly articulated. It is highly technical but lawyers in this field need to know it. The Court found that the arbitration agreement contained an enforceable delegation clause and the appellant failed to challenge the validity and enforceability of that clause.

The appellant did challenge the AAA arbitrator’s authority to hear the case on jurisdictional grounds. The arbitrator denied that challenge. But the appellant failed to challenge the arbitrator’s jurisdiction to make that ruling. Regardless, the Court of Appeals ruled in her favor. But the Supreme Court reversed, noting in part that “the delegation provision is an agreement to arbitrate threshold issues concerning the arbitration agreement”, citing the Seminal case of Rent-A-Center, W., Inc. v. Jackson.

In what may be the next arbitration ruling to be reversed by the Supreme Court, the Court of Appeals ruled in favor of the appellant in Wind v. McClure. In that case, the Court of Appeals held that the Circuit Court was correct in refusing to enforce an arbitration agreement because its language and format failed to comply with state law mandates. To be specific, the arbitration agreement failed to include certain large font warnings, regarding the existence of an arbitration clause. The requirement in question, however, is not included in the Federal Arbitration Act, the supremacy of which the Supreme Court strictly enforces. Perhaps the appellate will not appeal. Food for thought.

5th Circuit Strikes Down SEC Administrative Proceedings Framework for Securities Fraud cases

2022-06-01T11:40:00.009-05:00

In Jarkesy v. Securities and Exchange Commission, Case No. 3-15255, a panel of the U.S. Court of Appeals for the Fifth Circuit ruled on May 18, 2022, in a 2-1 decision that the U.S. Securities and Exchange Commission (“SEC”) may no longer use its own administrative proceedings framework to enforce SEC securities fraud cases. Instead, the SEC must bring such actions in federal district courts where respondents may exercise their rights to civil jury. This is a stunning development for the SEC because the case finally recognizes that the SEC should not be acting as both prosecutor and jury in securities fraud cases nor require respondents to exhaust their administrative remedies before having their day in court.

In Jarkesy, the SEC brought administrative enforcement proceedings against the respondents alleging securities fraud. From the inception of the matter, however, respondents challenged the SEC’s right to bring such a matter administratively because it deprived them of their rights to civil jury. The administrative law judge ruled against respondents as did the SEC upon review and ordered respondents to cease and desist from committing further violations, pay a civil penalty of $300,000, and to disgorge nearly $685,000 in alleged ill-gotten gains.

“The case finally recognizes that the SEC should not be acting as both prosecutor and jury in securities fraud cases nor require respondents to exhaust their administrative remedies before having their day in court.”

On appeal, the 5th Circuit vacated the SEC’s judgment and held that the SEC’s administrative proceedings were unconstitutional for at least two reasons: (1) respondents were deprived of their Seventh Amendment right to civil jury; and (2) Congress unconstitutionally delegated legislative power to the SEC by failing to give the SEC an intelligible principle by which it could determine what matters it could use its administrative proceedings framework and what matters it was required to file suit in federal district courts. It remains to be seen whether the SEC will request a rehearing before the entire panel of the Fifth Circuit or seek redress from the U.S. Supreme Court, and whether other circuits of the U.S. Court of Appeals will follow suit. But as of now, the SEC should no longer use its own administrative enforcement proceedings in securities fraud cases.

For further guidance on Jarkesy or SEC enforcement proceedings in general, feel free to give us a call at (314)-563-2490.

Author: Brian St. James

Self-Directed IRA Custodian Liability under State Securities Acts

2021-11-08T16:45:00.002-06:00

It should come as no surprise to anyone that if purchasers of securities or a state’s securities commission bring an enforcement action for the unlawful sale or contract for sale of unregistered securities, then they will seek recourse against anyone involved in the transaction because the proceeds of such sales have often been spent by unscrupulous issuers in many of these circumstances. Self-directed IRA custodians are no exception.

Such was the case in Boyd v. Kingdom Trust Company, et al.,[1] where two Ohio residents opened self-directed IRA accounts to invest in promissory notes as alternative investments. As practice dictates, the promissory notes were purchased by the self-directed IRA custodians for the benefit of the Ohio residents and the physical promissory notes held by the custodians in the self-directed IRA accounts.

The residents argued that the self-directed IRA custodians and the issuer were jointly and severally liable pursuant to Ohio Securities Act provision that states:

“The person making such sale or contract for sale, and every person that has participated in or aided the seller in any way in making such sale or contract for sale, are jointly and severally liable to the purchaser … for the full amount paid by the purchaser and for all taxable costs.”[2]

The Ohio Supreme Court in this case took a narrow view of this enactment by distinguishing the self-directed IRA custodians’ role as purchasers of the promissory notes as opposed to either participating in the sale or aiding the issuer in the sale and vindicated them, finding that “a financial institution’s mere participation in a transaction, absent any aid or participation in the sale of illegal securities, does not give rise to liability under R.C. 1707.43(A).”[3]

But every self-directed IRA custodian should also note that this Court also stated that:

“Nothing in our holding today would insulate from liability a self-directed IRA custodian who colludes with the seller in an unlawful sale of securities or actively participates or aids in the sale of illegal securities. But the certified question before us is limited to the liability of a self-directed IRA custodian whose only alleged participatory conduct was the purchase of illegal securities on behalf and at the direction of the owner of a self-directed IRA.”[4]

Consequently, the self-directed IRA custodians escaped liability in this case merely because the two Ohio residents failed to allege any other participatory activity in the sale of the promissory notes, such as providing the templates for the promissory notes, drafting them, being included in the issuer’s pitch materials, etc.[5] And in a regulatory environment such as the present one in which plaintiffs and enforcement sections of state securities commissions seek restitution for defrauded investors by all means available to them, self-directed IRA custodians should be extremely mindful of their participation in these transactions.

Consequently, if faced with such potential liability, you may wish to consult with experienced securities enforcement counsel at Cosgrove Law Group, LLC.

Author: Brian St. James

Please follow us on Twitter @CosLawGroup, on LinkedIn at Cosgrove Law Group, LLC, and on Facebook at Cosgrove Law Group, LLC.

[1] 150 Ohio St. 3d 196, 2018-Ohio-3156, 113 N.E. 3d 470 (2018).

[2] R.C. 1707.43(A). Note this provision has been enacted by each state that has adopted the Model Securities Act.

[3] 150 Ohio St. 3d at 199, 113 N.E. 3d at 473.

[4] Id. Emphasis added.

[5] Situations where the custodian issues a finder’s fee or commission to the seller could also be “participatory activity.”

Conflict Management for Terminated Financial Advisors

2021-10-19T16:51:00.000-05:00

There is plenty of room for conflict when a financial advisor is leaving his or her broker-dealer. Although the departure may start off in an amicable fashion, tensions often flare once promissory notes and client retention issues arise. Moreover, an involuntary or “for-cause” termination may implicate defamation and regulatory issues. In other words, your broker-dealer may defame you on your U-5/U-4[1] providing you with an arbitration claim but also subjecting you to months of regulatory scrutiny from FINRA and state regulators. So here is my lecture: it is wise to retain independent counsel as soon as you are even contemplating leaving your current broker-dealer. Your legal counsel can help you achieve a smooth transition or at least advocate for you during the termination process. Our firm has represented countless departing brokers on a nearly endless array of issues. We have also recouped millions of dollars in defamations awards and settlements. Food for thought.

Please follow us on Twitter @CosLawGroup, on LinkedIn at Cosgrove Law Group, LLC, and on Facebook at Cosgrove Law Group, LLC.

[1] In 2020, U5 defamation cases were the fourth most common intra-industry claim filed with FINRA, behind breach of contract, promissory notes, and compensation claims. (https://www.littler.com/publication-press/publication/form-u5-defamation-claims-rise-finra-be-prepared)

The SEC Chair sets the Agency’s sights on Cryptocurrencies

2021-10-14T16:36:00.001-05:00

On October 5, 2021, Securities and Exchange Commission Chairman Gary Gensler addressed the House Financial Services Committee regarding the agency’s role in regulating the cryptocurrency markets. His remarks regarding Congress’ need to fill the regulatory gaps in cryptocurrency markets have been criticized as confusing considering his past statements that most cryptocurrencies are securities and therefore already fall under the SEC’s regulatory scheme. Adding to the uncertainty is his refusal to stake out a clear position as to whether the two biggest cryptocurrencies, Bitcoin and Ethereum, are securities.

The SEC and its state counterparts presently apply the Howey[1]/Forman[2] tests set down by the U.S. Supreme Court in analyzing whether cryptocurrencies are “investment contracts” within federal and state securities laws. This fact extensive analysis that is applied on a case-by-case basis may lead to different results from one cryptocurrency to another. Consequently, if faced with an enforcement action by either the SEC or the States of Missouri, you may wish to consult with experienced securities enforcement counsel at Cosgrove Law Group.

Author: Brian St. James

Please follow us on Twitter @CosLawGroup, on LinkedIn at Cosgrove Law Group, LLC, and on Facebook at Cosgrove Law Group, LLC.

[1] S.E.C. v. W.J. Howey Co., 328 U.S. 293, 66 S. Ct. 1100, 90 L.Ed. 1244 (1946) and 293,

[2] United Housing Foundation, Inc. v. Forman, 421U.S. 837, 95 S. Ct. 2051, 44 L. Ed. 2d 621 (1975)

State Regulators Focus on Precious Metals and Self-Directed IRA’s

2021-09-27T15:53:00.003-05:00

The organization of North American securities regulators recently had their annual conference. The organization is known as NASAA.

During the conference presentation and panel discussion, it was reported that much attention was paid to self-directed IRA’s. The regulators believe that SDIRA’s are being used in conjunction with investment “scams.” It was reported that the regulators are anxious to work with federal legislators, but it was unclear as to what the proposed legislative solution to the alleged problem would be.

In conjunction with the discussions, the regulators referenced the precious metals industry. Our firm has worked with stakeholders in the precious metals industry for over a decade. Many of those industry players take compliance and ethical business practices very seriously. We also represent precious metals industry stakeholders when they are contacted by or receive a subpoena from a regulator. It was reported that state regulators opened more than 80 investigations of offerings related to SDRIA’s last year and brought 53 enforcement actions as well. The results of these investigations and actions were not, however, reported.

Court Strikes Non-Compete and Non-Solicitation Provisions

2021-09-15T13:00:00.003-05:00

In a financial services industry dispute, the Eighth Circuit Court of Appeals recently reversed a district court's enforcement of a non-compete agreement and non-solicitation agreement in employment contracts. The appellants were a financial advisor and her new financial services firm. The appellee that lost on appeal was the financial advisor's former employer.

The financial advisor was Cara Miller. When she worked for Honkamp Krueger Financial Services, she signed an employment agreement that included a non-compete and non-solicitation agreement and then an Agreement Ancillary to Employment that failed to include a non-compete provision. Miller voluntarily terminated her employment when Honkamp Krueger was purchased by another firm. She wisely sent a letter terminating her employment agreement rather than just her employment. She sought a declaratory judgment in the district court. Honkamp Kruger counterclaimed, seeking a preliminary injunction against her, and prevailed.

The Court of Appeals took different approaches to the non-compete and non-solicitation agreement[1]. The Court concluded that the non-compete agreement ended when Miller provided written notice that the employment contract had ended. The Court found that the District Court's application of the non-solicitation agreement was void against public policy in that it prohibited accepting clients as well as soliciting them. Two quotes from the opinion are worthy of repetition: 1) "…non-compete agreements are 'strictly' constructed against the one seeking to restrain another from pursuing his profession, business, or employment", and 2) "…a contract cannot prevent former employees from accepting clients of their former employers because clients are not parties to the contract and should be allowed to choose with whom they want to do business." Food for thought.

Please follow us on Twitter @CosLawGroup, on LinkedIn at Cosgrove Law Group, LLC, and on Facebook at Cosgrove Law Group, LLC.

[1]https://1.next.westlaw.com/Document/Ic18609b004ed11ec8cc1ca5e79b1b862/View/FullText.html?listSource=Foldering&originationContext=clientid&transitionType=MyResearchHistoryItem&contextData=%28oc.Search%29&VR=3.0&RS=cblt1.0

What to do about FINRA Customer Complaints

2021-09-15T12:55:00.005-05:00

Trust is essential for a successful career as a securities broker. FINRA’s BrokerCheck website allows the public and employers to search a securities broker by name and discover any disciplinary actions that have been issued against that broker. A BrokerCheck report also lists any formal complaints by previous investors. This system helps prevent investors from getting involved with securities brokers with a history of fraudulent and/or negligent behavior. In some instances, however, BrokerCheck casts too wide a net, causing significant reputational harm to undeserving brokers.

When a customer complaint appears on a broker’s BrokerCheck report, it is originally listed as pending. This occurs whether or not the complaint actually has merit. Unfortunately, complaints can be listed as pending for years until settled or decided in an arbitration. If the Broker-Dealer or FINRA deny the complaint on its merits the status of the complaint changes from pending to denied; however, the complaint remains on the BrokerCheck report. Even though a complaint is listed as denied, investors may still find themselves weary of that broker when comparing them to a broker with a claim-free record.

Recognizing that BrokerCheck complaints can have a tremendous influence on a broker’s career, FINRA allows brokers to request expungement of claims on their BrokerCheck report. Here at Cosgrove Law Group, LLC, we have experience helping securities brokers remove meritless complaints from their FINRA BrokerCheck report. If you are suffering under a meritless claim on your BrokerCheck report, please contact the Cosgrove Law Group, LLC for more information on how we can help.

Authors: Alexander Oakes and Max Simpson

Please follow us on Twitter @CosLawGroup, on LinkedIn at Cosgrove Law Group, LLC, and on Facebook at Cosgrove Law Group, LLC.

The Arbitration System

2021-06-25T09:39:00.002-05:00

The premise that underlies the justification for the loss of rights in arbitration is simple: both parties knowingly agreed to binding arbitration. This presumption is based upon the presumptions that 1) signators read contracts before signing, 2) they have the time and knowledge to understand the implications of the arbitration provision, and 3) they have a viable ability to opt-out of agreeing to the provision. Arbitration's entire legitimacy is based upon these fairly specious presumptions. And there has been much written about these presumptions and whether or not binding arbitration is actually the product of an informed voluntary decision by both parties. See “Whimsy Little Contracts' with Unexpected Consequences: An Emperical Analyss of Consumer Understanding of Arbitration Agreements,” Jeff Sovern, Elayne Greenberg, Paul Kirgis, and Yuxiang Liu, St. John's Legal Studies Research Paper No. 14-0009, October 29, 2014 and “Arbitration Clauses Trap Consumers with Fine Print,” Jeff Sovern, AmericanBanker.com, December 2, 2014.

The position of the “Whimsy Little Contracts'...” study is that no one would voluntarily agree to have substantial rights resolved in a quasi-judicial system contaminated by bias. Take a look at this chart and decide for yourself if the system is fair and free of improper influence:

Finally, there is another false assumption that bolsters the presumption favoring arbitration: it is more efficient than the courts: Cheaper and quicker! Unfortunately, I could rattle off twenty examples demonstrating just how questionable this presumption is when presented as a general truth. I received an arbitration award from JAMS 7 years after the claim was filed. I just paid AAA over $20,000 before the Panel has ever convened, and the Respondent buried us in discovery. If I was in Federal Court, I would have a scheduling order protecting my client for approximately $200 in filing fees.

In sum, both the courts and the legislature need to take a hard and honest look at the jurisprudential legitimacy of binding arbitration. Food for thought.

The Harms and Indicators of Excessive Trading

2021-06-23T09:41:00.001-05:00

Many securities brokers work for commissions. This means that they charge investors a fee whenever executing a trade on their behalf. This method of compensation has, in the past, enticed some nefarious brokers to increase their compensation by making more trades on a customer’s behalf than is in the customer’s best interest.

What is Excessive Trading?

Excessive trading, also known as churning, occurs when a securities broker executes trades in a customer’s account at an unsuitable frequency in an effort to increase their own commissions. Make no mistake, excessive trading is illegal. Unfortunately, in all but the most egregious circumstances, you may need to consult a professional to determine whether you are a victim of excessive trading. There is no “one size fits all” test to determine whether a broker is churning a customer’s account. Instead, courts and regulators balance several factors to determine whether a broker’s trading would be deemed excessive. It is determined by the volume at which trades are being executed, the type of security being traded, the investor’s stated investment objectives and the investor’s risk tolerance (including their age, net worth, and investment experience). For instance, the same number of trades may be suitable for an investor with more speculative objectives but unsuitable for an investor with more conservative objectives. Moreover, one type of product traded a certain number of times may be suitable; whereas, a different type of product—not meant for that volume of trading—traded just as many times may be unsuitable.

The Harms of Excessive Trading

Excessive trading can cause significant and irreparable harm to investors beyond simply loss of principal. It will almost always prevent the desired growth due both to excessive fees that accompany it and the excessive switching of investment products that will only yield growth if they are held onto for certain periods of time. Even if an investor’s principal investment remains intact after a ten year period, the fact that an account achieved no, or minimal, growth over that period—when a properly traded account would have seen the growth the investor desired—can cause damage to an investor’s financial health which cannot be undone.

The Evolution of Excessive Trading

Excessive trading primarily occurs when securities brokers engage in unnecessarily frequent switching of equities sold on public securities exchanges. When this occurs, the broker “earns” a commission for each trade. Over time, these charges compound and cause substantial harm. In recent years, more and more securities brokers are starting to engage in excessive trading of more long term investment products not sold on public exchanges such as mutual funds, unit investment trusts, private equity funds, closed-end funds, and, most notably, variable annuities. Long-term product switching, especially when it involves variable annuities, does not need to occur at the same volume as equity switching in order to be deemed excessive. For example, annuities are specifically designed to be held onto long term and are often marketed to elderly vulnerable investors with very low risk tolerance. Investors placed in products such as variable annuities may be charged inordinately high[1] fees when they are both placed in and exit the product. That means that the fees investors incur as a result of excessive trading will rack up even more when the trading involves individually tailored private investment products like annuities.

The Indicators of Excessive Trading

Regulatory agencies such as FINRA have two main tools to identify excessive trading. One is by looking at the Turn-Over Rate. This is the number of times the securities in the account turn into new securities. The second is called the Cost-Equity Ratio. This is the amount the account would need to appreciate in order for the customer to simply cover the fees they are being charged. A turn-over rate of 6 and a cost-equity ratio of 20 percent are the prime indicators that excessive trading is most likely occurring. However, as noted above, these are just two indicators of many. Excessive trading still may exist where these indicators are not met.

Who Can Stop Excessive Trading?

More so than both FINRA and the customers themselves, it is actually the broker-dealer who is in the best position to both spot and put a stop to excessive trading. Many securities firms have alert systems in place where they will be automatically be notified if an investor’s turn-over rate reaches 6 and their cost-equity ratio reaches 20 percent; however, case-law dictates that these two numbers are not necessary to make someone liable for excessive trading. Many brokers engaging in this practice know how to effectively skirt these alerts and avoid raising red flags by engaging in trading that falls just shy of reaching the numbers necessary to trigger the alerts. For this reason, FINRA has called on all broker-dealers to be more vigilant in broker supervision beyond merely “checking in on things” once an alert has gone off.

Unfortunately, it is incredibly difficult for investors to recognize when excessive trading is actually occurring. The investor is not trained in this industry and may only receive quarterly or annual statements from their broker. In some of the most egregious violations, brokers will skirt supervision mechanisms by fraudulently changing an investor’s preferences to allow for more frequent and speculative trading, essentially banking on investors not noticing the change in preferences on their account statements.

The best thing that investors can do is make sure that their investment objectives and risk tolerance are listed correctly on account statements, actively communicate with their broker, and take thorough notes of their conversations. If investors do have any suspicions, they should never be afraid to call the broker-dealer and speak to a supervising manager. Legitimate brokers are not offended by this action and it will have no affect on your working relationship.

Here at Cosgrove Law Group, LLC, we have substantial experience dealing with fraud related to brokers and financial professionals. If you suspect that you are a victim of excessive trading, contact the experienced attorneys at Cosgrove Law Group, LLC.

Author: Alexander Oakes, J.D. Candidate 2023, St. Louis University School of Law

[1] It is not uncommon to see an investor charged 25 percent of their principal investment if they exit an annuity early.

U-5 Filings and the Compelled Self-published Defamation Doctrine

2021-02-12T14:20:00.000-06:00

Last year, the California Court of Appeals issued a highly instructive opinion in the area of U-5 defamation. Some excerpts from that opinion will help us get started on a variety of blogs. The case is Tilkey v Allstate Insurance Company.

INTRODUCTION

While Michael Tilkey and his girlfriend Jacqueline Mann were visiting at her home, the two got into an argument. Tilkey decided to leave the apartment. When he stepped out onto the enclosed patio to collect his cooler, Mann locked the door behind him. Tilkey banged on the door to regain entry, and Mann called police. Tilkey was arrested and pled guilty to a disorderly conduct charge only, and other charges were dropped. After Tilkey completed a domestic nonviolence diversion program, the disorderly conduct charge was dismissed as well.

Before the disorderly conduct charge was dismissed, Tilkey's company of 30 years, Allstate Insurance Company (Allstate), terminated his employment based on his arrest for a domestic violence offense and his participation in the diversion program. Allstate informed Tilkey it was discharging him for threatening behavior and/or acts of physical harm or violence to another person. Following the termination, Allstate reported its reason for the termination on a Form U5, filed with Financial Industry Regulatory Authority (FINRA) and accessible to any firm that hires licensed broker-dealers like Tilkey. Tilkey sued Allstate for wrongful termination and compelled self-published defamation.

The jury returned a verdict in Tilkey's favor on all causes of action and awarded him $2,663,137 in compensatory damages and $15,978,822 in punitive damages. The Court of Appeals concluded that compelled self-published defamation is a viable theory, and substantial evidence supported the verdict that the statement was not substantially true. The court did, however, remand the matter for recalculation of the punitive damages award.

FACTS

On August 31, 2014, Mann sent an e-mail to Tilkey at work mentioning the charges that had been filed against him. A field compliance employee later discovered this e-mail while conducting a routine compliance review and forwarded it to Human Resources (HR). HR professional Tera Alferos conducted the initial investigation, and she interviewed Tilkey. She noted Tilkey had been asked to accept a plea deal to have two of the three charges dropped, then the last one dismissed. She never spoke with Mann or interviewed the arresting officers. She also did not investigate Mann's background or review her social media accounts.

A couple weeks later, Alferos sent her supervisor a summary of her investigation, which stated that the police report had been reviewed and noted Tilkey had been charged with but not convicted of a crime. The summary also explained there was no FINRA reporting obligation because there were no felony charges, and it concluded there had been no violation of company policy.

A supervisor then changed the conclusion to state Tilkey's behavior may have been at a level that caused the company to lose confidence in him. At the supervisor’s request, Alferos next added references to the domestic violence charge because it suggested Tilkey had engaged in behavior that could be construed as acts of physical harm or violence toward another person, in violation of company policy. In an e-mail referencing the decision to terminate Tilkey's employment, a Ms. Metzger wrote that they were amending the reason for terminating Tilkey to be "violence against another person whether employed by Allstate or not. "It identified the policy violation as "[t]hreats or acts of physical harm or violence to the property or assets of the Company, or to any person, regardless of whether he/she is employed by Allstate." When the company terminated his employment, it informed Tilkey, "Your employment is being terminated as a result of engaging in behaviors that are in violation of Company Policy. Specifically, engaging in threatening behavior and/or acts of physical harm or violence to any person, regardless of whether he/she is employed by Allstate."

The company then filed a Form U5 with FINRA reporting its reason for terminating him as follows: "Termination of employment by parent property and casualty insurance company after allegations of engaging in behaviors that are in violation of company policy, specifically, engaging in threatening behavior and/or acts of physical harm or violence to any person, regardless of whether he/she is employed by Allstate. Not securities related."

Tilkey sued Allstate asserting three causes of action: (1) violation of California section 432.7; (2) wrongful termination based on noncompliance with section 432.7; and (3) compelled self-published defamation to prospective employers. Following trial, the jury returned a verdict for Tilkey and awarded $2,663,137 in compensatory damages, with $960,222 for wrongful termination and $1,702,915 for defamation, and $15,978,822 in punitive damages. Allstate moved for a new trial, which the trial court denied. Allstate appealed.

I: WRONGFUL TERMINATION

Allstate argued it did not violate the California wrongful termination statue (432.7) when it used as a factor in its termination decision Tilkey's arrest and subsequent conditional plea and entry into a diversion program. Tilkey countered that the company's reliance on his arrest records violated section 432.7; thus, he was wrongfully terminated. The parties' disagreement hinged on the interpretation of section 432.7, subdivision (a)(1), which prohibits employers from utilizing as a factor in employment decisions any record of arrest or detention that did not result in conviction or any record regarding referral to or participation in any pretrial or post trial diversion program.

Allstate argued a conditional plea agreement qualifies as a conviction. Tilkey contended he never entered a guilty plea; thus, there was no conviction. The court concluded we conclude the term "conviction" as defined in section 432.7 does not require entry of judgment: “The plain language here makes clear that a judgment is not required because the conviction can exist without respect to sentencing. (See ibid.) The statute's legislative history supports this interpretation.” A conviction under section 432.7 does not require an entry of judgment; it simply requires entry of a guilty plea. Thus, Allstate did not violate section 432.7 by using Tilkey's arrest as a factor in its decision to terminate his employment.

II: DEFAMATION

Allstate next challenged the defamation verdict, contending that self-compelled defamation should not provide a basis for a defamation per se cause of action. It further contended there was no evidence that Tilkey's self-publication was compelled by its publication of the reason for his employment termination on the Form U5 because that publication contained a privileged statement. Finally, Allstate maintained that its statement was substantially true, justifying reversal of the verdict.

For a valid defamation claim, the general rule is that "the publication must be done by the defendant." (Live Oak Publishing Co. v. Cohagan (1991) 234 Cal.App.3d 1277, 1284 (Live Oak Publishing).) But there is an exception "when it [is] foreseeable that the defendant's act would result in [a plaintiff's] publication to a third person." For the exception to apply, the defamed party must operate under a strong compulsion to republish the defamatory statement, and the circumstances creating the compulsion must be known to the originator of the statement at the time he or she makes it to the defamed individual.

Compelled Self-Published Defamation Per Se

In an action for defamation per se, the meaning is so clear from the face of the statement that the damages can be presumed. The originator of the statement is liable for the foreseeable repetition because of the causal link between the originator and the presumed damage to the plaintiff's reputation but the publication must be foreseeable. The presumed injury is no less damaging because the plaintiff was compelled to make the statement instead of the employer making it directly to the third party. Allstate offered several other arguments for why the Court should not accept a theory of compelled self-published defamation.

Form U5 Privilege

Allstate provided a written explanation for Tilkey's termination of employment on the Form U5 to FINRA, which was available to every prospective employer of similarly licensed employees. Thus, disclosure was not absolutely privileged. Thus, Tilkey was compelled to explain the reason for his discharge, and this repetition was reasonably foreseeable.

Additionally, the qualified privilege that attaches to communications about an employee's job performance when made without malice or abuse to a third party likewise protects an employer against compelled self-published defamation. This conditional privilege helps protect the free flow of reference information.

Firms are required to file a Form U5 with FINRA whenever a registered representative leaves the firm. If the registered representative's employment has been terminated, the form asks the firm to provide a reason for termination. When the Form U5 identifies allegations of improper conduct by a broker-dealer, an issue that FINRA may need to investigate, it can on those occasions be considered "a communication made 'in anticipation of an action or other official proceeding.' (Briggs v. Eden Council for Hope & Opportunity (1999) 19 Cal.4th [1106,] 1115.)" (Fontani v. Wells Fargo Investments, LLC (2005) 129 Cal.App.4th 719, 732, disapproved of on other grounds in Kibler v. Northern Inyo County Local Hospital District (2006) 39 Cal.4th 192.) In those instances, the information reported on the Form U5 would be protected by the absolute privilege outlined in Civil Code section 47, subdivision (b), at least in California.

Section 7 of the Form U5, however, includes a list of disclosure questions for full terminations that asks if the terminated employee was the subject of a governmental investigation; was under internal review for fraud, wrongful taking of property, or violated investment related laws, regulations, or industry standards relating to compliance; was convicted of or pled guilty to a felony; or was convicted of or pled guilty to a misdemeanor that related to investments, fraud, false statements, bribery, perjury, forgery, counterfeiting, extortion, or wrongful taking of property. These questions make clear that FINRA seeks termination information that allows it to assess whether the employee's conduct lacked compliance with regulatory requirements in the securities arena. FINRA does not ask for information about non-securities-related activities because that information falls outside its scope of regulation.

Thus, according to the California Court, the absolute privilege extends to communications required by FINRA, i.e., fraud- and securities-related information. However, the communication of Tilkey's termination here did not regard improper securities-related conduct, and Allstate did not limit its responses to fraud- and securities-related information. Instead, Allstate explained Tilkey's departure was the result of a "termination of employment by parent property and casualty insurance company after allegations of engaging in behavior that are in violation of company policy, specifically, engaging in threatening behavior and/or acts of physical harm or violence to any person, regardless of whether he/she is employed by Allstate. Not securities related." This statement did not contain allegations of improper securities conduct, theft, or allegations or charges of fraud or dishonesty. It was not offered in anticipation of or to initiate an investigation; nor was it offered in the course of any other official 29 proceeding. (See Civ. Code, § 47, subd. (b).) Thus, the absolute privilege does not apply[1].

Substantial Evidence Supported the Jury Findings That Tilkey Was Compelled to Self-Publish a Statement That Was Not Substantially True

The jury concluded that Tilkey was under strong pressure to communicate Allstate's defamatory statement to another person. There was ample evidence to support this conclusion. A “vocational evaluator” testified Tilkey would have a difficult time ever getting another job because he had been terminated, and the reason for termination reported on the Form U5 was negative. He also noted that because Tilkey sold life insurance, he was required to hold securities licenses, and agencies and employers hiring those with securities licenses would have access to U5 forms. Tilkey's supervisor at Allstate, testified that Allstate routinely reviewed the securities public information from the Form U5 of any person they were hiring, and he could not recall ever hiring anyone at Allstate whose Form U5 stated he was terminated for cause. Tilkey testified that when he recruited agents, he would have someone check the Form U5, and he never hired anyone whose Form U5 showed the termination was for cause. He also never received an interview from any company that had access to a Form U5, even though he had 30 years of experience and performed well, receiving the third largest bonus in the state just a few weeks before his termination. Even if the company never offered any specific information about the reason for Tilkey's discharge from employment to prospective employers, its statement at the time of discharge and its reporting of the information on the publicly available Form U5 necessitated Tilkey's self-publication in other settings. In sum, the Court of Appeals upheld the defamation verdict but concluded that the punitive damage award was excessive. More on that later.

[1] Had Allstate instead eliminated the specifics in its statement, privilege may have attached because Allstate was required to report the termination. For example, it could have supplied the following statement: "Termination of employment by parent property and casualty insurance company after allegations of engaging behavior that are in violation of company policy. Not securities related."