SECLaw.com - The Securities Law Blog

The SEC's "Feel Good" Committee

2009-07-09T13:34:00.000-04:00

The SEC's new "investor Advisory Committee" is getting ready to become a functioning entity. The committee was created to advise the SEC on matters of concern to investors, and to provide the Commission with investor perspective on regulatory issues. My view on the Committee is in this month's On Wall Street Magazine, in an article titled "The SEC's 'Feel Good' Committee".

Finally, a Rational Analysis of "Mandatory" Arbitration

2009-06-30T12:15:00.000-04:00

While his brethren at the claimant's bar shout for the end of mandatory arbitration in securities disputes, Seth Lipner, a well known and respected customer attorney,former PIABA President, and law professor, has entered the "mandatory" arbitration fray, and hit the nail on the head in his column at Forbes.com.

In his column, Should Securities Arbitration be Mandatory? Seth is correct, and not just because he agrees with me. I have sung the praises of securities arbitration for decades, and have blogged about the recent move to end securities arbitration and problems with the process as FINRA tinkers with it. The posts here, here, here, here and here. Or just click on the "Arbitration" category in the right hand margin for all of the posts.

Mandatory arbitration in the securities industry did not start with Shearson vs. McMahon. It started with an NASD rule, approved by the SEC and Congress, that required all registered persons and firms to arbitrate disputes among themselves, and with their customers. The use of arbitration agreements in customer agreements was a direct result of the one sided (and short sighted) government mandate. Customers could force brokers to arbitrate, but brokers did not have the same right. Enter the pre-dispute arbitration agreement in customer agreements to level the playing field.

In the world of "mandatory" arbitration, there is virtually no case as mandatory as the situation in which stock brokers find themselves. They aren't forced to arbitrate their disputes because they didn't read a contract. Stock brokers are forced to arbitrate their disputes because the US Goverment says they have to arbitrate their disputes.

Stock brokers are forced to arbitration if they want to have a job. All of the arguments against mandatory arbitration apply with equal force for stock brokers. They have absolutely no choice; except to give up their careers.

So, should Congress end mandatory arbitration, it will also end mandatory arbitration for stock brokers. Brokers will be free to sue in court, and will be free to be sued in court. So will their employers, the brokerage firms.

As Seth points out, securities arbitration is a different animal, and in many ways, given the government oversight and the fact that it is in large part paid for by the securities industry, a significant advantage to the investor, and the employee.

Removing the requirement that brokers must arbitrate means that all of the costs and delays of court litigation are back in play. Firms will decide which cases they want to go to court, and the tough ones will go to court, where the party with more money has a significant advantage.

Remove arbitration and everyone goes to court; along with motions to dismiss, depositions, interrogatories, formal discovery motions, interlocutory appeals, motions for summary judgment, and more appeals from final judgments. Plus a three or four year wait to be heard.

For what? So that customers get a jury? Let's be realistic; no one gets a jury trial in this country except for criminals and personal injury plaintiffs. Everone else, including burned investors and employees, settles or is thrown out before a trial. Less than 5% of all non-personal injury suits actually go to a trial, and a smaller percentage go to a jury.

Congress needs to carefully consider what it is doing. Removing pre-dispute arbitration agreements will harm thousands of investors every year. Right now investors with claims for less than $100,000 are virtually locked out of meaningful arbitration,because they can't afford an attorney.

Remove arbitration, and investors with claims for less than $200,000 will not find an attorney willing to foot the bill for a contingency fee.

I have been at this for over 25 years. So has Seth. Read Seth's column, and let me know where we are wrong.

Email Storage and the Attorney Client Privilege

2009-06-30T01:30:00.001-04:00

Work place computers, privacy and the attorney client privilege are starting to create a legal stir, which can have an impact on the brokerage community.

FINRA rules and SEC regulations require brokerage firms to store and preserve all incoming and outgoing emails. The rule has obvious merit, and while implementation was initially an issue, it no longer is, as technology caught up with the rules. Every firm can capture and store emails today.

Underlying the rule is the premise that all information on a company computer belongs to the company. The rule did not have to concern itself with violation of individual privacy rights of the firm's employees; they have none when they use the company computer.

But a recent New Jersey case may change that. In a recent decision, the NJ Appellate Division ruled that employees do have a rights to the personal information on their computer, and more importantly, that the attorney-client privilege protects emails on an employees computer, even if the use of the computer was prohibited by work place rules.

New Jersey attorney Paul Kostro has an excellent analysis of the decision at his NJ Family Law Blog and the analysis applies in all employment situations - including the financial industry.

The case is Stengart v. Loving Care Agency Inc., App. Div. (Fisher, J.A.D.) (A-3506-08T1; APPROVED FOR PUBLICATION; Decided June 26, 2009):

Bernard Madoff is sentenced to 150 years in prison

2009-06-29T14:42:00.000-04:00

Bernard Madoff was sentenced to 150 years in prison Monday. Judge Chin issued the maximum sentence that was permissible under the sentencing rules for the fraud.

Congressional Stock Trading Oddities -Time for Blind Trusts?

2009-06-29T08:50:00.002-04:00

The controversy over Senator Durbin's stock transactions has put the spotlight back on stock market transactions by our elected officials. While Senator Durbin appears to have bought and sold stocks after the public announcement of the information he allegedly received, other odd trades are beginning to surface.

There are a number of reports of senators and representatives buying and selling stock at the time of important and significant announcements surrounding the government bailout programs last year. There are certainly problems with the claims of insider trading as I pointed out in my recent post on Senator Durbin's trades, which appear to be perfectly legitimate. The stories ignore the fact that many of these representatives have brokers or money managers who actually pick the positions that are bought or sold, and there are some who are actually in blind trusts.

But in a time when the American public is thoroughly disgusted with the conduct of our elected officials, and with the financial sector, isn't it time to address those perceptions and do something about the ability of elected officials to purchase or sell securities. Or to at least prevent them from doing so in industries that they have the ability to dramatically impact through legislation or other actions?

Blind trusts would appease some of the concerns without an outright prohibition, and is something that should be considered. Then again, it is these senators and representatives who would have to enact such a rule upon themselves. We will undoubtedly see term limits before we see a rule requiring blind trusts.

Madoff Sentencing Today

2009-06-29T08:29:00.001-04:00

Facing 150 years in prison, Madoff will be sentenced today by US District Judge Denny Chin. The sentencing comes on the heels of an announcement on Friday that all of Madoff's property had been seized as part of an effort to obtain compensation for his victims. The property is said to be worth nearly 80 million dollars.

The details are at CNN.com

Accountant Pleads Guilty in UBS Tax Fraud Case

2009-06-26T08:49:00.001-04:00

The UBS tax fraud case is expanding. An accountant who hid money with UBS pleaded guilty to filing a false tax return. According to press reports, prosecutors based their charges on UBS records that they obtained as part of a defferred compensation agreement.

So much for customer protection and Swiss banking secrecy.

http://www.miamiherald.com/business/story/1114689.html

Stock Loan Fraud Bites Firms

2009-06-19T15:44:00.002-04:00

The investigation into stock loan practices and the trials that arose from that investigation did not gain much press, but the impact on the business practices surrounding stock loan programs are being felt. On Wednesday, FINRA announced fines, and suspensions against Raymond James and RBC for their alleged participation in the process.

FINRA - FINRA Fines Raymond James, RBC Capital Markets Corporation, Stock Loan Trader for Improper Stock Loan Practices

FINRA's Ketchum Acknowledges Lack of Confidence, Calls for More Regulation

2009-06-19T14:39:00.001-04:00

He references the erosion of investor confidence after the market collapse and the arrest of Madoff, causing some to wonder, "given his status as a respected veteran of the securities industry, many investors were left to wonder if he was truly an outlier, or emblematic of how the industry operates."

Interesting comment from a long term FINRA insider and the now-CEO of one of the requlators who let that fraud go on under their noses for decades.

Does Mr. Ketchum fall on his sword and resign? No. Incredibly he calls for more regulation, and pushes again to gain regulatory control over investment advisors.

FINRA - Remarks by Chairman and CEO Rick Ketchum From the Exchequer Club

Time For Government Mandated Arbitration to Go

2009-06-18T09:01:00.002-04:00

The government's financial reform plan has been released, and is available online at the link.

This might be the start of the end of arbitration agreements in brokerage accounts, as the report recommends that the SEC "study" the issue. The underlying argument is that pre-dispute arbitration agreements are not fair to the individual, because his is giving up his right to go to court of any dispute he might have, and he is giving it up before the dispute arises.

That position is debatable, but this proposal raises a significant question. If you accept the unfairness premise as begin true, why aren't we discussing the fact that the SEC (through its underling, FINRA) forces individuals to arbitrate their claims, by use of a rule that requires every employee of the brokerage industry to arbitrate disputes with his employer, and every customer.

Why isn't anyone talking about government mandated arbitration by employees and individuals in the brokerage industry?

Is there any other industry where the government mandates that its employees arbitrate every dispute they might have?

Administration Plans Fiduciary Standard for Brokers

2009-06-17T17:47:00.001-04:00

And it begins. A market crash, a major ponzi scheme, and new regulations. The Obama administration announced today that it will propose to establish a fiduciary duty for broker-dealers offering investment advice and harmonize the regulation of investment advisors and broker-dealers.

The move is being praised by investment advisor organizations and by consumer groups, but the entire debate is something of a tempest in a teapot. Brokers are not fiduciaries when they act as brokers, but the distinction has, for the most part, been lost over the years, as brokers take a more advisory role in their relationship with their customers, and many brokers today offer advisory services to their customers.

The interesting part of the announcement was FINRA's response. According to InvestmentNews.com, FINRA's President hailed the call for harmonization. He also pushed for putting investment advisors under FINRA regulation. With 25,000 investment advisory firms in the country, FINRA has not explained how it is going to regulate 25,000 new firms when it cannot properly regulate the 5,000 or so broker-dealers that it is currently charged with responsibility for regulating.

The quote from FINRA is priceless - “Finra is uniquely positioned to build an oversight program that ensures investment advisers are properly examined and their customers are adequately protected."

Madoff's firm was under FINRA's jurisdiction, and is currently in SIPC liquidation because his massive fraud was not discovered by FINRA or the SEC, both of which had jurisdiction over him.

Obama administration to create a fiduciary standard for broker-dealers - Investment News

PIABA Petitions SEC To Remove Industry Arbitrator Requirement

2009-06-16T09:22:00.002-04:00

PIABA, the bar association dedicated to suing brokers and brokerage firms, has filed a petition with the SEC to remove the requirement of having an arbitrator that is affiliated with the securities industry from panels involving customer disputes.

The requirement of an industry arbitrator has been part of FINRA arbitrations since the forum has existed, and has its genesis in worthwhile goals. In the past, having an arbitration panel that was familiar with the retail securities business was a benefit to all sides, as it lessened the need for expert witnesses and lengthy testimony from witnesses as to practices and procedures in the industry.

But as arbitration expanded and became more popular, the process began to look more and more like a court proceeding. While we can debate the benefits, if any, of that transformation, the industry arbitrator has become an issue. Expert witnesses are common place today. Further, having a panel decide a case based on facts not in evidence (an individual arbitrator's personal experience, knowledge and opinions) cuts against our sense of due process and trial procedure.

Plus, it just doesn't "look" right. It is difficult to argue that the process is fair when one of the arbitrators has an affiliation with the securities industry.

Of course, there is no evidence that even suggests that the industry arbitrator sides with the industry. In my experience it just isn't the case. In fact, I obtained a multimillion dollar award for a customer, which included punitive damages, from a panel that included the General Counsel of a major wirehouse.

But individual stories prove nothing, and perceptions are important. Perhaps it is time to insure that all arbitrators are not only impartial, but have the appearance of being impartial.

PIABA has actually taken a reasonable position here. It is not asking to ban industry arbitrators, it is asking that the rules be changed so that the customer can opt out of having an industry arbitrator.

In my view, a reasonable compromise, but one that does not go far enough. If an arbitrator who was a back office clerk at a brokerage firm 3 years ago has an appearance of bias, doesn't a securities attorney who spends his days representing customers against brokers have at least the same level of an appearance of bias against the industry?

While I have no doubt that my brethren who represent customers decide their cases fairly and without bias, it is a bit odd to have an arbitrator who spends his time suing brokers as the arbitrator in a customer dispute.

Appearances mean a lot in arbitration. Let's allow all parties to opt out of having an industry arbitrator, and also allow them to opt out of having a customer attorney on the Panel. And lets do the same for employee arbitrations. Remove the industry arbitrators from those panels as well.

More information, and a copy of the petition, is at the Securities Law Professor Blog - PIABA Submits Petition to SEC to Eliminate Requirement of Industry Arbitrator in Customer Disputes

Supremes to Decide If Arbitration Agreement Includes Class Actions

2009-06-16T08:44:00.002-04:00

I shudder at the thought of a class action in arbitration, and really cannot imagine who would push for such an outcome, but at least one party to an arbitration is doing so.

In Stolt-Nielsen S.A., et al. v. AnimalFeeds International Corp. the US Supreme Court is going to rule on the plaintiff's request that a class action go to arbitration. The question presented in the case is "[w]hether imposing class arbitration on parties whose arbitration clauses are silent on that issue is consistent with the Federal Arbitration Act, 9 U.S.C. §§ 1 et seq."

Can you imagine FINRA trying to administer a class action arbitration? It would be a nightmare. Fortunately, we don't have to worry about that, since FINRA's rules, which are part of the agreement to arbitrate, prohibit class actions.

Those go to court.

The "Controversy" Around Senator Durbin

2009-06-15T23:34:00.005-04:00

Running with headlines like Durbin cashed out during big stock collapse newspapers and bloggers are claiming that Senator Dubin traded on inside information when he sold $115,000 worth of stock in late September, 2008.

Durbin didn't sell $115,000 in stock on the 19th, he sold $43,000 of unidentified mutual fund shares, and bought $43,000 in Berkshire Hataway. He didn't "cash out" or "sell out" or "dump", he sold one group of stocks and bought another. Later in the month he sold other investments and bought more Berkshire Hathaway.

So, no selling based on any information, it is a net wash. And please keep in mind that Lehman went bankrupt and the markets tanked on September 15, 2008, well before the meeting and the sales.

Oh, and one more point. The information that Bernanke told Congress was made public on the 19th, the day of Durbin's sales. It is impossible to trade on inside information, even assuming that this is inside information, when that information is public.

So, no selling on inside information. But what is the supposed inside information? Bernanke told Congress to enact legislation to help the banks. That is hardly inside information, by any definition of the term, but now we need to believe that saying that the banks are in trouble would cause the senator to sell stock? Did you need Mr. Bernanke to tell you that the banks were in trouble after Lehman went out of business and its stock went to 13 cents?

So, it is not inside information and he didn't "dump" his stock, he sold mutual funds and bought Berkshire Hathaway.

Not much of a story there.

UPDATE: While the comments to this post have been positive, some have been claiming that Bernanke's requests to help the banks were not public on the 19th. I don't think it matters, because I think that by September 19 it was common knowledge that the banks were in trouble and that the feds would have to do something. Bear Stearns was out of business, Lehman filed for bankrupcty, and AIG received a 85 billion dollar loan before the 19th. However, Bernanke made the information public on the morning of the 19th, at a press conference, where President Bush, Paulson and Bernanke urged Congress to take action to assist the banks, and announced references to what became TARP. Similar comments were made by the three on September 18, and were widely reported in all of the major news outlets.

Some examples:

Washington Post, Bloomberg, Politico, FOXNews, USNews

Beware of Enforcement Agencies

2009-06-05T08:52:00.001-04:00

A group of former government lawyers turned white-collar defense lawyers gathered in Washington, D.C., this week to discuss the current enforcement environment as well as changes across federal agencies in response to the financial crisis. While one lawyer likened the pro-enforcement era to "a walk in the woods with a very hungry grizzly bear" and another warned it was "2002 on steroids," the bottom line was: Be afraid, Corporate America. Be very afraid.

Beware of Enforcement Agencies, Say Ex-Bush Officials

Does the NASAA Really Oppose "Take it or Leave it" Arbitration Clauses?

2009-06-03T12:39:00.001-04:00

Intellectual honesty is important; particularly when it comes to government officials and regulators. Which is why I simply shake my head at the comments made by the North American Securities Administrators Association (the "NASAA") regarding pre-dispute arbitration agreements.

The NASAA is an organization of securities regulators - its membership consists of the securities regulators from the 50 states. In a recent press release it announced that it fully supports the Arbitration Fairness Act, which would overturn decades of law in the United States, and which would make pre-dispute arbitration agreements unenforceable.

Putting aside the question of whether the Act is a good idea or not, the support of the NASAA is a bit surprising. In its statement, the NASAA not only attacked the arbitration process itself (calling it unfair) but also stated that a "take-it-or-leave-it" arbitration provision is inherently unfair.

Why is that position surprising? Because the NASAA supports a system of rules that require employees to arbitration every dispute they have with their employers. FINRA rules require all brokers and brokerage firms, to arbitrate every customer dispute, and every dispute amongst themselves. Brokers, who are individuals just like consumers and investors, have the same "take-it-or-leave-it" arbitration agreement presented to them. If you want to be a stock broker, you MUST agree to arbitration every dispute with a customer, and your employer, because the FINRA rules require you to do so. You have no choice. If you want to be a broker you MUST agree to arbitrate your disputes.

So, if take it or leave it arbitration provisions are bad, and if the state securities regulators are against such provisions, why are they not forcing FINRA to drop the requirement for brokerage firm employees? Why are these regulators not adopting regulations, which they have every right and authority to do, declaring pre-dispute arbitration agreements for brokerage firm employees to be unenforceable?

I am a fan of arbitration, in particular FINRA Arbitrations. But if you are going to claim that pre-dispute arbitration agreements are unfair and should be enforceable, then all of such agreements should be unenforceable. The members of the NASAA could make that law with the stroke of a pen.

Why haven't they done so?

Who Says Employees Can't Win in Arbitration - $4.1Billion Award

2009-06-03T11:50:00.001-04:00

Making arguments by anecdotes is not the way to present a convincing argument, and one winner (or loser) does not prove that a dispute resolution process is fair (or unfair). But in the midst of all of the misleading and inaccurate comments being made about arbitration and how it is stacked against the little guy, I couldn't help but chuckle at this award.

A court has just confirmed a $4.1 BILLION award in favor of an employee against his former employer for commissions, other compensation and punitive damages.

And since the rules relating to arbitration apply to the employer as well as the employee, there undoubtedly is not much chance for an appeal.

I don't know any of the facts of the case, and have only read the employee's attorney's press release, but that is a heck of a lot more specific information than the comments about homeowners who have supposedly lost their homes because of an arbitrator's decision.

Court Issues $4.1 Billion Judgment to Employee Confirming Arbitration Award for Unpaid Commissions, Securities, and Punitive Damages for Fraud

Morgan Stanley Smith Barney

2009-06-01T14:49:00.000-04:00

The joint venture between Morgan Stanley and Smith Barney closed today, creating a massive brokerage firm with over 18,000 financial advisors and 1,000 branch offices.

According to press reports, the joint venture will handle each firm's retail operations, which each firm's institutional business will remain separate, although institutional will execute is orders through the joint venture.

What remains to be seen is the effect of the joint venture, if any, on existing relationships between brokers and their respective firms.

Mark Cuban sues SEC over insider trading documents

2009-06-01T09:15:00.000-04:00

You gotta love a billionaire who believes he has been wrongly accused and is willing to fight to clear his name. Mark Cuban, named in an insider trading case by the SEC, is striking back.

A fair reading of the case against him reveals that it is not much of a case. The SEC is seeking to expand the rules against insider trading yet again. Those rules have been stretched so far as to make the rule unrecognizable to the original drafters - the SEC and the courts have actually interpreted the statutes as if a key phrase is missing.

I have blogged about the case in the past, (Mark Cuban and the SEC Improper Trading Investigation, Cuban's Duty of Trust?, and The Cuban Case and Confidentiality), so my views on the case are pretty clear.

Last week, Mark Cuban's attorneys argued a motion to dismiss the SEC complaint in federal court. While I believe his motion has a sound legal basis (I do not believe the SEC's complaint states a valid cause of action), motions to dismiss complaints filed by government entities have a very low success rate, and it is doubtful that the motion will be granted.

But it sets up Mr. Cuban's defense, and shows the weaknesses in the SEC's case, even if the case is not thrown out. A great defensive move, and one that undoubtedly cost some money.

Next we learn that Mr. Cuban is suing the SEC. Now, there is a millionaire who is upset. He has filed a complaint in federal court alleging that the SEC has violated the Freedom of Information Act in connection with his requests to them under the Act.

Having dealt with the SEC and FOIA requests in the past, his allegations do not surprise me. Assuming he can prove what he alleges, the SEC is once again going to have egg on its face, and an additional battle in the insider trading case, as Cuban will be able to argue that they have acted in bad faith in dealing with him. That is if the SEC loses of course.

The press story is linked below. This should be an interesting twist to the case.

Mark Cuban sues SEC over insider trading documents

Cour Strikes Class Action Ban in Arbitration Agreement

2009-05-29T07:33:00.001-04:00

Class action bans in arbitration agreements have always been a cause for concern, and I have always taken the position that such bans are illegal. While some clever attorney had the idea to jam that sentence into an arbitration agreement, the ban has nothing to do with arbitration, and is in reality a complete ban on anytype of dispute resolution in some circumstances.

The reality is that there is nothing to get in an uproar about, since the bans are illegal. The latest decision striking the class action ban was yesterday, in the Federal District Court in Seattle, when the court refused to enforce ATT's ban on its customer's participation in class actions.

Class action by ex-AT&T Wireless customers allowed

Single-Regulator Plan for Banks Now Close

2009-05-28T09:48:00.000-04:00

Here we go. Not only more rules, more laws, more regulations, but yet another layer of regulation. I don't do banks, but if this is happening on the banking side, I can't wait to see what they do with the securities side.

http://online.wsj.com/article/SB124347634088461159.html#mod=rss_whats_news_us

SEC Charges Brokers with Unauthorized Trading in Customers' Accounts

2009-05-28T08:31:00.001-04:00

The SEC is still hard at work - they filed a complaint alleging that a broker-dealer engaged in a fraudulent scheme by entering tens of millions of dollars of unauthorized securities trading through the accounts of two customers.

More at SEC Charges Brokers with Unauthorized Trading in Customers' Accounts

Judge Sotomayor's Securities Law Opinions

2009-05-28T08:24:00.001-04:00

Professor Black has collected Judge Sotomayor's securities law opinions from her time on the Second Circuit. I have not read them all, but for those who are interested - Judge Sotomayor's Securities Law Opinions

Sotomayor’s Appellate Opinions Are Unpredictable,

2009-05-27T23:45:00.001-04:00

Judge Sonia Sotomayor has authored some 150 civil and business cases and voted on hundreds more. But legal scholars who have examined her record closely say that her opinions in this field are unpredictable, and do not put her clearly in a pro- or anti-business camp.

The NYT has a summary of some of her decisions.

Santander, a Madoff Feeder Pays the Trustee

2009-05-26T22:57:00.000-04:00

Banco Santander is paying the Madoff Trustee 235 million dollars to settle claims against it, according to the WSJ.

Feeder funds - hedge funds who sent investments to Madoff in return for a share of the fees came to the forefront of the Madoff litigation once it became clear that Madoff didn't have the 17 or 20 or 50 billion dollars.

Santander is the first to fold. Watch for the rest follow.

Santander, a 'Feeder,' Pays a Price - WSJ.com