April 28, 2013

Controversial Democratic Appointee Pushes SEC for Less Talk About Investor and Securities Market Protections and More Action

According to Securities and Exchange Commissioner Luis Aguilar, the growing number of registered investment advisers, the increasing complexity of the financial instruments they use, and the recent trends in securities examinations show that there is a need for the regulator to up the vigorousness of its investment adviser examinations and enforcement activities. He noted that even as the SEC is working to give the regulated community best practices and guidance to enhance compliance, it also intends to increase its scrutiny of advisers, including more exams (especially for private fund advisers). Alternative investment managers will also get more attention.

Aguilar pointed out that with the number SEC registered investment advisers having gone up about 50% to over 10,000 last year, the value of the assets that they manage also increasing from about $22 trillion in 2002 to approximately $44 trillion in 2011, as well as a rise in the number of complex financial instruments that advisers use, there are more chances for “mischief” to happen. Hence, there is the need for more robust enforcement.

Also, as our securities fraud law firm mentioned in a previous blog post, the SEC commissioner wants there to be an end to mandatory arbitration agreements. Per the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC now can prohibit or limit pre-dispute arbitration agreements, which have become standard fare for brokerage firms. Aguilar is concerned that they are also becoming routine for investment advisory firms. He wants the government to ponder the possibility of adopting rules that would stop or limit broker-dealers and investment advisers from mandating that customers sign clauses in their agreements with one another that prevents them from filing securities fraud lawsuits and instead only resolve their disputes via arbitration.

Regarding retail investors, Commissioner Aguilar doesn’t believe they are getting the same degree of protections in both the corporate bond and municipal securities markets. While corporate bonds that the investing public can buy have to be registered with the SEC, no statutory authority exists that requires the same of municipal securities. Also, before municipal securities offering documents are made available to the public, the SEC does not get or even look at these documents. Aguilar says investor protections in this arena are mainly through the regulation of municipal securities dealers and brokerage firms.

Further scrutinizing the SEC, Commissioner Aguilar recently said that the regulator is still missing the mark on certain important initiatives involving investor protection, including the lack of regard he says it exhibited for regulators and investor’ suggestions about the lifting of the ban on private offering-related general advertising. Per the Jumpstart Our Business Startups Act, the Commission has to amend the 1933 Securities Act’s Rule 506 to get rid of the existing ban on general advertising in specific situations. However, the ban’s removal has led to fear that offerings that are mass-marketed under the rule will place investors at even more risk of abuse and financial fraud.

Aguilar Says SEC Will Ramp Up Examinations To Deal With Increases in Violative Behavior, Bloomberg/BNA, April 19, 2013

Aguilar Speech: Outmanned and Outgunned: Fighting on Behalf of Investors Despite Efforts to Weaken Investor Protections, SEC, April 16, 2013

Aguilar Speech: Keeping a Retail Investor Focus in Overseeing the Fixed Income Market, SEC, April 16, 2013


More Blog Posts:
SEC Commissioner Aguilar Calls For the Abolishment of Mandatory Arbitration Agreements, Stockbroker Fraud Blog, April 21, 2013

Court Upholds Ex-NBA Star Horace Grant $1.46M FINRA Arbitration Award from Morgan Keegan & Co. Over Mortgage-Backed Bond Losses, Stockbroker Fraud Blog, October 30, 2012

US Supreme Court Once Again Upholds Enforcement of Arbitration Agreements, Institutional Investor Securities Blog, February 17, 2013

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Posted In: Arbitration , Investment Advisers , SEC Enforcement , Securities Fraud

April 21, 2013

SEC Commissioner Aguilar Calls For the Abolishment of Mandatory Arbitration Agreements

U.S. Securities and Exchange Commission member Luis Aguilar is pressing the government to think about adopting rules that would limit or bar investment advisers and brokers from making customers sign away their right to file a securities fraud case. He made his statements in front of the he North America Securities Administrators Association’s yearly conference.

Aguilar spoke about how it was important to advocate for investor choice. He said that by giving investors the chance to choose how they wish to protect their legal rights and file their legal claims, the government would be enhancing federal securities laws while creating better investor protections.

The 2010 Dodd-Frank Act gives the Commission new powers to strengthen investor protections, including the authority to restrict pre-dispute arbitration agreements, which brokers routinely use. The agreements bar an investor from being able to sue the financial firm should a disagreement arise. Meantime, corporations generally remain in favor of arbitration as a venue for resolution because they believe this is less costly.

A few months back, Massachusetts Secretary of the Commonwealth William F. Galvin made a similar request, this time to the SEC. Galvin asked that investment advisers be prevented from including pre-dispute mandatory arbitration clauses in contracts. He said that nearly 50% of investment advisers surveyed that are registered in his state admitted to using these agreements.

At Shepherd Smith Edwards and Kantas, LTD, LLP our FINRA arbitration lawyers and securities fraud attorneys represent institutional and individual investors in both arbitration and the courts. Contact us today and ask for your free case assessment.

Read SEC Commissioner Aguilar's Speech at the North American Securities Administrators Association's Annual Conference in DC, April 16, 2013

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OmniVision Technologies Investors’ Securities Lawsuit Can Proceed, Says District Court, Stockbroker Fraud Blog, April 20, 2013

Federal Reserve Board Establishes Key Rule That Will Let Regulator Identify Systemically Important Nonbank Financial Institutions, Institutional Investor Securities Fraud Blog, April 19, 2013

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Posted In: Arbitration , Securities Fraud

April 19, 2013

Former Merrill Lynch, Oppenheimer, Deutsche Bank Broker is Ordered by FINRA To Pay Investor $11M Over Alleged Securities Fraud

A FINRA arbitration panel is ordering ex-broker Karl Hahn, who previously worked with Bank of America Corp's (BAC) Merrill Lynch (MER), Oppenheimer & Co. (OPY), and Deutsche Bank AG’s (DB) Deutsche Bank Securities, to pay investor Chase Bailey $11 million because he sustained about $6 million in losses allegedly caused by securities fraud. Bailey contends that Hahn made excessive trades and misrepresented securities related to transactions involving a number of investments, including a variable annuity, approximately $2.3 million in fraudulent real estate financing involving East Coast properties, and covered calls.

In the filmmaker/Internet entrepreneur’s securities arbitration claim, Bailey named the three financial firms where Hahn previously worked. It is during this period that Bailey was allegedly defrauded. (He had moved his funds from one brokerage firm to the other each time Hahn was hired by that employer.) Bailey settled his case with Merrill for $700,000, while claims against Deutsche Bank and Oppenheimer were tossed out.

Per the FINRA arbitration ruling, Bailey is awarded $6.4 million in punitive damages and $4.1 million in compensatory damage. Ordering brokers to pay punitive damages is uncommon.

In February, Deutsche Bank & Hahn were ordered to pay $934,000 to Susan and Michael Myers. The couple, who had sued on their behalf and for a number of trusts, had claimed civil fraud, while contending that financial firm had negligently supervised Hahn, who worked in its private wealth management division between 2008 and 2009.

The Myerses had bought high-risk life insurance in which policyholders use loans usually tied to variable interest rates to finance premiums. Hahn, who advised the couple via Deutsche Bank, allegedly failed to tell them that his dad would get a “significant” commission from that life insurance policy. They said that this might have been the reason he recommended that they invest in the policy. (Brokers are not supposed to make investment recommendations that will benefit them or those that they know.) The Myerses claimed substantial losses.

Hahn has been involved in other securities cases. He was charged with wire fraud involving an alleged $1.1 million real estate scam in 2010. He also was involved in a $2.55 million federal court judgment that Deutsche Bank obtained in 2012. That lawsuit involved the unpaid balance of a $2.8 million bonus he got when he joined the financial firm.

Contact Our Securities Fraud Law Firm
If you believe that you too were the victim of securities fraud involving Mr. Hahn or another broker, please contact Shepherd Smith Edwards and Kantas, LTD LLP today to request your free case evaluation. You may have reason to file your own stockbroker fraud claim.

Ex-Merrill, Deutsche Bank Broker Ordered to Pay Client $11 Million, Fox, April 5, 2013

U.S. panel orders Deutsche Bank, ex-adviser to pay $934,000, Reuters, February 14, 2013


More Blog Posts:
Court Upholds Ex-NBA Star Horace Grant $1.46M FINRA Arbitration Award from Morgan Keegan & Co. Over Mortgage-Backed Bond Losses, Stockbroker Fraud Blog, October 30, 2012

UBS Loses Appeal to Have FHFA’s $6.4 Billion MBS Fraud Lawsuit Dismissed, Institutional Investor Securities Blog, April 18, 2013

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Posted In: Arbitration , Deutsche Bank , FINRA , Financial Firms , Merrill Lynch , Oppenheimer , Securities Fraud

April 8, 2013

Previous Dissent by Arbitrator is Not Reason to Vacate Award Morgan Keegan Was Ordered to Pay Investors, Says District Court

The U.S. District Court for the Middle District of Florida is holding that an arbitration award granted to investors cannot be vacated under the Federal Arbitration Act just because an arbitrator exhibited obvious partiality when failing to reveal that he wrote a dissent in an unrelated arbitration that allegedly showed he had prejudged issues of law. The securities case is Antietam Industries Inc. v. Morgan Keegan & Co.

Petitioners Antietam Industries Inc., Janice Warfel, and William Warfel contend they sustained financial losses over their RMK fund investments. In 2011, they filed a Financial Industry Regulatory Authority arbitration case claiming that their money was lost because Morgan Keegan had made misrepresentations while failing to disclose how risky the funds were.

Last year, the panel awarded the petitioners $100,000 in compensatory damages and $100,000 in punitive damages, plus fees and interest, for negligence, breach of fiduciary duty, and other claims. When they sought to confirm the award, Morgan Keegan submitted a motion to vacate, pointing to FAA and contending that arbitrator Christopher Mass allegedly showed partiality and “misbehavior” with his failure to disclose his previous dissent. The court, however, rejected Morgan Keegan’s argument, saying it was not convinced that Mass was predisposed or had prejudged.

“Many investors do not realize that the securities arbitration process is much different than court, said Shepherd Smith Edwards and Kantas, LTD, LLP and Securities Fraud Lawyer William Shepherd. “When investors open a brokerage account, they agree to resolve disputes in arbitration and will not be able to file a lawsuit against the firm or broker. However, this has some advantages to the investor. Court cases can last for years, but the arbitration process is usually completed in just over a year. As well, it is more difficult to overturn an arbitration decision than a court case. In this case, the investor was able to avoid losing a victory on appeal.”

To schedule your free consultation, contact our FINRA arbitration law firm today.

Antietam Industries Inc. v. Morgan Keegan & Co.


More Blog Posts:
Morgan Keegan Settles Subprime Mortgage-Backed Securities Charges for $200M, Stockbroker Fraud Blog, June 29, 2011

Goldman Sachs Execution and Clearing Must Pay $20.5M Arbitration Award in Bayou Ponzi Scam, Upholds 2nd Circuit, Institutional Investor Securities Blog, July 14, 2012

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Posted In: Arbitration , FINRA , Financial Firms , Morgan Keegan

February 15, 2013

Texas Courts Show Preference for Arbitration to Resolve Securities Fraud Claims and Other Business Disputes

Over the years, the Texas courts have followed federal courts in that they are now showing a preference that business disputes be resolved in arbitration rather than with a trial. Many view arbitration as a less costly, faster, and more logical way to solve conflicts between a company’s employees and its clients.

This willingness to have disputes be resolved outside a courtroom took on even more fervor in 2009, when the Texas Supreme Court determined that non-signatories in an arbitration agreement could be made to deal with their problems between each other away from the courtroom. The court held that an arbitration agreement between an employee and employer that was signed prior to the employee’s passing binds that employee’s wrongful death beneficiaries even if they didn’t sign the agreement. The state’s highest court said that in states where wrongful death actions are derivative, these are bound by the agreement of the decedent.

Then, in 2012, the Texas Supreme Court again exhibited its approval for dispute resolution methods not having to require a jury when it found in an employment dispute that a threat by an employer to use its legal right to fire an at-will employee if he didn’t sign a jury waiver is not coercion that would render a jury waiver agreement not valid. Also, a standalone arbitration agreement is still valid even if an employer keeps its right to unilaterally change or take back an employment policy in its employee manual. This includes arbitration policies (and even if the arbitration agreement doesn’t talk about the right to modify its terms or of incorporating the employment manual by reference.) Also, mutual promises to bring employment disputes to arbitration are satisfactory consideration for the agreements.

Meantime, the US Supreme Court also continues to express preference for arbitration. In 2010, the nation’s highest court held that arbitrators and not judges are the ones with the authority to decide whether unconscionability exists when the agreement gives the former that authority. Responding to a discrimination lawsuit by an employee, the court sided with employer Rent-A. Center. Inc., which had sought a motion to compel arbitration due to an agreement that the plaintiff had signed as part of terms for employment.

"Since landmark decisions in 1987, arbitration agreements in investors' account documents have been strictly enforced,” said Texas securities arbitration lawyer William Shepherd. “Since that time virtually all disputes between securities firms and their clients have been decided in arbitration, not courts. Arbitration decisions, including in securities arbitration, are fully binding on the parties. In fact, is far more difficult to appeal or 'vacate' an arbitration award than it is to appeal a court decision. This can be bad for investors if the decision is unfavorable, but this is good for investors who win because they only rarely have to face years of appeals before they are paid."


More Blog Posts:
Texas Securities Criminal Case Against Oil and Gas Company Executive Can Proceed, Rules Fifth Circuit, Stockbroker Fraud Blog, February 6, 2013

Alleged Houston, Texas Affinity Fraud Scam Targeting Druze and Lebanese Communities Leads to SEC Charges Against Day Trader, Stockbroker Fraud Blog, January 28, 2013

Judge that Dismissed Regulators’ Claims Against Morgan Keegan to Rule on ARS Lawsuit Again After His Ruling Was Reversed on Appeal, Institutional Investor Securities Blog, November 27, 2012

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Posted In: Arbitration , Texas Securities Fraud

January 22, 2013

FINRA News Roudup: FINRA Unveils Telephone Mediation Pilot and Proposes A More Stringent Definition of Public Arbitrator

FINRA Unveils Telephone Mediation Pilot
The Financial Industry Regulatory Authority says it now has a pilot program that allows parties with simplified cases to choose reduced-fee or pro bono phone mediation. Volunteers with arbitration claims involving $50,000 or under are welcome to participate. In cases involving damage claims of $25,000 or under, mediators would work on a pro bono basis. For cases between $25,001 and $50,000, there would be a reduced fee mediation rate of $50/hour. No administrative fees will be charged.

Benefits to this phone mediation pilot include getting rid of in-person mediation preparation and travel costs, as well as more flexibility and convenience. The pilot was launched on January 15.

FINRA Proposes A More Stringent Definition of Public Arbitrator
According to the Securities and Exchange Commission, FINRA is proposing that the definition of “public” arbitrator not include persons with associations to a hedge fund or mutual fund. The SRO is also proposing that there be a “cooling off period” of two years before individuals that have terminated certain affiliations can take on this arbitrator role.

FINRA wants to make the rule changes because of worries by investor representatives that they don’t consider certain arbitrators that have a specific experience or background and are listed on the public roster to actually be public. The SRO also thinks that the cooling off period will allow certain persons that have had certain affiliations to regain an impression of neutrality in the eyes of constituents.


FINRA Securities Cases
If you are an investor that has sustained losses due to securities fraud, you may be able to recover your investment by going through FINRA arbitration. It is a good do have good securities representation with a FINRA securities law firm that is experienced in handling such cases. Contact Shepherd Smith Edwards and Kantas, LTD, LLP today.

FINRA Launches Small Claims Telephonic Mediation Pilot Program, FINRA, January 16, 2013

Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Proposed Rule Change Relating to Amendments to the Customer and Industry Codes of Arbitration Procedure to Revise the Public Arbitrator Definition, SEC, January 11, 2013 (PDF)


More Blog Posts:
After SCOTUS Overturns Oklahoma Supreme Court Decision Over Enforceability of an Arbitration Agreement’s Non-Complete Cause, Case Now Goes to Houston, Texas, Stockbroker Fraud Blog, November 12, 2012

US Supreme Court's Janus Ruling May Compel SEC to File More Aiding, Abetting, and Control Person Liability Securities Claims, Institutional Investor Securities Blog, March 7, 2012

Securities Fraud: Mutual Funds Investment Adviser Cannot Be Sued Over Misstatement in Prospectuses, Says US Supreme Court, Stockbroker Fraud Blog, June 16, 2011

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Posted In: Arbitration , FINRA

November 30, 2012

After SCOTUS Overturns Oklahoma Supreme Court Decision Over Enforceability of an Arbitration Agreement’s Non-Complete Cause, Case Now Goes to Houston, Texas

For the third time in two years, the US Supreme Court has stood up for arbitration agreements, overturning yet another decision by a state court. The case is Nitro-Lift Technologies v. Howard. The Oklahoma State Court had ruled that the non-compete provision in an employment arbitration agreement was unenforceable because it is unconscionable.

Per the specifics of the case, Nitro-Lift Technologies, an oil well servicing company based in Louisiana, had given two of its ex-Oklahoma employees a demand for arbitration after they resigned and went to work for a competitor. Nitro contended that the former employees had violated a non-compete clause and that because of this they must now arbitrate. Meantime, the two ex-employees filed a lawsuit in Oklahoma state court seeking a declaratory judgment that the non-compete provisions could not be enforced.

The Oklahoma Supreme Court would go on to rule in the ex-Nitro employees’ favor, finding that state precedent allows the court jurisdiction over arbitration agreement provisions and that the non-compete clause is a violation of public policy there. Therefore, the court found, the clauses could not be enforced and are void.

Nitro’s attorney would go on to argue that this ruling was not consistent with SCOTUS precedent regarding arbitration’s primacy, per the Federal Arbitration Act. The company submitted a cert petition noting that the US Supreme Court had recently reversed the Florida’s state court ruling in KPMB v. Cocchi after the lower court had decided that Ponzi fraud victims could sue the auditor. The Supreme Court had also found in Marmet Health Care v. Brown that under the Federal Arbitration Act, West Virginia cannot bar arbitration in nursing home cases involving wrongful death and personal injury. Other lawsuits in which the nation’s highest court made similar determinations include Buckey Check Cashing v. Cardegna and AT & T Mobility v. Concepcion.

The Supreme Court’s justices apparently remain adamant that states cannot impose their own ideas regarding public policy on arbitration agreements. The court has described the FAA as the “supreme Law of the Land,” and they interpret the act in a manner that lets businesses make employees and consumers arbitrate instead of go to court. This can be a benefit for businesses, especially as a cost-saving measure (and especially when class actions are involved).

The ex-Nitro employees will now arbitrate their non-compete claims in Houston. According to their attorney, the two of them did not know that they had given up certain rights when they signed the agreement.

Texas Securities Fraud
Our Houston securities lawyers represent both clients with Texas arbitration claims and investor fraud lawsuits. Please contact Shepherd Smith Edwards and Kantas, LTD, LLP today. Your first case evaluation is free.

US Supreme Court Scolds Oklahoma Supremes for Discounting Arbitration Precedent, ABA Journal, November 26, 2012

Nitro-Lift Technologies v. Howard, US Supreme Court, (PDF)


More Blog Posts:
SEC Clawback Lawsuit Against Two Former Arthrocare Corp. Executives Over Fraud Scheme Can Proceed, Says District Court in Texas, Stockbroker Fraud Blog, November 24, 2012
Texas Securities Fraud: Investors Bilked in $68M Dallas Ponzi Scam Hope To Recover Some Funds Via Rare Guitar Auction, Stockbroker Fraud Blog, October 25, 2012

US Supreme Court's Janus Ruling May Compel SEC to File More Aiding, Abetting, and Control Person Liability Securities Claims, Institutional Investor Securities Blog, March 7, 2012

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Posted In: Arbitration , Texas Securities Fraud

November 9, 2012

FINRA Provides Guidance As It Opens Up Arbitration Process to Investment Advisers

The Financial Industry Regulatory Authority is now making its arbitration process available to all registered investment advisers. The SRO’s arbitration forum has in the past been for member broker-dealers, but not IA’s, to resolve disagreements. (That said, IAs that are dually registered with FINRA have had to arbitrate via the SRO’s arbitration process if the disagreement pertained to the adviser’s activities as a member of FINRA or as an associated person.) Now, however, FINRA is ready to take arbitration cases against investment advisers as long as the parties involved are both amenable to this.

Some people have expressed concern that opening up FINRA’s arbitration process to these advisers could create problems. For example, seeing as broker-dealers and investment advisers are upheld to different standards under federal law, there has been the worry that FINRA arbitrators might get confused as to which standard applied to a case.

FINRA arbitration lawyer William Shepherd, however, disagrees: “It is true that financial advisors are held to a fiduciary standard by statute, but securities brokers are often held to a ‘common law’ fiduciary standard. For example, brokers are held to a fiduciary standard when they use discretion to invest their clients’ money (either with or without written permission). As well, for decades the FINRA Arbitration Code has allowed cases to be filed for ‘any dispute, claim or controversy.’ Current FINRA arbitrators are savvy enough to make any distinction in the responsibilities of different investment professionals and are likely the most capable persons in existence to decide cases concerning financial advisors.”

FINRA’s decision to open its arbitration process comes during the ongoing discussion about possible self-regulatory oversight for advisers. Bill H.R. 4624 proposes bringing advisers under the supervision of at least one SRO, with FINRA as the potential watchdog. There has, however, been strong opposition to the legislation, and House Financial Services Committee Chairman Spencer Bachus (R-Ala.), who ushered H.R. 4624, has decided not to keep pushing it forward until a committee consensus is reached.

Meantime, FINRA has put out guidance on how investment advisers who are not members of the SRO can use its mediation and arbitration forum to resolve disagreements with employees and members. Per the guidance on disputes between IAs that are firms not regulated by FINRA and investors/investment adviser employees, the SRO will accept disputes by parties seeking this forum as long as the investor and IA turn in a post-dispute agreement to arbitrate, the IA or other parties consent to pay arbitration surcharge fees, and the investor submits a written submission agreement to send the dispute to FINRA Dispute Resolution (the agreement has to be signed by all parties involved in the arbitration and the signatures need to have been written after the events that led to the dispute happened). FINRA mediation services will be offered for investment adviser disagreements on a voluntary basis.

Guidance on Disputes between Investors and Investment Advisers who are not FINRA-regulated firms, FINRA

FINRA Opening Arbitration Process To Investment Advisers, Spokeswoman Says, Bloomberg/BNA, October 29, 2012


More Blog Posts:
Court Upholds Ex-NBA Star Horace Grant $1.46M FINRA Arbitration Award from Morgan Keegan & Co. Over Mortgage-Backed Bond Losses, Stockbroker Fraud Blog, October 30, 2012

Plaintiff Must Arbitrate Faulty Investment Advice Claim With TD Ameritrade But Can Proceed With Litigation Against Oakwood Capital Management, Stockbroker Fraud Blog, October 29, 2012

Citigroup Ordered by FINRA to Pay $1.2M Over Bond Markups and Markdowns, Institutional Investor Securities Blog, March 27, 2012

Continue reading "FINRA Provides Guidance As It Opens Up Arbitration Process to Investment Advisers " »

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Posted In: Arbitration , FINRA , Investment Advisers

October 30, 2012

Court Upholds Ex-NBA Star Horace Grant's $1.46M FINRA Arbitration Award from Morgan Keegan & Co. Over Mortgage-Backed Bond Losses

Three years after the Financial Industry Regulatory Authority awarded former Chicago Bulls forward Horace Grant a $1.46 million arbitration award in his securities claim against Morgan Keegan & Co., the U.S. Court of Appeals for the Ninth Circuit has upheld that ruling. Grant, who had suffered losses in the brokerage firm’s mortgage-backed bond funds, accused the brokerage firm of not disclosing to him that his investments were not suitable for him, withholding information about the actual risks involved, and failing to supervisor the fund manager. Morgan Keegan is now part of Raymond James Financial Inc. (RJF).

Grant bought the majority of the funds through his account with Morgan Keegan in 2004 when the brokerage firm owned the sports agency that represented him. The mortgage-backed bond funds were among a group of investment products that took huge losses in value in 2007 and 2008 when the subprime market failed.

Hundreds of investors proceeded to file securities claims against Morgan Keegan, which finally agreed to settle with regulators for $200 million the allegations that it had inflated the value of the high-risk subprime securities that the funds held. James Kelsoe, a fund manager who is accused of purposely inflating the subprime securities’ value, would later to agree to an industry bar by the SEC and consent to pay a $500,000 penalty.

After Grant filed and then later won his FINRA arbitration case against Morgan Keegan, the broker-dealer immediately sought to have the ruling dismissed. It lost in the in the U.S. District Court for the Central District of California and appealed again and now has lost again.

A number of judges have question Morgan Keegan’s legal strategy, which seems to involve requiring investors to resolve disputes against it in arbitration but then going to the courts to try to have the arbitration rulings that aren’t in its favor thrown out. FINRA Arbitration Attorney William Shepherd has this to say:

By federal law, any participant in private arbitration has the right to seek to vacate an arbitration award, but on very limited grounds. Yet, the rules of the Financial Industry Regulatory Authority (FINRA) do not allow appeals of arbitrators decisions. Thus, FINRA has the power to sanction Morgan Keegan, or any other member firm, if that firm seeks to appeal arbitration awards by disguising such appeals as motions to vacate. Moreover, as part of its fine and sanctions, the SEC could have required Morgan Keegan to simply pay these victims their losses, with simplified arbitration claims only to determine the amount of the losses. Twenty years ago, the SEC did exactly that to Prudential Securities, based on that firm's fraudulent partnerships. The problem is that these days the securities regulators, both FINRA and the SEC, are simply too chummy with Wall Street to actually protect investors.”

Meantime, Grant and Morgan Keegan are still involved in a separate $3 million arbitration claim that the ex-NBA star filed in 2010. His legal team is contending that Morgan Keegan’s ongoing legal efforts have left him with no choice but to cash in his NBA pension. Morgan Stanley filed a lawsuit arguing that the case should be resolved not in arbitration but through the court system.

Court Upholds Ex-NBA Star's Win vs. Morgan Keegan, The Wall Street Journal, October 25, 2012

Ex-NBA star says fight with brokerage worse than facing Shaq, Reuters, October 15, 2012


More Blog Posts:
Plaintiff Must Arbitrate Faulty Investment Advice Claim With TD Ameritrade But Can Proceed With Litigation Against Oakwood Capital Management, Stockbroker Fraud Blog, October 29, 2012

Morgan Stanley Must Pay CFTC $200K for Supervisory Violations, Sued for Bias by Detroit Owners Over New Century Loans, Stockbroker Fraud Blog, October 26, 2012

If SEC JOBS Act Rule 506 Proposal is Made Final, Legal Challenges Are Likely, Institutional Investor Securities Blog, October 27, 2012

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Posted In: Arbitration , Financial Firms , Morgan Keegan , Raymond James

October 29, 2012

Plaintiff Must Arbitrate Faulty Investment Advice Claim With TD Ameritrade But Can Proceed With Litigation Against Oakwood Capital Management

The California Court of Appeals says that while investor Irene Mastick can proceed with her securities litigation against Oakwood Capital Management LLC, she has to arbitrate her securities claim against TD Ameritrade Inc. Mastick had sued representatives of the two financial firms, along with M.E. Safris & Co. and her accountant Michael Safris alleging that she had been provided with poor investment counsel.

Mastick claims that after meeting the defendants in 2008, she was advised to take the proceeds from her life insurance policies and invest them. Contending that she was given bad advice regarding this strategy’s tax consequences, she filed her fraud lawsuit.

Safris, who is a New Jersey resident, had the securities case removed to federal court and Mastick amended her complaint to include the firm representatives. Oakwood and TD Ameritrade then sought to compel arbitration but the federal court then denied their petitions and remanded the lawsuit due to lack of diversity. TD Ameritrade and again sought to compel arbitration.

While Mastick’s agreement with Oakwood is subject to California law and states that disputes are to be dealt with via arbitration per American Arbitration Association rules, her agreement with TD Ameritrade is under Nebraska law, with disputes to be handled via arbitration per FINRA rules. Noting inconsistent ruling, the trial court rejected both petitions. The two financial firms then appealed.

Now, the California appeals court is reversing in part and affirming in part. It is affirming the rejection of Oakwood’s arbitration petition to arbitrate and reversing the denial of TD Ameritrade’s arbitration petition to arbitrate. The court said that per FAA, courts have to enforce arbitration terms in contracts involving interstate commerce, and they do not have the authority to either stay arbitration pending a litigation’s resolution or refuse to enforce an arbitration provision that is valid in order to avoid duplicative proceedings or conflicting rulings. However, contracting parties can agree that their arbitration is not governed by FAA even when interstate commerce is involved. Therefore, the court found that Mastick and Oakwood’s selection of California law gives the trial court the power to invoke California Code of Civil Procedure Section 1281.2, subd (c) to their arbitration agreement. This means that the trial court could decide to reject an arbitration deal if one of the parties also was part to a related lawsuit with a third party that sets up the possibility of rulings that conflict on a “common issue of law or fact.” The appeals court noted that Safris, who is “party to this litigation,” is not involved in the arbitration agreement between Mastick and Oakwood. The latter two must now litigate.

As for Mastick’s allegations against TD Ameritrade, the court noted that the Nebraska Uniform Arbitration Act also doesn’t allow a court to stay arbitration or deny enforcement of such a provision to avoid “duplicative proceedings or conflicting rules.” Because of this, the court has to stay the action between TD Ameritrade and Mastick and it is compelling both of them to resolve their disagreement in arbitration.

Mastick v. TD Ameritrade Inc. and Oakwood Capital Management LLC (PDF)


More Blog Posts:
Morgan Stanley Must Pay CFTC $200K for Supervisory Violations, Sued for Bias by Detroit Owners Over New Century Loans, Stockbroker Fraud Blog, October 26, 2012

Texas Securities Fraud: Investors Bilked in $68M Dallas Ponzi Scam Hope To Recover Some Funds Via Rare Guitar Auction, Stockbroker Fraud Blog, October 25, 2012

If SEC JOBS Act Rule 506 Proposal is Made Final, Legal Challenges Will Be Likely, Institutional Investor Securities Blog, October 27, 2012

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Posted In: Arbitration , Securities Fraud

August 27, 2012

Merrill Lynch Agrees to Pay $40M Proposed Deferred Compensation Class Action Settlement to Ex-Brokers

Merrill Lynch (MER) has arrived at an “agreement in principle” to resolve the class action lawsuit filed by John Burnette and Scott Chambers over deferred compensation that they contend that the brokerage firm refused to pay them after it merged with Bank of America (BAC) in 2008 and they left its employ. About 1,400 brokers are part of this class. However, some 3,300 ex-Merrill brokers have submitted deferred compensation claims against the brokerage firm for the same reason.

Merrill had refused to give these employees their deferred compensation, which is what a broker usually gets paid for staying with a financial firm for a specific number of years, when they resigned after the merger. These brokers, however, cited “good reason” for their departure, which is another cause they can claim to receive this.

The class action settlement was presented to U.S. District Judge Alison Nathan at Manhattan federal court on Friday. She will decide whether to approve it, as well as certify the class according to the parties’ definition. However, it is not known at this time how many brokers will go for this settlement if it is approved.

It is not unusual for many to opt not to be part of a class action settlement and instead seek to obtain more money via an individual arbitration claim. Having an arbitration lawyer personally representing your case generally leads to bigger results. Already, over a thousand ex-Merrill brokers have filed their FINRA claims. Also, for an ex-Merrill broker whose deferred compensation was above six figures, they are likely to get much less by going the class action route. Meantime, ex-Merrill brokers with revenues that exceeded $500,000 during a certain timeframe before they left the financial firm cannot participate in a class action settlement. Neither can those that accepted bonuses and waived certain rights related to deferred compensation claims from Merrill after the deal with Bank of America.

That said, even the ex-Merrill brokers that decide to opt out of the class are likely to benefit from this settlement because it establishes a floor for payouts while serving as Merrill’s public acknowledgement that it had a financial duty to pay the former brokers upon their departure.

Under the class action settlement, the majority of advisers would get 40-60% of the value of their account. According to OnWallStreet.com, for a broker to receive 60%, advisors must have already made a request for reimbursement, whether via lawsuit, arbitration, or some other way and left the financial firm prior to January 30, 2010. To be eligible to receive 50%, these advisers too will have had to have made some type of legal action and resigned by June 30, 2010. If no action was taken, and the former broker still wants to opt in, they would turn in a form and seek 40% of compensation--dependent upon when they exited the firm. Other ex-advisors might also be able to receive 40 to 60% of payment depending on when they left Merrill, whether they had filed a deferred compensation claim, and in what compensation plans they were participants. Ex-dvisers that had an agreement with the Advisor Transition Program, however, would not be able to participate.)

Merrill to Make Good on Former Brokers' Deferred Comp, On Wall Street, August 24, 2012

Merrill to pay $40 mln in deferred compensation suit, Reuters, August 25, 2012

More Blog Posts:
Merrill Lynch to Pay Brokers Over $10M for Alleged Fraud Over Deferred Compensation Plans, Institutional Investor Securities Blog, April 5, 2012

Advanced Equities Ordered by FINRA Arbitration Panel to Pay $4.5M to Ex-Broker, Stockbroker Fraud Blog, June 12, 2012

Claims Continue over MasterShare - Prudential Securities’ Deferred Compensation Plan, Stockbroker Fraud Blog, August 13, 2008

Continue reading "Merrill Lynch Agrees to Pay $40M Proposed Deferred Compensation Class Action Settlement to Ex-Brokers " »

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Posted In: Arbitration , Bank of America , Class Action Lawsuits , FINRA , Financial Firms , Merrill Lynch

August 23, 2012

FINRA Seeking to Create a Bigger, More Diverse Arbitrator Roster

According to the Financial Industry Regulatory Authority ‘s lead arbitrator recruiter, the self-regulatory organization is taking active steps to create a roster of arbitrators that is not only larger than its current one, but also more professionally and culturally diverse. Barbara Brady spoke at a Practicing Law Institute seminar this month.

Arbitrators are who that preside over FINRA arbitration cases on numerous matters, including financial fraud claims by investors and broker-brokerage firm disputes. Last year, arbitrators made more than 1,270 securities arbitration decisions that led to over $19 million in repayment to investors, over $63 million in fines, and 475 broker suspensions. Only a court can overturn an arbitrator’s securities ruling and this would have to be due to extenuating circumstances.

"Outcomes in arbitration vary greatly based on the quality of the arbitrators," said William Shepherd, a Houston-based attorney, whose firm has represented investors in more than 1,000 arbitration claims over the past twenty years. "If securities arbitration is to have any integrity at all FINRA must make certain that the arbitrator decides cases fairly."

Choosing who should be named an arbitrator can lead to disagreement over how much securities industry/brokerage firm experience or ties a candidate should have. For example, while an arbitrator who used to be a broker or a securities attorney may have certain technical expertise and experience that could prove helpful in deciding a case, he/she may also be biased.

"Having savvy arbitrators may streamline the process a bit with less reliance on expert testimony," said Shepherd, “but it is difficult for such arbitrators to understand the lack of understanding of investments by the ordinary investor. I often point to my client’s own experiences to demonstrate this to arbitrators. For example, my client’s understanding of machinery at his workplace keeps him from getting hurt, but if you walked into that factory you might be killed the first day. It’s not that you’re stupid, just that you lack experience in that environment. The dangers of investing were foreign to my client. That is why he or she hired an expert. ”

Securities panels with three arbitrators usually handle arbitration disputes when over $100,000 is involved. Customers are allowed to opt for two of the three arbitrators or all three of them to not have a securities industry background. That said, just because someone is a non-industry arbitrator doesn’t mean he/she lacks biases.

While FINRA chooses not to reveal the demographics of its arbitrator pool, Brady claims that the SRO does try to select a diverse range of arbitrators from different backgrounds. She said FINRA is making an effort to make sure that women, minorities, and professors of economics, law, and real estate are represented.

Who makes a good arbitrator?, Reuters, August 20, 2012

Arbitrator Appointment Frequently Asked Questions, FINRA


More Blog Posts:
Morgan Stanley Smith Barney Ordered by FINRA Arbitration Panel to Pay $5M Over Allegedly False Promises Made To Brokers Recruited from UBS AG, Stockbroker Fraud Blog, June 22, 2012

Apple REIT Arbitration: FINRA Rules Against David Lerner Associates in First of Hundreds of Cases, Stockbroker Fraud Blog, May 26, 2012

UBS, Citigroup FINRA Arbitration with Nonprofit Over ARS Cannot Be Halted, Said District Court, Institutional Investor Securities Blog, August 6, 2012

Continue reading "FINRA Seeking to Create a Bigger, More Diverse Arbitrator Roster" »

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Posted In: Arbitration , FINRA

June 22, 2012

Morgan Stanley Smith Barney Ordered by FINRA Arbitration Panel to Pay $5M Over Allegedly False Promises Made To Brokers Recruited from UBS AG

A Financial Industry Regulatory Authority arbitration panel is ordering Morgan Stanley Smith Barney to pay $5 million to Todd G. Vitale and John P. Paladino, two of the brokers that the financial firm had wooed from UBS AG (UBS) in 2008. The two brokers are alleging fraudulent misrepresentations, breach of written and oral contract, promissory fraud, negligent misrepresentation, fraudulent omission and/or concealment, intentional interference with existing and prospective economic advantage, negligent omission and/or concealment, California Labor Code violations, breach of implied covenant of good faith and fair dealing, promissory estoppel, constructive fraud, negligent supervision, and failure to supervise. They both still work for Morgan Stanley Smith Barney.

Both brokers were recruited a few months before Morgan Stanley merged with Citigroup Inc.'s (C) Smith Barney. Per the terms of their recruiting agreement, Vitale was promised that within six months of joining the financial firm he would become a salaried manager. Paladino would then inherit Vitale’s book, which would come with significant revenue.

After the merger occurred, however, a number of key management changes happened, and four years after they were hired, Vitale still hasn’t been promoted to manager while Paladino has yet to get his book. Also, Paladino’s monthly income has been reduced.

Ruling on the case, the FINRA arbitration panel awarded $2 million to Paladino and $2.6 million to Vitale. $355,000 in legal fees was also awarded to the two men.

This arbitration proceeding is one of numerous cases of late involving investment advisers claiming that financial firms had wooed them with promises that were never fulfilled. Brokerage firms often make verbal commitments when recruiting and they protect themselves by not including these agreements in the actual employment contract.

“Successful financial advisors and brokers can manage tens of millions or even hundreds of millions of dollars of their clients’ assets and securities firms are willing to pay, or promise to pay, them millions of dollars to bring their clients’ accounts to a new firm,” said Shepherd Smith Edwards and Kantas, LTD, LLP Partners and FINRA Arbitration Attorney William Shepherd. “Just as firms are not always honest with investors, these firms do not always keep their promises to advisors and brokers. Because licensed representatives and their firms are required to sign agreements to arbitrate disputes, cases of this type must be decided in securities arbitration. Our law firm has represented both investors and investment professionals in securities arbitration proceedings in their disputes with financial firms.”

Meantime, Morgan Stanley Smith Barney has issued a statement saying that the financial firm’s disagree with the panel’s decision and the facts support the ruling. However, there are internal firm memos documenting the recruiting deal.

Former Morgan Stanley Smith Barney Brokers Win $5M Employment Dispute Arbitration Award, Forbes, June 20, 2012

Panel Says MSSB Must Pay Recruited Brokers $5 Million, Wall Street Journal, June 20, 2012

More Blog Posts:
Merrill Lynch to Pay Brokers Over $10M for Alleged Fraud Over Deferred Compensation Plans, Institutional Investor Securities Blog, April 5, 2012

Investment Advisers and Brokers Should Be Able To Explain in One Page Why an Investment Would Benefit a Retail Client, Says FINRA CEO Richard Ketchum, Stockbroker Fraud Blog, June 14, 2012

Securities Law Roundup: Ex-Sentinel Management Group Execs Indicted Over Alleged $500M Fraud, Egan-Jones Rating Wants Court to Hear Bias Claim Against SEC, and Oppenheimer Funds Pays $35M Over Alleged Mutual Fund Misstatements, Stockbroker Fraud Blog, June 13, 2012


Continue reading "Morgan Stanley Smith Barney Ordered by FINRA Arbitration Panel to Pay $5M Over Allegedly False Promises Made To Brokers Recruited from UBS AG" »

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Posted In: Arbitration , Financial Firms , Morgan Stanley , UBS

June 12, 2012

Advanced Equities Ordered by FINRA Arbitration Panel to Pay $4.5M to Ex-Broker

A Financial Industry Regulatory Authority arbitration panel has ordered Advanced Equities, CEO Dwight Badger, and Chairman Keith Daubenspeck to pay one of their former brokers $4.5 million in compensatory damages. The ex-broker, John Galinsky, had accused all three of them of not paying certain commissions on his work to raise capital for clients, such as Alien Technology, Bloom Energy, Arbinet (ARBX), ForceIO Networks, Infinera, (INFN), Motricity (MOTR), and Peregrine Semiconductor (PSMI). He also made claims of unjust enrichment, breach of contract, retaliatory discharge, and fraudulent inducement. Daubenspeck and Badger cofounded Advanced Equities.

The FINRA arbitration panel awarded Galinksy $3.47 million in actual damages, $347,000 in interest, $211,314 in other costs related to trial, and $500,000 in punitive damages—the last due to the investment banking boutique showing a “reckless disregard” for the broker’s warrant rights while breaching its fiduciary duties to him. Additionally, Advanced Equities must pay FINRA $61,650 in session fees. (There were 51 pre-hearing and hearing sessions took place between June 2010 and April 2012, which is after Galinsky went to arbitrators.)

Advanced Equities is a Chicago-based investment firm. It makes late-stage venture capital investments in tech companies. Just last January, the Securities and Exchange Commission sent Wells notices to Badger and Daubenspeck letting them know they could face federal enforcement action over a 2009 private offering.

Galinsky worked for Advanced Equities’ retail broker unit for 10 years. He now works with National Securities Corporation.

Brokers With Arbitration Claims Against Financial Firms
“In 1972, financial firms instituted mandatory arbitration to resolve disputes between financial firms and disputes between those firms and their representatives. During the 1980’s mandatory arbitration agreements with clients of securities firms were enforced by the courts,” said FINRA Arbitration Attorney William Shepherd. “Today, while the vast majority of securities arbitration actions are between investors and firms, each year hundreds of disputes between securities firms, and between those firms and their brokers, are also resolved in arbitration.”

Among such cases, was the claim brought by Patrick M. Mendenhall against UBS Financial Securities. Last year, a FINRA arbitration panel ordered the financial firm to pay its former broker $350,000 in compensatory damages and 6% interest until the amount was paid. Mendenhall, a former UBS broker, had sought resolution over allegedly unpaid deferred compensation and unused vacation time

Ex-Advanced Equities Broker Gets $4.5 Million IOU, Wealth Management, June 3, 2012

FINRA panel orders Advanced Equities to pay $4.5 mln, Reuters, May 21, 2012

Former UBS Broker Sues Firm For $3.8 Million in Deferred Comp and Unused Vacation Time, Forbes, November 28, 2011


More Blog Posts:
Senate Democrats Want Volcker Rule’s “JP Morgan Loophole” Allowing Portfolio Hedging Blocked, Institutional Investor Securities Fraud, May 22, 2012

Wall Street Complains Financial Reform Will Mean More Lawsuits. Is This Bad?, Institutional Investor Securities Blog, October 16, 2010

Hampton Porter Investment Bankers's Stockbrokers, Convicted For Securities Fraud In Pump-And-Dump Scheme, To Be Sentenced This Year, Stockbroker Fraud Blog, January 9, 2007

Continue reading "Advanced Equities Ordered by FINRA Arbitration Panel to Pay $4.5M to Ex-Broker" »

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Posted In: Arbitration , FINRA

May 16, 2012

Charles Schwab Corp.’s Lawsuit Against FINRA to Stop Enforcement Case is Dismissed by Federal Judge

A federal judge has thrown out a lawsuit filed by Charles Schwab Corp. (SCHW) against the Financial Industry Regulatory Authority Inc. The financial firm had sought to stop the SRO’s enforcement case against it over an allegedly illegal arbitration agreement.

Schwab had added a new provision to over 6.8 million customer account agreement that would prevent clients from beginning or joining a class action lawsuit against the broker-dealer. Customers would also have to agree that industry arbitrators wouldn’t be able to consolidate securities claims from different investors. (Both kinds of cases typically involve investors with smaller claims that are usually less than $10,000. Lawyers who oppose Schwab’s arbitration provision have said that it leaves many of these investors without a legal process to be able to recover any financial losses.) By February, more than 50,000 clients had opened accounts with Schwab since it had implemented its new arbitration provision.

However, FINRA does not let class actions go through its arbitration system and it prevents broker-dealers from limiting the ways in which customers can file claims in court that are not allowed in arbitration. In its enforcement case against Schwab, the SRO accused the brokerage firm of violating its rules by making clients waive their right to file a class action complaint against it. Schwab immediately responded with a lawsuit against FINRA.

The brokerage firm said that it added the class-action waiver last year following the US Supreme Court’s ruling in AT&T Mobility LLC v. Concepcion. That decision held that the Federal Arbitration Act preempts laws guaranteeing rights to file class action cases and supports the use of private dispute resolution by making sure that arbitration agreements are upheld. Schwab wanted a determination that its class action waiver was enforceable. (It even cited the Supreme Court’s decision in Compucredit Corp. v. Greenwood. In that ruling, the court ruled that only a congressional mandate could preclude the enforcement of an arbitration agreement under the FAA.)

In her opinion, U.S. magistrate judge Elizabeth LaPorte of the U.S. District Court for the Northern District of California agreed with FINRA that Schwab must follow the SRO’s procedures for disciplinary cases, which includes a review by a federal court judge. She also said that the court of appeals would have the final say in these cases and can fix any mistakes. Also, even though Schwab had tried to argue that going through FINRA’s process, which can take four years or even longer, would cause it harm that was irreparable, the court said that such a delay is not enough of a reason to be allowed to avoid FINRA’s process.

At Shepherd Smith Edwards, and Kantas, LTD, LLD our FINRA arbitration lawyers represent investors with claims against brokerage firms, brokers, and investment advisers. Your initial case evaluation with one of our stockbroker fraud attorneys is free.

Court Throws Out Finra Suit Against Charles Schwab, FOX Business/Dow Jones Newswires, May 11, 2012

Schwab client-waiver spurs FINRA complaint, Reuters, February 1, 2012

AT&T Mobility LLC v. Concepcion

Compucredit Corp. v. Greenwood

More Blog Posts:
FINRA Says Charles Schwab Corp. is Making Customers Waive Right to Pursue Class Action Lawsuits, Stockbroker Fraud Blog, May 8, 2012
Schwab Subsidiary OptionsXpress Accused of Naked Short Selling Scam by SEC, Stockbroker Fraud Blog, May 1, 2012

Citigroup Ordered by FINRA to Pay $1.2M Over Bond Markups and Markdowns, Institutional Investor Securities Blog, March 27, 2012

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Posted In: Arbitration , Charles Schwab , FINRA , Financial Firms

May 11, 2012

Stockbroker Fraud News Roundup: UBS Puerto Rico Settles SEC Action for $26M, Morgan Keegan’s Bid to Get $40K Award Over Marketing of RMK Advantage Income Fund Vacated is Denied, and SEC Settles with Attorney Involved in $1B Viaticals Scam

UBS Financial Services Inc. of Puerto Rico (UBS) has agreed to pay $26.6 million to settle the Securities and Exchange Commission administrative action accusing the financial firm of misleading investors about its control and liquidity over the secondary market for nearly two dozen proprietary closed-end mutual funds. By settling, UBS Puerto Rico is not denying or admitting to the allegations.

Per the SEC, not only did UBS Puerto Rico fail to disclose to clients that it was in control of the secondary market, but also when investor demand became less in 2008, the financial firm bought millions of dollars of the fund shares from shareholders that were exiting to make it appear as if the funds’ market was stable and liquid. The Commission also contends that when UBS Puerto Rico’s parent firm told it to lower the risks by reducing its closed-end fund inventory, the Latin America-based financial firm carried through with a strategy to liquidate its inventory at prices that undercut a number of customer sell orders that were pending. As a result, closed-end fund clients were allegedly denied the liquidity information and price that they are entitled to under the law. UBS Puerto Rico must now pay a $14 million penalty, $11.5 million in disgorgement, and $1.1 million in prejudgment interest.

The SEC has also filed an administrative action against Miguel A. Ferrer, the company’s ex-CEO and vice chairman, and Carlos Ortiz, the firm’s capital markets head. Ferrer allegedly made misrepresentations, did not disclose certain facts about the closed-end funds, and falsely represented the funds’ market price and trading premiums. The Commission is accusing Ortiz of falsely representing the basis of the fund share prices.

In other stockbroker fraud news, the U.S. District Court for the District of Colorado has denied Morgan Keegan & Co. Inc.'s bid to vacate the over $40,000 arbitration award it has been ordered to pay over the way it marketed its RMK Advantage Income Fund (RMA). Judge Richard Matsch instead granted the investors’ motion to have the award confirmed, noting that there were “many factual allegations” in the statement of claim supporting the contention that the firm was liable.

Per the court, Morgan Keegan had argued that the arbitration panel wasn’t authorized to issue a ruling on the claimants’ bid for damages related to the marketing of the fund, which they had invested in through Fidelity Investment. Morgan Keegan contended that seeing as it had no business relationship with the claimants, it couldn’t be held liable for their losses, and therefore, the FINRA arbitration panel had disregarded applicable law and went outside its authority. The district court, however, disagreed with the financial firm.

In other stockbroker fraud news, the SEC has reached a settlement with a Florida attorney accused of being involved in a financial scam run by a viaticals company that defrauded investors of over $1 billion. The securities action, which restrains Michael McNerney from future securities violations, is SEC v. McNerney. He is the ex-outside counsel for now defunct Mutual Benefits Corp.

The MBC sales agent and the company’s marketing materials allegedly falsely claimed that viatical settlements were “secure” and “safe” investments as part of the strategy to get clients to invest. The viaticals company also is accused of improperly obtaining polices that couldn’t be sold or bought, improperly managing escrow premium funds in a Ponzi scam, and pressuring doctors to approve bogus false life expectancy figures.

McNerney, who was sentenced to time in prison for conspiracy to commit securities fraud, must pay $826 million in restitution (jointly and severally with other defendants convicted over the MBC offering fraud).

UBS Puerto Rico unit to pay $26.6 mln in SEC pact, Reuters, May 1, 2012

Morgan Keegan & Co. Inc. v. Pessel (PDF)

SEC Files Charges Against Former Attorney for Mutual Benefits, SEC, April 30, 2012


More Blog Posts:
Stockbroker Fraud Roundup: SEC Issues Alert for Broker-Dealers and Investors Over Municipal Bonds, Man Who Posed As Investment Adviser Pleads Guilty to Securities Fraud, and Citigroup Settles FINRA Claims of Excessive Markups/Markdowns, Stockbroker Fraud Blog, April 10, 2012

Commodities/Futures Round Up: CFTC Cracks Down on Perpetrators of Securities Violations and Considers New Swap Market Definitions and Rules, Stockbroker Fraud Blog, April 20, 2012

Institutional Investor Fraud Roundup: SEC Seeks Approval of Settlement with Ex-Bear Stearns Portfolio Managers, Credits Ex-AXA Rosenberg Executive for Help in Quantitative Investment Case; IOSCO Gets Ready for Global Hedge Fund Survey, Institutional Investor Securities Blog, March 29, 2012

Continue reading "Stockbroker Fraud News Roundup: UBS Puerto Rico Settles SEC Action for $26M, Morgan Keegan’s Bid to Get $40K Award Over Marketing of RMK Advantage Income Fund Vacated is Denied, and SEC Settles with Attorney Involved in $1B Viaticals Scam" »

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Posted In: Arbitration , FINRA , Morgan Keegan , Mutual Funds , SEC Enforcement , UBS , Viaticals

April 24, 2012

FINRA Proposal Giving Collective Actions Exemption from Arbitration Gains SEC’s Accelerated Approval

The Securities and Exchange Commission has given accelerated approval to a proposed rule change by the Financial Industry Regulatory Authority. The proposal modifies FINRA’s Dispute Resolution's Code of Arbitration Procedure for Industry Disputes exempts collective actions from arbitration. The SEC decided to approve the proposed rule change after determining that it is consistent with not just the Exchange Act’s requirements, but also with regulations and rules applicable to a national securities association.

While class actions have been exempt from arbitration, small and large customers claims, employee disagreements, and complex cases have not. However, with the increase in collective actions, FINRA now believes that it is better to hear such actions submitted under the Equal Pay Act of 1963, the Age Discrimination in Employment Act, and the Fair Labor Standards Act (FLSA) in the courtroom.

"This seems to be a reversal of FINRA's earlier goals to expand their arbitration system to perhaps even include class action cases,” said FINRA Securities Lawyer William Shepherd. “Noting that FINRA is really just a trade association of all securities dealers, the suspicions are that legislators and courts have become so friendly to Wall Street lately that they no longer need their own dispute forum to avoid responsibility for their misdeeds."


FINRA sought the rule change following the ruling issued by a district court that held that a collective action is not a class action, per the Industry Code’s Rule 13204 that precludes class action from arbitration. The case was Hugo Gomez et al. v. Brill Securities, Inc. The U.S. District Court for the Southern District of New York ignored FINRA’s Interpretive Guidance that the SRO’s intent was to have collective actions also precluded from arbitration, much like class actions as is interpreted within Rule 13204’s meaning.

Also, per FINRA’s proposal, the rule change would:
• Provide that a claim involving plaintiffs that are similarly situated and make a case against the same defendants will not be settled through FINRA arbitration.

• Bar an associated person/firm member from enforcing any arbitration agreement against a member of a putative/collective class action group as it relates to any claim subject to a putative/collective class action (unless collective certification is not given or decertification occurs.)

• Grant arbitrators the power to determine whether a claim belongs to a collective action.

(Also, last month FINRA submitted an amendment to its proposal that would let a party ask any forum presiding over the collective action to resolve the disagreement within a specified time frame.)

Shepherd Smith Edwards and Kantas, LTD, LLP represents investors in arbitration and the courts. Contact our securities fraud law firm to speak with a FINRA securities arbitration attorney today.

Financial Industry Regulatory Authority, Inc.; Notice of Filing of Proposed Rule Change , FINRA, January 5, 2012

Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval of a Proposed Rule Change, SEC, April 9, 2012 (PDF)


More Blog Posts:
FINRA Says Charles Schwab Corp. is Making Customers Waive Right to Pursue Class Action Lawsuits, Stockbroker Fraud Blog, February 8, 2012

Citigroup Global Markets Inc. Sues Two Saudi Investors in an Attempt to Block Their FINRA Arbitration Claim Over $383M in Losses, Stockbroker Fraud Blog, October 22, 2011

US Supreme Court Once Again Upholds Enforcement of Arbitration Agreements, Institutional Investment Securities Fraud, February 17, 2012

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Posted In: Arbitration

Tags: Collective actions

February 8, 2012

FINRA Says Charles Schwab Corp. is Making Customers Waive Right to Pursue Class Action Lawsuits

The Financial Industry Regulatory Authority has filed a complaint against Charles Schwab Corp. The SRO says the online brokerage is in violation of FINRA rules because it makes clients waive their rights to pursue class actions against it.

Per a new provision added to over 6.8 million customer account agreements, Charles Schwab clients are now not allowed to begin or join class-action complaints against the financial firm. Customers must also agree that arbitrators won’t be given authority to consolidate claims from different parties, as this would set up a class-action situation.

Over 50,000 clients have opened accounts with the financial firm since it implemented this new limitation. Now, FINRA wants an expedited hearing. The SRO is concerned that the class action waiver will cause millions of Schwab clients to mistakenly think they cannot bring or take part in an already existing class action complaint against the brokerage firm. Also, FINRA has specific rules about the conditions that financial firms can place on clients, and the SRO says this provision is a definite violation.

In an attempt to counter FINRA’s claims, on February 1, Schwab submitted a declaratory judgment action in district court. It wants a determination that agreements, such as the class action waiver, are enforceable. It has noted the US Supreme Court’s recent opinions interpreting the Federal Arbitration Act. For example, Schwab says that in in AT&T Mobility LLC v. Conception, the court said that the FAA preempts statutes or cases that mandate access to procedures regarding class action. The brokerage firm also pointed to the court’s ruling in Compucredit Corp. v. Greenwood, in which it ruled that solely a congressional mandate that was clear could preclude enforcing an arbitration agreement under the FAA. The brokerage firm believes that this matter should be resolved in federal court. It has vowed to combat any disciplinary action that FINRA attempts to impose against it.

At Shepherd, Smith, Edwards and Kantas, LTD, LLP, our stockbroker fraud lawyers represent institutional and individual clients with individual securities claims and lawsuits against investment advisers and financial firms. While filing a class action may seem like the less stressful, easier option, you have a greater chance of recouping more, if not all, of your losses if you file an individual securities fraud case.

However, this does not mean that you should have your right to file or join a class action complaint taken away from you. Unfortunately, brokerage firms can commit certain acts of misconduct that may cause investors to unnecessarily suffer financial losses. You should know that you could be able to get back some, if not all, of your money.

Our stockbroker fraud law firm has helped thousands of investors successfully pursue securities fraud lawsuits and claims against financial firms. Your first case evaluation with Shepherd Smith Edwards and Kantas, LTD, LLP is free.

Schwab new client-waiver spurs FINRA complaint, Reuters, February 1, 2012

FINRA Files Complaint Against Schwab for Asking Customers to Sign Waiver, AdvisorOne, February 1, 2012

Read the FINRA Complaint


More Blog Posts:
Charles Schwab & Co. Defendant in Class-Action Securities Fraud Lawsuit Filed on Behalf of Schwab Total Bond Market Fund Investors Over CMOs and Mortgage-Backed Securities, Stockbroker Fraud Blog, September 7, 2010

Schwab to Distribute $3.5 Billion to Its Shareholders by Buying Back Over 100 Million Shares, Stockbroker Fraud Blog, July 11, 2007

Merrill Lynch, Pierce, Fenner & Smith Ordered to Pay $1M FINRA Fine for Not Arbitrating Employee Disputes Over Retention Bonuses, Institutional Investor Securities Blog, January 26, 2012

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Posted In: Arbitration , Charles Schwab , FINRA , Financial Firms

October 22, 2011

Citigroup Global Markets Inc. Sues Two Saudi Investors in an Attempt to Block Their FINRA Arbitration Claim Over $383M in Losses

Citigroup Global Markets Inc. (C) is suing Abdullah and Ghazi Abbar. The Saudi investors have filed a FINRA arbitration claim against the Citigroup unit seeking to recover the $383 million that they say the bank lost their family’s money. The Abbars, who are father and son, are accusing Citigroup Global Markets of mismanaging their family’s savings.

Citigroup, which wants injunctive relief, says that the entities that took care of the the Abbars’ private-equity loan and leveraged option transactions are located abroad and therefore not under FINRA’s jurisdiction for arbitration. The financial firm also says that father, son, and their investment entities are not CGMI clients and their claims are not activities related it. The investment bank has noted that the Abbars chose to pursue it rather than the non-U.S. parties that they actually had agreements with that completed the transactions. The Abbars, however, say that those overseeing the Citigroup entities that took party in the daily management of their credit deal are personnel that are registered with FINRA.

Says Shepherd Smith Edwards and Kantas Founder and Stockbroker Fraud Lawyer William Shepherd, “The financial industry has created its own securities arbitration forum to resolve disputes and claims between and against its members. It is ironic when claims are filed that they often go to court to beg to get out of arbitration, their self-imposed fate. While courts in New York seem to operate to accommodate Wall Street’s wishes, the law for decades has held that decisions regarding the liability of securities firms are for the arbitrators, not the courts. If these investors have properly alleged any wrongdoing by the U.S. securities firm, the court has no business intervening. Such wrongdoing can be simply ‘control person liability,’ which is the failure to control or properly supervise the behavior or operations of a subordinate or subsidiary.”

CGMI placed $343 million of the Abbars money in hedge funds that were included in a leveraged option swap transaction. In their FINRA arbitration claim, the Abbars argue that leading CGMI officers, including ex- global wealth management chief Sallie Krawcheck and Chief Executive Officer Vikram Pandit, pursued them.

Father and son contend that because of alleged “gross misconduct" by CGMI, their wealth was lost. They say that the bank's failure to monitor the investments properly led to their total collapse during the height of the economic collapse in 2008. The Abbars also believe that lendings related to the Citigroup investments played a role in the losses. The Abbars says that Citigroup, which then started managing the positions that remained in the portfolio while implementing a program to redeem it, will “unjustly benefit” by about $70 million from the redemption of these investments.

Citigroup Sues to Block Arbitration of Saudi Investors’ Claim, Bloomberg/Businessweek, October 6, 2011

Citigroup Aims to Stop Arbitration From Proceeding, OnWallStreet, October 7, 2011

More Blog Posts:
Citigroup Global Markets Fined $500,000 by FINRA for Inadequate Supervision of Broker Accused of Bilking Sick and Elderly Investors, Stockbroker Fraud Blog, August 16, 2011

Citigroup Ordered by FINRA to Pay $54.1M to Two Investors Over Municipal Bond Fund Losses, Stockbroker Fraud Blog, April 13, 2011

Citigroup to Pay $285M to Settle SEC Lawsuit Alleging SecuritiesFraud in $1B Derivatives Deal, Institutional Investors Securities Blog, October 20, 2011

Continue reading "Citigroup Global Markets Inc. Sues Two Saudi Investors in an Attempt to Block Their FINRA Arbitration Claim Over $383M in Losses" »

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Posted In: Arbitration , Citigroup , FINRA , Financial Firms

September 9, 2011

Claimant Not Only $100K Loses Securities Arbitration Case Against Citigroup Global Markets But Gets Stuck with Financial Firm’s $50K in Legal Bills

Alphonse M. Lucchese, a CitiSmith Barney customer, has not only lost his $100,000 securities claim against the financial firm in Financial Industry Regulatory Authority arbitration, but he also now must pay for Citigroup’s $49,985 in attorney fees. The case is Alphonse M. Lucchese, Claimant, v. Citi Smith Barney, Citigroup Global Markets, Inc., Robert Joseph Malenfant, and Alfred George Weaver, Respondents.

Lucchese had originally filed a securities fraud lawsuit in Middlesex Superior Court of Massachusetts. The case was later dismissed and sent to arbitration.

Lucchese claims Smith Barney stockbroker Weaver, who is a Respondent, recommended that he buy 4,000 shares of Lehman preferred. Despite his reservations—including concerns about the stock and how they compared with other companies’ shares—Lucchese “reluctantly agreed” and at $25/share spent $100,000.

The stock initially dropped 20%—a $20,000 drop in value. The Claimant says that Weaver told him to hold on to his stock. When the financial markets collapsed, Lucchese’s stocks’ worth then dropped by 63%. He says that when he told Weaver to sell the position even though it meant losing $63,000, the broker recommended that the Claimant still hold on to his shares and that Lehman was not going to fail… only it did. Lucchese’s shares then became worthless when Lehman filed for bankruptcy.

While Weaver acknowledged making a mistake by not selling Lucchese’s stock, the Respondent claims that the Claimant never ordered him to sell. Lucchese disputes this account.

The arbitrator, when ruling on the case, decided that there was lack of credible evidence supporting Lucchese’s claim. He also found that Weaver acted on “good faith” when he advised Lucchese not to sell prior to Lehman filing for bankruptcy and that the broker would have no way of knowing that this would happen.

Lucchese’s claims of securities fraud, including breach of fiduciary duty, breach of contract, negligence, failure to supervise, violations of federal and state securities laws, and other violations were denied in their entirety. In addition, the arbitrator determined that the Claimant should be responsible for Citigroup’s legal fees of $49,985, $3,150 in arbitration forum fees, and $400 for the explained decision.

Most securities cases must be resolved in arbitration and you want to make sure you are represented by experienced stockbroker fraud lawyers to increase your chances of recouping your losses. A securities claim is not the type of case you want to handle on your own.


Citi Smith Barney Customer Sues Over 2008 Failure to Sell Lehman Shares, Forbes, December 18, 2011


More Blog Posts:
Citigroup Global Markets Inc. Sues Two Saudi Investors in an Attempt to Block Their FINRA Arbitration Claim Over $383M in Losses, Stockbroker Fraud Blog, October 22, 2011

Citigroup Global Markets Fined $500,000 by FINRA for Inadequate Supervision of Broker Accused of Bilking Sick and Elderly Investors, Stockbroker Fraud Blog, August 16, 2011

Citigroup to Pay $285M to Settle SEC Lawsuit Alleging SecuritiesFraud in $1B Derivatives Deal, October 20, 2011

**This post has been backdated for publication.

Continue reading "Claimant Not Only $100K Loses Securities Arbitration Case Against Citigroup Global Markets But Gets Stuck with Financial Firm’s $50K in Legal Bills " »

Posted by Shepherd Smith Edwards & Kantas LTD LLP | | Email This Post

Posted In: Arbitration , Citigroup , Financial Firms

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