The purpose of hedging governmental employment with due process rights is to prevent jobs from being used as patronage every time the political winds shift. On a university campus, such rights are often needed to protect free speech.

Indeed, in my law practice, I have been engaged to coach professors through various types of employment disputes without resorting to litigation. I have to admit that a warring faculty is a pretty cutthroat group to be among. It would probably take a sociologist rather than a trial lawyer to explain it, but I have seen it often enough to be impressed by it.

Along came the North Carolina Court of Appeals in Leonard Bernold v Board of Governors of the University of North Carolina, which affirmed the lower court and Board of Governors decision to terminate a professor on the grounds of “lack of collegiality.”

I cannot imagine a more subjective basis for termination, short of taking a vote among a faculty to determine if a professor was “liked” or “disliked.” For this reason, I cannot imagine that such a basis for termination actually comports with the protections one thought would have been enshrined in due process rights. It should be noted that the lack of collegiality charge was dressed up with the allegation that it was disruptive to the faculty and had gone on for three out of five prior employment years. But, “disruptive” is hardly less subjective. That it had gone on for awhile does not seem to alter the subjective nature of the charge.

There had been a full hearing and assuming there was a transcript, so it seems logical to conclude the court opinion simply left out the “juicy” tidbits that might make the subjective into the objective, or at least more substantive. But, more likely, this is the direction we are headed with due process rights. We are, in fact, abolishing them by demoting them to the level of mere feelings.

[Hat tip to Professor Ross Runkel.]

It once again amazes me that a college football player, a college kid, not an NFL player, can be treated this way. It also amazes me that it is news flashed across the planet rather than merely a line item in a campus newspaper.

I wonder if the football coach, an employee of a state institution, realizes he is a state actor and may have violated the civil rights to free speech of a citizen commenting on the way in which this government employee, the football coach, attended to his duties? While a high school football coach might be able to squash the free speech rights of a minor in a public high school under the rubric of preserving the peace at the school, that should not be available to a college football coach employed by a taxpayer funded state institution.

Nobody can reign in a sitting head football coach at a division 1 NCAA school in the Big Twelve with no worse than a 50% record and so much television revenue yet to collect for the year, so this is all academic.

Even the explanation by FINRA of what these products are lacks clarity for the people FINRA is trying to warn. Of even more concern, however, is that these products, FINRA believes, are especially apt to act erratically in volatile markets.

FINRA’s explanation of these products contains nicknames like “short funds” and “ultra short funds,” as if the investor reading the alert that did not understand the more formal name might get something out of the less formal. Of course, FINRA has to start somewhere, and the name is the most logical place to start. But, what else is the investor likely to get beyond the names? Will the investor really understand the nature of these products and their real risks?

These products should probably be classified by FINRA for suitability purposes as “speculative,” if FINRA’s warning is to have any real meaning. That would go a long way toward diverting them from the unsophisticated. FINRA could also declare them unsuitable for retirement accounts. FINRA could also preclude margin account purchases of these products, or limit margin account purchases to margin accounts with an actual marked to market value exceeding one million dollars.

Unless FINRA begins these types of protective rule implementations, FINRA will always be regulating after the losses instead of preventing them.

Why did the number of new case filing in 2007 drop so drastically? Was it because of strong market performance? Was it because of upgraded and determined compliance by the securities broker dealers? Was it because the legal community decided to leave these types of cases to specialists? Was it because the legal community thought that the system was rigged (i.e., the controversy over industry panel members and other disputes) and stopped filing cases?

We have heard anecdotal reports, and seen some news media reports, suggesting that all of these might be true, or might be the perception of at least some participants. If these, in whole or in part, are true, or perceived as true, then FINRA’s projection of new case filings for 2009 may be too high.

The term “management” is not defined in the Colorado statute. However, it is pretty clear the court is confused about what constitutes “management.” The only employees in “management” are those who can bind the company or otherwise decide company policy, typically corporate officers and directors. That would be a logical purpose of the statute. Applying the statute to middle or lower tier supervisors turns the statute from a fair allocation of business risk to a draconian labor control tool.

Of course, will Financial Advisors in Colorado with titles like “Vice President” or “Director” once again face non-compete risks when they trade jobs? Protocol firms may not be tempted but many will be in the is shaky economy. Financial Advisors in Colorado should try to wheedle an email or something that indicates they are not in management, or obtain a page from a firm policy manual that says something similar.

(Hat Tip: Professor Ross Runkel’s employment law summaries)

The case was interesting because the employee made the same mistake many people make. The employee was using a web based password protected email account believing that no trace of the email on the outside website was being left on the computer owned by the employer. That was untrue. Because the employee was viewing web email through the browser on the employer’s computer, the computer captured a picture of every image the employee saw, thus preserving it for the employer’s computer analyst to retrieve.

The moral of the story: do not use an employer’s computer for anything you want to remain private. Go outside of the employer’s hardware.

Most employers are not set up to retrieve or view web images viewed by the employee, but that does not mean a computer expert cannot retrieve the images from the computer when desired. Just because compliance systems are not set up to see every image the employee can see, like web based email, does not mean the email, once viewed on the employer’s computer, cannot be viewed by a computer analyst.

While the fine is not insubstantial, the cost of the subprime mortgage collapse has been astronomically more than $60 million. The combined lack of focus on federal stock prosecutions and the devolution to state by state enforcement apparently may have been a factor in bringing about a pervasive lack of securities industry standards. With recent statutory limitations on stock class actions and the general tort reform mood of the country, the ability of the average victim to enforce securities law violations has also been reduced.

With less to fear from the federal government, the fragmentary enforcement available from the state level, and the diminished capacity of the private class action bar, the securities industry may have gotten its wish. But, maybe it should have been frightened of getting it.

Madoff awaits sentencing after pleading guilty to 11 felony counts in a Ponzi scheme by which he swindled investors out of $65 billion. Inmate 61727-054 has settled into his new home: a 7½ x 8-foot cinder block cell at the Metropolitan Correction Center in New York City.

How could Madoff get away with such a massive fraud for so long? Don’t we have regulatory mechanisms in place to protect investors against crooked brokers and investment advisors? Yes we do — sort of. If the Bernie Madoff super-con has provoked your ire, how do you react when you learn that one of the people entrusted with preventing such skullduggery was – wait for it – Bernie Madoff. Keep reading.

The Securities and Exchange Commission is the agency charged with enforcing federal securities laws. The SEC was established in 1934 in response to the 1929 crash and the Great Depression that followed. The SEC makes sure that public companies disclose information that investors have a right to know. It also brings enforcement actions against brokers, dealers and advisors who violate securities laws.

However, to a great extent, the SEC allows the securities industry to regulate itself. Come again? That’s right, our first line of defense to protect investors against dishonest brokers and broker-dealers is for the brokers to regulate themselves.

FINRA (the Financial Industry Regulatory Authority) is the self-regulatory organization entrusted by the SEC with making sure that its member brokerage firms and their registered reps follow the law. FINRA can initiate disciplinary actions against its erring members, and also, unhappy customers may file complaints with FINRA against their brokers, which are resolved through arbitration.

By the way, if you have never heard of FINRA, you probably have heard of its predecessor: the National Association of Securities Dealers (NASD). In 2007, the NASD became FINRA and took over enforcement of all major U.S. stock exchanges. So how well does FINRA do at keeping its own members in the financial sector in line? That is, how is FINRA doing besides failing to uncover the biggest swindle in the history of the industry?

According to the Wall Street Journal, in 2008 FINRA levied fines against financial firms totaling $40 million. $40 million? That’s a miniscule sum compared to the trillions being managed by the 5,000 brokerage firms, 173,000 branch offices and 659,000 registered reps that FINRA oversees.

In addition, customers filed about 5,000 arbitration cases with FINRA in 2008. The most common complaints were breach of fiduciary duty, misrepresentation, breach of contract and negligence. However, less than 500 arbitrations in 2008 survived the process all the way to an actual hearing and decision, and less than half of them (42%) resulted in an award for the claimant. About 2,000 more cases were settled or mediated.

To the securities industry, a few million dollars in fines and a couple of hundred arbitration awards is the equivalent of an occasional “traffic ticket.” The industry merely budgets these minor inconveniences as part of the cost of doing business.

And how does Madoff figure into this discussion? Well, believe it or not, Madoff is a former chairman of the NASD’s board of directors, a former member of the NASD board of governors, and a former chairman of Nasdaq, the stock exchange the NASD regulated. In other words, to put it in the simplest possible terms, while Madoff was stealing billions of dollars from unwitting investors, he was also serving as one of the top officials entrusted with making sure brokers didn’t get away with such things. Wall Street, we have a problem.

Dallas money manager Gary D. Halbert writes: “How could regulators have missed this one? Oddly, Madoff appears to have operated below the radar screens of the SEC and various other regulatory agencies for many years. Perhaps this was because of Madoff’s very high Wall Street profile and his service as co-founder, board chairman and governor of the NASDAQ for several years in the late 1980s and early 1990s.”

Halbert continues:

The SEC said it conducted two inquiries [including a 2007 examination] of Madoff in the last several years and did not find major problems. … I find this baffling! My company, Halbert Wealth Management, is a Registered Investment Advisor with the SEC. We have been through a routine examination by the SEC. Our broker-dealer firm, ProFutures Financial Group, has been through multiple routine examinations by the NASD, and more recently FINRA … I can tell you that these routine regulatory examinations – at least among smaller firms like mine – are rigorous. They typically have 2-3 examiners in our offices for up to two weeks at a time looking at all of our books … If my company was running a Ponzi Scheme, or stealing customer monies, I feel confident that the regulators would have caught us upon the next regularly scheduled examination. … Frankly, I have NO CLUE how the SEC failed to discover Madoff’s giant Ponzi Scheme in its various examinations.

Halbert’s observation underscores a frequent criticism of SEC and FINRA enforcement: that the agencies go after small fish to keep up appearances, while failing to uncover large-scale wrongdoing perpetrated by the major players. Madoff was one of the biggest, and he went undetected for years.

As I said, under our current system, our first line of defense to protect investors against dishonest brokers and broker-dealers is for the brokers to regulate themselves. That means that in the case of Bernie Madoff, we have been trusting history’s all-time greatest thief to keep himself honest. That’s not working. New SEC chief Mary Schapiro says a crackdown is coming. “The world has changed dramatically in the last year,” Schapiro recently told Congress. “There will be no sacred cows.”

Given recent headlines, tough talk is to be expected. Tough action is another matter. We’ll believe it when we see it.

It remains to be seen how industry survivors will fashion their employment policies going forward. However, California courts have recently indicated a no nonsense attitude toward employment contracts containing non-compete clauses and California has always treated forfeitures with disdain. Texas, likewise, seems to have affirmed its own legal, if not moral, prohibition of anti-competitive provisions that go further than necessary to protect legitimate employer interests, such as forfeitures of earned stock or compensation.

The Texas Court of Appeals in Corpus Christi issued its 2009 opinion in Valley Diagnostic Clinic v Dougherty. While this was a dispute between a doctor and his former clinic, in which the clinic sought to forfeit earned but deferred compensation, the principles are the same for other industries. Just as the Texas State Board of Medical Examiners places certain limits on enforcement of these types of clauses, so, too, does FINRA and state regulators (even if they are not identical). Over shadowing that, however, is that the public policy of Texas, like many other states, deems “a compensation provision made only in exchange for a non-compete promise…precisely the sort of restraint of trade that Texas law prohibits.”