March 8, 2016

North Carolina Retiree Couple Files FINRA Arbitration Case Against Morgan Stanley Over Energy Investment

Two North Carolina investors have filed an arbitration claim with FINRA against Morgan Stanley (MS) over unsuitable investments involving the financial firm’s Cushing MLP High Income Exchange Traded Note. The married couple, who are retirees in their sixties, are accusing the brokerage firm of:

· Common law fraud

· Negligence

· Breach of fiduciary duty

· Negligent supervision

· Failure to adequately disclose the risks

In a phone interview with InvestmentNews, the claimants said that they have lost over $100K. According to the couple, a Morgan Stanley broker invested about $150,000 of their money in the Morgan Stanley Cushing MLP High Income ETN, which is an exchange traded note connected to master limited partnerships with shipping and energy assets. Their legal team said that the couple did not understand the extent of the risks involved in that they could potentially lose their principal. This was a loss they could not afford. Instead, the claimants were purportedly told that their investment would make them money.

The Cushing MLP High Income Exchange Traded Note seeks to give investors cash upon maturity or early repurchase, as well as variable coupon payments every quarter (depending on how the underlying index, performs). The claimants’ broker fraud lawyers believe that Morgan Stanley recommended the exchange traded note to investors who were seeking to make money but may not have understood or been fully apprised of all the risks.

Continue reading "North Carolina Retiree Couple Files FINRA Arbitration Case Against Morgan Stanley Over Energy Investment" »

September 26, 2015

Broker Fraud News: Ex-Dallas Broker Faces Prison, Fintegra Files for Bankruptcy, and Broker Who Promised Investors They’d Double Their Money Can No Longer Sell Securities

Ex-Dallas Broker Accused of Texas Securities Fraud Face Five Years
Wade Lawrence, a former Dallas broker, has pleaded guilty to Texas securities fraud. As part of his plea bargain the 43-year-old will have to forfeit $1.5 million and pay over $250,000 in fines. He also faces up to five years behind bars for his $2.1 million securities scam.

According to prosecutors, over the course of working for several securities firm over the last seven years, Lawrence falsely offered risky investments with the promise of 20% to 100% returns. He lost a significant amount of money and invested just a portion of investors’ funds. Lawrence used a lot of investors' cash to cover his own living expenses, personal travel, as well as pay for fancy jewelry. The Associated Press reports that to date Lawrence has given back $581,000 to investors.

Minnesota-Based Brokerage Firm Files for Bankruptcy
Broker-dealer Fintegra has filed for bankruptcy in U.S. Bankruptcy Court in Minnesota. The firm had to stop its securities business in June after it was hit with a $1.5M arbitration award that placed it under the $250,000 regulatory net capital requirements of minimum.

According to the FINRA arbitration panel, Finestra and a broker violated state anti-fraud provisions related to the sale of Miasole Investments II, an unregistered security. The securities fraud complaint, submitted by Fintegra customers, states that the broker-dealer could only pay $300,000 of the award. However, InvestmentNews reported that the attorneys for one of the clients said that to date none of the award has been paid.

Fintegra, in its FOCUS report with the SEC, admitted that it had been named in five separate lawsuits, all involving the alleged sale of securities that were either unsuitable or violated state securities laws.

Continue reading " Broker Fraud News: Ex-Dallas Broker Faces Prison, Fintegra Files for Bankruptcy, and Broker Who Promised Investors They’d Double Their Money Can No Longer Sell Securities" »

February 27, 2015

Bill Seeks to Eliminate Mandatory Arbitration Clause From Brokerage Contracts, While SEC Approves New Public Arbitrator Limits

The Investor Choice Act in Congress, A U.S. House bill written by Keith Ellison, D-Minn., is looking to stop investment advisers and brokers from obligating investors to pursue their claims in arbitration instead of going to court. The proposed legislation would bar pre-dispute mandatory arbitration clauses in contracts between clients and their representatives.

As of now, almost all brokerage agreements, and an increasing number of investment adviser ones, come with provisions mandating that investors take their disputes to the arbitration system, which is run by the Financial Industry Regulatory Authority. There are those that believe that the forum favors brokers and advisers. Meantime, others say that the arbitration system is much more efficient for investors than going to court.

This is not the first time that Ellison has pushed for ending mandatory arbitration. He unveiled a similar bill in 2013 but it did not become law. The Public Investors Arbitration Bar Association has put out a statement voicing its support for Ellison’s latest bill, which it says gives investors back their right to choose whether they want to take their dispute to court or arbitration.

The 2010 Dodd-Frank Act granted the U.S. Securities and Exchange Commission the power to put a stop to mandatory arbitration. However, the SEC has yet to tackle the issue.

Our FINRA arbitration lawyers are here to help investors recoup their losses in claims against a broker or investment adviser. Contact our securities fraud law firm today.

FINRA Arbitration and Arbitrators
Nearly all customer claims against broker-dealers are resolved in FINRA arbitration. Each case is heard by a three-arbitrator panel. The parties decide who can be on the panel by eliminating candidates until there are three left. Parties are allowed to choose all-public panels.

The SEC has just approved a proposal by FINRA that would put limits on who can become a public arbitrator to be able to preside over such disputes. The rule categorizes anyone who has ever worked in the financial industry as an industry (or nonpublic) arbitrator.

Also, anyone who spent at least 20% of their time over the previous five years representing investors with securities claims would go from being a public arbitrator to a nonpublic one. They could go back into the public arbitrator category after a cooling off period of five years.

Anyone who has been a plaintiff’s lawyer for over 15 years is permanently barred from serving as a public arbitrator. Also disqualified as public arbitrator are accountants, lawyers, and others who worked for financial firms for over 20 years. If they worked for firms for less time, they could go back under the public arbitrator category five years after they stop working for them. In its regulatory order, the SEC said that it believes the proposed rule change would tackle any perceived bias toward Wall Street on the part of public arbitrators by moving certain individuals that fit the specific criteria into the nonpublic arbitrator category.

Bill would end mandatory arbitration in brokerage contracts, Investment News, February 26, 2015

Order Approving a Proposed Rule Change Relating to Revisions to the Definitions of Non-Public Arbitrator and Public Arbitrator, FINRA, February 26, 2015

More Blog Posts:
Investors Name Icon Investments in Securities Arbitration Claims, Stockbroker Fraud Blog, December 19, 2014

Ex-LPL Financial Adviser, James Bashaw from Texas, Lands at New Brokerage Firm, Stockbroker fraud Blog, October 30, 2014

Judge Temporarily Blocks Meredith Whitney Fund From Making Investor Payouts in the Wake of BlueCrest Capital Opportunities Lawsuit, Institutional Investor Securities Blog, February 27, 2015

December 19, 2014

Investors Name Icon Investments in Securities Arbitration Claims

Investors are accusing brokerage firms of making inappropriate recommendations and selling investments in Icon Leasing Fund Eleven, LLC and Icon Leasing Fund Twelve, LLC to them even though they would not be able to withstand the high risks. The two funds are registered, non-traded Equipment Leasing Direct Participation Programs (DPPs).

Not only are the Icon Eleven and Icon Twelve investments very high risk and illiquid investments, but also there are little if any secondary markets where their shares can be sold. Investment dividends from Icon cannot be predicted because they are contingent upon profits made from equipment leases.

During their offering periods, the two funds started paying distributions. However, not long after Icon Eleven and Twelve stopped taking new investors, the investments’ value started to drop fast and dividend payments became inconsistent. The decline has resulted in significant financial losses for investors.

In one quarterly report from almost a year ago Icon Leasing Fund Twelve noted that its liabilities are far greater than its assets. SEC documents from the end of 2012 show that Icon Eleven’s estimated per share value was $159.31, which is a more than 84% decline in share value.

Meantime, as investors have sustained losses, Icon Investments purportedly gave financial firms and their investment advisers among the biggest commissions for alternative products. The Icon Leasing Fund Eleven and Icon Leasing Fund Twelve have been accused of using just 81% of investors’ money to buy actual equipment while 18% of these funds went toward fees, commissions, and expenses.

Also, regulator filings reveal that Icon Funds reserved the right to buy shares for affiliates and officers at a discount. This approach would have earned higher returns for Icon-related entities while the value of investors’ shares would have been harmed.

If you are an investor in the United States who has sustained losses related to the Icon Leasing Fund Twelve, the Icon Leasing Fund Eleven, or the Icon Leasing Fund Ten, please contact our Icon Investment Fraud law firm today. Our alternative investment fraud attorneys would like to offer you a free case consultation. You may have grounds for a FINRA arbitration case.

Direct Participation Programs (DPPS0
Icon Trusts are registered, non-traded Equipment Leasing Direct Participation Programs (DPPs). Although registered with the U.S. Securities and Exchange Commission, DPPs are not found on public exchanges. Their lack of an active secondary market makes it hard for retail investors to independently assess the prices charged for these investments. Detecting fraud can also be harder.

With equipment leasing DPPs, a sponsor sells units of limited partnership. The substantial offering costs are subtracted while the rest of the money made is invested in a pool of equipment leases that were leveraged by more borrowing. This type of DPP touts a reliable income stream. However, a substantial number of the distributions that are given to investors are not income but a return of capital. And while partners may market the tax benefits, such as depreciation deductions and interest payment on borrowing employed to leverage, to investors, these benefits can only be applied to offset income from other passive investments.

Often, investors will get less than what they originally put into equipment leasing DPPs. Recently, Icon Leasing investors were told that the company would no longer pay dividends on certain funds.

A number of brokerage firms have been accused of not telling investors about the risks involved. Investors have also accused Icon of failing to do the necessary due diligence before selling this type of equipment leasing DPPs to customers.

Contact Shepherd Smith Edwards and Kantas, LTD LLP today.

More Blog Posts:

Credit Suisse Ordered to Pay $40M Verdict to Highland Capital, Institutional Investor Securities Blog, December 19, 2014

Ex-LPL Financial Adviser, James Bashaw from Texas, Lands at New Brokerage Firm, Stockbroker fraud Blog, October 30, 2014

Stifel, Nicolaus & Century Securities Must Pay More than $1M Over Inverse and Leveraged ETF Sales, Stockbroker Fraud Blog, January 14, 2014

October 18, 2014

SEC Approves Regulations Involving REIT Prices and Arbitration Fraud Intervention

The U.S. Securities and Exchange Commission has approved a Financial Industry Regulatory Authority-proposed rule that would create greater transparency of Nontraded real estate investment trusts. Under the new rule, investors will have to be provided with more information about the costs involved in buying shares of nontraded REITs.

With the existing practice, brokerage firms can list nontraded REITS as having $10/share price. The new rule would obligate broker broker-dealers to include a per share estimated value for an REIT or unlisted direct participation program on customer statements and make other disclosures.

Firms would calculate an REIT or DPP per share estimated value by either using the appraised value methodology or the net investment methodology. The appraised value method involves using the liabilities and assets of the REIT or DPP to determine the valuation upon which the share value would be based. The valuations would have to be conducted at least once a year by a third-party valuation expert. The net investment method involves brokerage firms articulating in customer statements that a portion of return of capital is included in a distribution and that this return lowers the estimated per share value listed on the statement.

Firm members also will have to include certain disclosures stating that the REIT or DPP isn’t on a national securities exchange and that in general it is illiquid. They also need to note that if a client is able to sell the security, the price may be lower than the estimated value found on the statement.

Meantime, the SEC has also approved a rule that will allow securities arbitrators to immediately report a fraud that they discover while involved in a related case if they believe investors are being harmed. Currently, arbitrators have to wait until a case is over to notify Financial Industry Regulatory Authority staff members of a suspected fraud.

Attorneys for investors and broker-dealers have expressed worry about the way that arbitrators who report suspect behavior might be dealt with by FINRA. Some attorneys have expressed concern that arbitrators who stay on a case after reporting fraud concerns could become biased toward certain parties because of conclusions they might have already reached before hearing all the evidence. There is also anxiety over whether a ruling could be easier to challenge.

Please contact our REIT fraud lawyers if you suspect that you may have been the victim of securities fraud. Our securities arbitration lawyers represent investor in recouping their losses. Your case consultation with us is free.

Unfortunately, financial fraud continues to be a problem and investors are the ones that suffer. Investors who have legal representation are more likely to recoup their money. Contact us today.

U.S. SEC approves securities arbitration fraud intervention rule, Reuters, October 15, 2014

SEC approves rule change for greater transparency of nontraded REITs, InvestmentNews, October 14, 2014

More Blog Posts:
Boston Investment Firm Accused of $5 Million Real Estate Investment Fraud Targeting Senior Investors, Stockbroker Fraud Blog, June 19, 2014

California Regulators Probe Inland American Real Estate Trust REIT, Stockbroker Fraud Blog, May 15, 2014

Non-Traded REITs, Structured Products, and Private Placements Remain Under Regulator Scrutiny, Institutional Investor Securities Blog, July 7, 2014

July 31, 2014

SEC Signs Off On FINRA Rule Restricting Expungement Of Customer Complaints

The U.S. Securities and Exchange Commission (“SEC”) has approved a Financial Industry Regulatory Authority (“FINRA”) rule that could make it tougher for brokers to expunge customer complaints from their records in settled arbitration cases. Rule 2081 bars brokers from making settlements with customers contingent upon the customer’s consent to not oppose the expungement of the dispute from the public record of the broker.

A record of arbitration complaints filed against brokers is kept as a part of the CRD system. The CRD system contains data about registered representatives and members, including their registration, employment, and personal histories. It also includes disclosure information pertaining to civil judiciary, disciplinary, and regulatory actions, criminal matters, and data about customer disputes and complaints.

The public can access this data through FINRA’s BrokerCheck website. Brokers can have a customer dispute erased from the CRD system and BrokerCheck only through a court order that confirms there has been an arbitration award that recommends such relief.

According to Investment News, a Public Investors Arbitration Bar Association-released study demonstrated that from 2007 to 2009, expungement requests were approved in 89% of settled cases resulting in settlements or awards. From May 2009 through 2011 that figure rose to 96.9%.

Arbitrators are told to inquire as to whether expungement was part of the terms of a settlement. Usually, when such a condition exists between parties it is never put in writing.

The purpose of the new FINRA rule is to make sure that full and reliable customer dispute data remains available to the public, brokerage firms, and regulators. Still, the SEC feels that there is more the self-regulatory organization should do.

In addition to approving the rule change, the SEC is calling on the SRO to review its expungement procedures and rules and figure out whether additional rulemaking is needed to make sure that expungement only occurs in exceptional situations.

Our FINRA arbitration lawyers represent investors in recouping their losses. Contact Shepherd Smith Edwards and Kantas, LTD LLP today.

SEC approves Finra rule limiting expungement, InvestmentNews, July 23, 2014

SEC Approves FINRA Rule to Prohibit Conditioning Settlements on Expungement, FINRA, July 23, 2014

Public Investors Arbitration Bar Association

More Blog Posts:
FINRA Sees 10% Rise in Arbitration Cases, Puerto Rico Bond Claims A Factor, Stockbroker Fraud Blog, April 27, 2014

FINRA Seeks to Limit Definition of Public Arbitrator, Stockbroker Fraud Blog, February 11, 2014

Lawyers, Investor Advocates Want to Know More About SEC Supervision Of FINRA’s Arbitrator Selections, Institutional Investor Securities Blog, December 2, 2013

April 27, 2014

FINRA Sees 10% Rise in Arbitration Cases, Puerto Rico Bond Claims A Factor

According to statistics put together by the Financial Industry Regulatory Authority, the number of securities arbitration cases brought by the self-regulatory agency is on target to exceed last year’s total. A likely contributor to the increase can be attributed to the numerous Puerto Rico municipal bond cases already filed by investors who sustained huge losses. More of these are inevitable, especially as FINRA just increased its arbitrator pool to deal with cases involving muni bonds from the US territory.

The broker-dealer regulator said that during this first quarter alone, 1,011 FINRA arbitration cases were submitted—a definite increase from the 919 securities arbitration claims filed during 2013’s first three months. However, the number of arbitration cases that were closed during this first quarter is less than in two years prior, with just 946 resolved. Compare that to the over 4,400 and 4,800 cases in 2013 and 2012, respectively.

That said, 5O% of arbitration cases decided during this initial quarter rendered damage awards, which is more than in the last two years. The most common claim in FINRA arbitration cases filed in 2014 so far is breach of fiduciary duty. Negligence, failure to supervise, and breach of contract are the other leading claims.

FINRA Arbitration
Arbitration is another means to resolving disputes as opposed to mediation and arbitration. A FINRA panel of arbitrators presides over the cases, studies the evidence and issues a ruling. The decision is final and binding unless a successful challenge is made in court within the statute of limitations. While outcomes are generally not made known to the public, if an award is issued then the SRO will publish this information.

Our FINRA arbitration law firm works with individual investors and institutional investors. We are here to help investors get their losses back. Shepherd Smith Edwards and Kantas, Ltd. LLP would like to offer you a free case assessment to find out whether you have reason to file an arbitration claim.

Finra sees uptick in arbitration cases filed in first quarter, InvestmentNews, April 22, 2014

Arbitration Overview, FINRA

More Blog Posts:
FINRA Seeks to Limit Definition of Public Arbitrator, Stockbroker Fraud Blog, February 11, 2014

FINRA Doesn’t Want Oversight Over Financial Advisers, Says CEO Ketchum, Stockbroker Fraud Blog, April 12, 2014

Lawyers, Investor Advocates Want to Know More About SEC Supervision Of FINRA’s Arbitrator Selections, Institutional Investor Securities Blog, December 2, 2013

February 11, 2014

FINRA Seeks to Limit Definition of Public Arbitrator

According to Investment News and The Wall Street Journal, sources in the know say that the Financial Industry Regulatory Authority wants to limit how many brokerage industry insiders can act as arbitrators in investor disputes with broker-dealers and brokers. The amendment would keep anyone affiliated with the securities industry, including lawyers and ex-brokers, from representing themselves in the role of public arbitrator. FINRA’s board of directors will decide whether to approve a proposed rule changes on this matter at a meeting this week.

Under the FINRA arbitration system, there are two arbitarator categories: nonpublic and public. Public arbitrators usually don’t have a current insider industry connection with the securities industry. Meantime, arbitrators that are nonpublic can have current ties, even working as a banker or a broker or securities fraud lawyer.

Usually, there are three arbitrators on a panel presiding over an investor-broker dispute. The panel members are selected from a list of arbitrators. Respondents and claimants go through this list to eliminate those they don’t want on the panel.

Currently, the SRO lets industry veterans that haven’t been associated with a broker-dealer in at least five years (and didn’t spend at least 20 decades in the financial services sector) add themselves to the list of public arbitrators. Accountants, lawyers, and others that previously represented brokerage firms but haven’t made $50,000 in yearly revenue from the companies in the last two years were able to do the same. If the proposal passes, however, all these individuals, as would lawyers representing investors in securities lawsuits, would have to list themselves as “nonpublic.”

FINRA reportedly hopes this revised and delineated designation would make panels more neutral. There have been worries that arbitrators with industry connections might find it hard to be impartial.

Our FINRA arbitration law firm represents investors with securities disputes that they wish to resolve before the SRO. Contact Shepherd Smith Edwards and Kantas, LTD LLP today.

Finra to Limit Use of Arbitrators with Industry Ties, Wall Street Journal, February 11, 2014

Finra moves to tighten public arbitrator definition, Investment News, February 11, 2014

Arbitration and Mediation, FINRA

More Blog Posts:
Lawyers, Investor Advocates Want to Know More About SEC Supervision Of FINRA’s Arbitrator Selections, Institutional Investor Securities Blog, December 2, 2013
FINRA Orders J.P. Turner to Pay $707,559 in Exchange-Traded Fund Restitution to 84 Clients, Stockbroker Fraud Blog, December 10, 2013

FINRA Issues Investor Alert on IRA Rollovers, Stockbroker Fraud Blog, January 31, 2014

December 10, 2013

FINRA Orders J.P. Turner to Pay $707,559 in Exchange-Traded Fund Restitution to 84 Clients

The Financial Industry Regulatory Authority Inc. says that J.P. Turner & Co. has to pay restitution of $707,559 to 84 clients over the sale of inverse and leveraged ETFs that were unsuitable for them, as well as for excessive mutual fund switches. The SRO says that the broker-dealer did not set up and keep up a supervisory system that was reasonable but instead oversaw inverse and leveraged ETFs the same way it did traditional ones. It also accuses the financial firm of providing inadequate training regarding ETFs. By settling, J.P. Turner is not denying or admitting to the charges.

Leveraged and Inverse Exchange Traded-Funds
Inverse and leveraged ETFs “reset” every day. They are supposed to meet their objectives daily so their performance can rapidly diverge from that of the benchmark or underlying index. Unfortunately, even if long-term index performance exhibits a gain, investors can be susceptible to substantial losses. Markets, when they are volatile, can only exacerbate the situation. Also, leveraged and inverse ETFs are not suitable for all investors.

According to FINRA, J.P. Turner let registered representatives recommend inverse and leveraged ETFs without conducting adequate diligence to comprehend the risks and features involved or determining whether the investments were appropriate for at least 27 customers, who included conservative investors and retirees. Because of this, contends the SRO, a lot of J.P. Turner clients held these ETFs for a number of months and they sustained collective net losses of over $200,000.

FINRA is also accusing J.P. Turner is of taking part in mutual fund switches that were not suitable. The agency believes that the broker-dealer did not set up a supervisory system that could prevent this type of mutual fund switching and lacked the adequate procedures to properly monitor for such patterns or trends. The regulator says that even when there were red flags, the brokerage firm did not reject any of over 2,800 mutual fund switches that showed up in its reports regarding switch exceptions. Because of this, FINRA notes, 66 clients paid over $500,000 in sales charges and commissions.

Adequate supervision of representatives, proper training, and the designing, maintenance, and implementation of the proper systems to detect unsuitable and improper activities are the responsibility of brokerage firms. When failure to provide any of these results in investors getting involved in investments that are inappropriate for them and they end up sustaining losses, there may be an opportunity for legal recourse through securities arbitration or by filing a financial fraud lawsuit.

Contact our exchanged-traded fund fraud lawyers to request your free case consultation. Shepherd Smith Edwards and Kantas, LTD LLP represents investors that have sustained losses and are seeking to get their money back.

FINRA Orders J.P. Turner to Pay More Than $700,000 in Restitution for Unsuitable Sales of Leveraged and Inverse ETFs and for Excessive Mutual Fund Switching, Yahoo, December 5, 2013

Leveraged and Inverse ETFs: Specialized Products with Extra Risks for Buy-and-Hold Investors, FINRA

More Blog Posts:
FINRA Securities Activities: SRO Withdraws Proposal to Make Financial Firms Link to BrokerCheck, Gets Request from SIFMA to Modify ‘Inability to Pay’ Rule, and Says Broker-Dealers Can Give Investors PIP Data About ETPs, Stockbroker Fraud Blog, May 15, 2013

US Hedge Fund Industry is Worried About Tax Implications Under EU Directive, Institutional Investor Securities Blog, November 27, 2013

New Stream Capital LLC Hedge Fund Executives Face Criminal Securities Fraud Charges, Stockbroker Fraud Blog, February 28, 2013

December 3, 2013

Broker-Dealer National Planning to Pay $6.2M FINRA Arbitration Award to Two Minnesota Investors Over REITs

A Financial Industry Regulatory Authority panel says that National Planning Corp. must pay a $6.2 million REIT arbitration award to Minnesota investors Stacy and Ronnie Erickson. The Erickson and trusts on their behalf accused the independent brokerage firm and its ex-brokers Christopher R. Olson of negligence, breach of fiduciary duty, misrepresentations, and industry rule violations involving real estate investment trusts.

According to the FINRA award, which doesn’t name the REITs that the Ericksons invested in, the claimants also invested in real estate investments in Waterway Holdings Group, which Olson and a Preferred Resource Group Inc. employee owned. Olson has since filed for bankruptcy and all claims against him have been halted. (Olson was allowed to resign from NPC after he failed to disclose his external business activities or the involvement of his clients in these undertakings. After he quit he registered with Berthel Fisher & Co. Financial Services Inc.)

The Ericksons say that in addition to becoming the victims of broker fraud, they had to fulfill outstanding loans on mortgages on the real estate investments to avoid foreclosure. They contend that Olson manipulated them into taking on significant debt, paying millions of dollars that they cannot get back, and annuitizing, liquidating, and structuring their investment assets that were for their retirement to pay back the “staggering” debt that resulted from the real estate investment recommendations.

NPC is part of National Planning Holdings Inc., a four brokerage firm network affiliated with Jackson National Life Insurance Co.

REIT Cases
While REITs have become popular recommendations by investment advisers and brokers—especially for clients wanting income or those who are retirees—it is unfortunate that many broker-dealers have failed to meet their duty as it pertains to REIT sales and solicitation practices. Our REIT fraud lawyers represent investors in recouping their losses. Contact Shepherd Smith Edwards and Kantas, LTD LLP today.

National Planning slammed with $6.2M arbitration award, InvestmentNews, November 26, 2013

Brokerage Ordered to Pay Nearly $6.2 Million for Investment Losses, The Wall Street Journal, November 25, 2013

More Blog Posts:
Financial Firms in the Headlines: UBS Charges Financial Planning Fees, MF Global Customers Seek to Cap Ex-Leaders’ Legal Defense Expenses, Ex-Thompson REIT CFO is Suspended, Stockbroker Fraud Blog, July 2, 2013

US Hedge Fund Industry is Worried About Tax Implications Under EU Directive, Institutional Investor Securities Blog, November 27, 2013

New Stream Capital LLC Hedge Fund Executives Face Criminal Securities Fraud Charges
, Stockbroker Fraud Blog, February 28, 2013

October 4, 2013

FINRA Considers Making Broker-Dealers Carry Insurance Covering Arbitration Payments

The Financial Industry Regulatory Authority intends to weigh whether to mandate that brokerage firms have insurance covering payments for possible arbitration awards issued to investors. The SRO is aware that there has been frustration among claimants who have not received their awards.

It can be a problem when a brokerage firm closes its doors without paying legal claims and awards it owes customers. Making broker-dealers carry insurance could lower the amount of awards that go unpaid. Unfortunately, some firms have such a small financial cushion that they can be forced to close shop over just one arbitration award.

According to SNL Financial, which conducted an analysis for The Wall Street Journal, over 940 firms reported having a net capital of under $50,000 in financial reports from as recent as July. FINRA says that 11% of all arbitration awards issued in 2011 have yet to be paid—that’s $51 million. This is 4% increase from what was unpaid from 2009 and 2010.

It doesn’t help that a lot of small broker-dealers have a net capital of about $5,000 and no insurance to take care of arbitration awards. And even with the Securities and Exchange Commission’s rule that these firms have this net capital (or a level related to the brokerage firm’s debt if the amount is higher), this doesn’t make it easier for an investor to get his/her lost investment losses from securities fraud back. To have the brokerage firm go out of business makes it that much harder to recoup their investments.

Brokers from these failed broker-dealers go on to find other work in the industry with, according to the analysis. This can lead to the practice known as “cockroaching,” involving problems with one brokers going to another firm when he/she transfers there to work.

Shepherd Smith Edwards and Kantas, LTD LLP Founder and Partner William Shepherd is quoted in the US Congressional record for recommending to the Government Accountability Office that the Securities Investor Protection Corporation be expanded so that broker fraud is included and firms would have to pay SIPC accordingly.

“The last I checked, broker insurance for a clean broker for up to $1 million coverage per claim was about $2,000 per year (less than firms' costs for stamps, as I said at the time),” said FINRA arbitration lawyer William Shepherd. “Attorneys, doctors and many drivers pay more. The average broker brings in over $100,000 per year, probably closer to twice that at most firms these days. Importantly, if brokers have many claims they will be cost prohibitive to firms or themselves. In this way insurance companies perform an important duty to the public. Just as drivers, doctors and others can be priced out of the business by their serial wrongdoing, so will financial advisor types.”

Our securities fraud law firm represents investors with FINRA arbitration claims and securities lawsuits against broker-dealers, brokers, investment advisers, and other financial representatives. Contact our investment fraud lawyers today.

Finra to Consider Requiring Brokerages to Carry Arbitration Insurance
, The Wall Street Journal, October 4, 2013

Tracking Brokers Who Move Between Expelled Securities Firms, Barrons/FINRA, October 4, 2013

More Blog Posts:

FINRA Arbitration Panel Orders Citigroup to Pay Senior Investor Couple $3.1M for Alleged Broker Fraud Related to “Selling Away” Practice, Stockbroker Fraud Blog, September 17, 2013

FINRA Enhances Its Arbitrator Vetting Policy, Stockbroker Fraud Blog, August 26, 2013

Former Broker Claims He is the Reason FINRA’s Regional Director Resigned, While Ex-JP Morgan Broker Files Arbitration Claim Against His Former Employer, Institutional Investor Securities Blog, June 18, 2013

September 17, 2013

FINRA Arbitration Panel Orders Citigroup to Pay Senior Investor Couple $3.1M for Alleged Broker Fraud Related to “Selling Away” Practice

Citigroup Inc. (C) now has to pay Dr. Nasirdin Madhany and Zeenat Madhany $3.1 million over claims that the financial firm failed to properly supervise a broker, which caused the couple to sustain over $1 million losses. The broker is accused of directing them to invest in real estate developments that later went sour.

In 2010, the couple filed a FINRA arbitration case alleging fraud, negligence, and other wrongdoings related to over $1 million in real estate investments they made between ’04-and ’07. The Madhanys, who are senior investors, were customers of then-Citigroup worker Scott Andrew King, who referred them to politician Lawton "Bud" Chiles III. The latter was looking for investors for a number of real estate projects. King, who allegedly had a conflict of interest (that he did not disclose) from buying two condominiums from Chiles at a discount, is said to have connected the couple and the politician without Citigroup’s knowledge.

The Madhanys invested in two real estate projects, which began to have problems in 2007 when the US housing market failed and that is when the couple lost their money. Also, they, along with other investors, had signed personal loan guarantee related to a $12 million loan on one of the projects. When the loan defaulted in 2009, Wachovia sued all of them. Last year, a court submitted a $10 million judgment against the investors, with each person possibly liable for the whole amount.

The FINRA arbitration panel’s ruling this week includes over $1 million for the couple’s real estate investment losses and $2.1 million for the couple’s portion of the $10 million judgment. Should the Madhanys have to pay the entire $10 million amount, Citigroup will have to pay them back.

Selling Away
The securities industry prohibits selling away, which is a practice involving advisors promoting investments privately without their firm’s knowledge. Brokerage firms can be held liable when a broker engages in “selling away.”

Our securities lawyers represent investors that have lost their investments because of selling away, elder financial fraud, and other types of securities fraud. Contact Shepherd Smith Edwards and Kantas, LTD LLP today and ask to speak with one of our FINRA arbitration lawyers.

Citigroup must pay couple $3.1 million for not overseeing broker: panel, Reuters, September 16, 2013

Orlando couple win $3.1M award from Citigroup Global, Orlando Sentinel, September 17, 2013

More Blog Posts:
Many Financial Fraud Victims Don’t See It Coming, Says Survey, Stockbroker Fraud Blog, September 7, 2013

FINRA Enhances Its Arbitrator Vetting Policy, Stockbroker Fraud Blog, August 26, 2013

Former Broker Claims He is the Reason FINRA’s Regional Director Resigned, While Ex-JP Morgan Broker Files Arbitration Claim Against His Former Employer, Institutional Investor Securities Blog, June 18, 2013

August 26, 2013

FINRA Enhances Its Arbitrator Vetting Policy

The Financial Industry Regulatory Authority is refining its new policy for looking into its arbitrators. The move is seen as even more essential in the wake of a court’s decision to dismiss an arbitration ruling that was decided on in part by someone who was indicted during a case against financial firm Goldman Sachs (GS).

Among the steps to be implemented is the use of Google to run searches on arbitrators right before they are appointed to a FINRA arbitration case. The SRO is also preparing to run annual background checks on its 6,500 arbitrators even after being checked when they applied for the arbitrator position.

The industry-funded watchdog’s actions are coming into effect at the same time as lawmakers are upping the pressure to put a stop to broker-dealers making investors arbitrate disputes—an agreement they consent to when they agree to work with the brokerage firm. This causes customers to forfeit their right to go to court over the disagreement. Meantime, consumer groups have been pressing the SEC to place restrictions on the arbitration agreement practice, and a new bill introduced by US Rep. Keith Ellison (D-MN) would modify the Dodd-Frank Wall Street Reform and Consumer Protection Act so that these mandatory agreements are banned.

State regulators support this legislation, which would give investors options, including arbitration and mediation. The bill also would not restrict a brokerage firm customer’s ability to submit a class action securities claim.

Right now, FINRA and Charles Schwab (SCHW) are still in a dispute because the latter decided to make its customers wave their right to file a class action lawsuit. While the SRO lost the enforcement case against the financial firm—the watchdog accused Schwab of violating industry rules that bar arbitrators from hearing class actions—it is appealing the ruling. Earlier this year, Schwab eradicated the waiver language, which can no longer be found on customer agreements.

While arbitration decisions tend to be binding, there are limited reasons that can allow a party to have a ruling dismissed. The U.S. District Court for the Eastern District of Pennsylvania vacated and remanded a securities arbitration decision that went in favor of Goldman Sachs Group Inc. The investor wants to get back $1.4M in purported losses.

Following the FINRA arbitration ruling, the investor went to federal court where Judge J. Curtis Joyner threw out the award after finding that the plaintiff’s legal rights as an investor were compromised because arbitrator Demetrio Timban did not give proper disclosure about being indicted for practicing law without authorization, which disqualified him from arbitrating the case. Goldman has since taken up the matter with the U.S. Court of Appeals for the Third Circuit.

Securities Arbitration Lawyer William Shepherd notes that “even within the legal community many believe that securities arbitration is simply an informal dispute resolution process where ‘mom and pop’ investors can try to recover some of their losses. While that is actually true, securities arbitration is also much more, and can involve cases of tens or even hundreds of millions of dollars.”

As an example, Mr. Shepherd points to a recent case in which a FINRA arbitration panel told Citigroup (C) and an ex-branch manager to pay over $11 million over losses involving an investment in a foreign bank. Read our previous institutional investor fraud blog post for more details.

Judge tosses out Goldman ruling, points to arbitrator, The Boston Journal, August 1, 2013

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 Must Pay $11M Claimant for Royal Bank of Scotland Investment Losses, Says FINRA Arbitration Panel, Institutional Investor Securities Blog, August 7, 2013

Former Broker Claims He is the Reason FINRA’s Regional Director Resigned, While Ex-JP Morgan Broker Files Arbitration Claim Against His Former Employer, Institutional Investor Securities Blog, June 18, 2013

August 21, 2013

FINRA NEWS: Goldman Sachs Appeals Vacating of Securities Award, Non-Customers of Brokerage Firm Can’t Compel Arbitration, & Three Governors Named To FINRA Board

Goldman Sachs Wants Third Circuit To Look at Vacated Arbitration Award
Goldman Sachs (GS) wants the U.S. Court of Appeals for the Third Circuit to look at a decision by a lower court to vacate a FINRA securities award issued by a panel member that included arbitrator Demetrio Timban, who was indicted on criminal matters and suspended. The securities case is Goldman Sachs & Co. v. Athena Venture Partners LP and involves an investor accusing the firm of making misrepresentations. The U.S. District Court for the Eastern District of Pennsylvania remanded the award, which favored the financial firm.

The district court said FINRA didn’t give the parties three arbitrators who were qualified and said the respondent’s rights were prejudiced. Judge J. Curtis Joyner said that therefore, a “final and definite award” was not issued. Following the scandal involving Timban, FINRA said it now would perform yearly background checks of arbitrators and other reviews before they are given a case.

District Court Says Buyers Who Are Not Broker-Dealer’s “Customers” Cannot Compel Arbitration
A district court has preliminarily enjoined an arbitration proceeding involving real estate investments. In Orchard Sec. LLC v. Pavel, the U.S. District Court for the District of Utah said that buyers were not a managing brokerage firm’s “customers” and did not have the right to compel arbitration under the SRO’s rules. The court also said that as the plaintiff firm Orchard Securities clearly demonstrated that its chances of success on its claim’s merits.

Margaret and Michael Pavel had filed an arbitration proceeding with FINRA contending that they had securities claims involving their purchase of tenant-in-common interests, including a New York offering that Orchard Securities LLC managed as a brokerage firm. Orchard Securities contended that it could not be made to arbitrate because there was no arbitration agreement or facts showing that the Pavels were its customers and therefore could compel arbitration. The NY offering had been recommended by a registered rep. with Direct Capital, which was a third-party broker-dealer enlisted by Orchard Securities.

Three Governors Are Elected to SRO’s Board, Four Are Reappointed
FINRA says that its members have elected two industry governors: Robert Keenan, who is St. Bernard Financial Services CEO, and James D. Weddle, who is Edward Jones’s managing partner. Keenan was elected small firm governor, while Weddle will be his large firm counterpart. Shelly Lazarus, who is an ex- Ogilvy & Mather chairman and CEO, was named a public governor.

Four other governors received reappointments to the board, which oversees FINRA. The board is comprised of 22 people—10 industry governors and 11 public ones. FINRA’s CEO also has a seat.

Our FINRA arbitration lawyers represent investors with securities claims. Contact Shepherd Smith Edwards and Kantas, LTD LLP today.

Goldman Sachs & Co. v. Athena Venture Partners LP

Purchasers Were Not ‘Customers’ Entitled to Compel FINRA Arbitration, Bloomberg BNA, August 14, 2013

Firms Elect Two Industry Governors to FINRA Board of Governors, New Public Governor Appointed, FINRA, August 6, 2013

FINRA Board of Governors

More Blog Posts:
Mandatory Securities Arbitration vs. Court? The Debate Rages Past the Quarter-Century Mark, Stockbroker Fraud Blog, July 4, 2013

FINRA Delays Audit Trail Plan, Proposes Arbitration Rule Changes, Asks for Firm’s Social Media Use Data, Warns About Cybersecurity Breaches, Stockbroker Fraud Blog, June 28, 2013

Former Broker Claims He is the Reason FINRA’s Regional Director Resigned, While Ex-JP Morgan Broker Files Arbitration Claim Against His Former Employer, Institutional Investor Securities Blog, June 28, 2013

July 4, 2013

Mandatory Securities Arbitration vs. Court? The Debate Rages Past the Quarter-Century Mark

Should investors have the option to resolve their securities claims not just in arbitration but also in court? Recently, Senator Al Franken (D-Minn) voiced his opinion that offering investors both options would be fairer. His comment came weeks after SEC Commissioner Luis Aguilar publicly spoke out against mandatory arbitration, noting that letting investors choose between the court system or Financial Industry Regulatory Authority arbitration would give them better protections. Right now, investors have to agree to resolve any disputes that arise with a brokerage firm or investment adviser through arbitration rather than litigation before their working relationship can go forward.

However, as Claimant Investors' Attorney William Shepherd noted, the debate of whether to go to the court or arbitration is a debate that has going on for some time now: “This dispute began in 1987 when the U.S. Supreme Court first decided that, because arbitration had become 'fair,' investors could no longer choose court if an arbitration agreement had been signed.”

Is it fair to let investors choose between having their claims heard in arbitration or by the judicial system? We definitely need a legal process that lets investors get redress efficiently and with the least amount of struggle.

FINRA Arbitration or The Court?
Getting rid of mandatory arbitration and letting investors choose what forum they’d prefer would be a huge change because FINRA arbitration and the court differ significantly. FINRA arbitrations tend to be more private, limits discovery and pre-hearing dismissals, and doesn’t obligate participants to obey the rules of evidence. Whereas courts will throw claims out over different reasons even before an investor gets his/her day in the, in a FINRA arbitration case, unless a settlement is reached first, an investor with a dispute will generally get to go before the arbitration panel even if the matters involved are the ones that a court would have dismissed.

That said, it is the advisers that have more to gain from the privacy granted by FINRA arbitrations, which are not open to the public. Also the paper trail accompanying such cases tend to be limited to a short summary on FINRA’s BrokerCheck that will include any award amount granted—unlike with a lot of courts, which will publish not just the names of the plaintiffs and defendants, potentially providing bad publicity for the latter. Also, when a lawsuit is resolved in a manner that doesn’t favor a firm or adviser, this can open the doorway for more securities lawsuits to follow. (Having to battle out a securities case before the public in court might even encourage some advisers to settle rather than go through the fallout that comes with losing litigation.)

Since each securities case is unique, it is hard to know in general whether FINRA arbitration or the court is the better option. However, if an investor has the choice, then he/she can pick the venue most favorable for his/her claims.

At Shepherd Smith Edwards and Kantas, LTD, LLP, our securities lawyers represent investors in both FINRA arbitration and the courts. Contact us today.

Details missing in the arbitration versus court debate, Investment News, July 7, 2013

SEC's Aguilar Calls for End to Mandatory Arbitration Clauses, The Wall Street Journal, April 16, 2013

Sen. Franken Leads Charge to Protect Consumers' Legal Rights Against Wall Street, Franken.Senate.Gov, April 30, 2013

More Blog Posts:
FINRA Delays Audit Trail Plan, Proposes Arbitration Rule Changes, Asks for Firm’s Social Media Use Data, Warns About Cybersecurity Breaches, Stockbroker Fraud Blog, June 28, 2013

Former Broker Claims He is the Reason FINRA’s Regional Director Resigned, While Ex-JP Morgan Broker Files Arbitration Claim Against His Former Employer, Institutional Investor Securities Blog, June 18, 2013

FINRA Orders Wells Fargo & Banc of America’s Merrill Lynch Ordered to Pay $5.1M for Floating-Rate Bank Loan Funds Sales, Stockbroker Fraud Blog, June 4, 2013

June 28, 2013

FINRA Delays Audit Trail Plan, Proposes Arbitration Rule Changes, Asks for Firm’s Social Media Use Data, Warns About Cybersecurity Breaches

FINRA Wants Broker-Firms to Provide More Data About Social Media Use
The Financial Industry Regulatory Authority has sent target examination letters to broker dealer members regarding their use of social media. The SRO warned that electronic and written communication may be subject to spot checks and it wants to know how the firms are using social media, what platforms they employ, and the names of the people that post on these sites. FINRA is also interested in each firm’s written supervisory procedures about this type of online communication that were in effect between February 4 and May 4, as well as what steps were taken to make sure that compliance was in effect.

SEC Seeks Comments on Proposed FINRA Arbitration Changes
In other FINRA news, the Securities and Exchange Commission has put out two proposed changes to the SRO’s arbitration and is seeking comment. One change would make panel selection in FINRA arbitration with three arbitrators easier by no longer mandating that a customer select a method for choosing the panel. Instead, all parties involved with cases that are presided over by three-member panels would use the same selection method: Every party would get lists of 10 public arbitrators, 10 chair-qualified public arbitrators, and 10-non public arbitrators. A party would be allowed to eliminate four arbitrators from the public list, as well as from the chair-qualified public list. Any party could establish a panel made up of all-public arbitrators by eliminating the names of all the arbitrators found on the nonpublic list.

The second proposed rule change would modify the broker-customer proceeding’s discovery guide. It describes the process for discovery and provides explanation for how arbitrators should use the guide in arbitration. Commenters have 21 days from Federal Register publication to make their remarks.

Increase in Cybersecurity Breaches Place Investors Funds in Peril
At a recent Insured Retirement Institute event, FINRA member regulation EVP Daniel Sibears says there has been a “proliferation” of complaints regarding cybersecurity breaches at broker-dealers firms and there are now dozens of complaints about customer information being compromised, especially data that is used to access online accounts, make transactions, and move funds. Sibears says this typically involves hackers who get into FINRA member clients’ private e-mail accounts where they can obtain access to their exchanges with the firms. They then reach out to the firms, pretending there is an emergency and asking that thousands of dollars in securities or cash be moved.

Siebers said that some firms end up sending money to hackers because firm employees are in a rush to help clients. Improper customer validation procedures is another reason this happens.

SROs Report a Delay in the Consolidated Audit Trail
Meantime, FINRA, Nasdaq, the New York Stock Exchange, and other self-regulatory organizations are now saying that there has been a delay in the development of what is being called the “consolidated audit trail,” and the deadline of June 20 for vendors to turn in their CAT request-for-proposal responses has been delayed by longer than six weeks. Per Regulation National Market System Rule 613, the SROs have to implement the CAT system, which will identify, gather orders, exchanges, and cancellations for all-exchange listed options and equities in US markets. The system will let regulators supervise and keep track of market transactions in an improved way.

Call the FINRA arbitration law firm of Shepherd Smith Edwards at (800)-259-9010 today and ask for your free case consultation.

FINRA Sees ‘Proliferation' of Complaints About Cybersecurity Breaches, Bloomberg, June 25, 2013

Audit Trail Won’t Be Fully Delivered Until 2017, Securities Technology Monitor, March 15, 2013

FINRA Requests Data on Firms' Social Media Use, Reuters, June 19, 2013

FINRA's Proposed Arbitration Rule Change, FINRA (PDF)

More Blog Posts:
FINRA Orders Wells Fargo & Banc of America’s Merrill Lynch Ordered to Pay $5.1M for Floating-Rate Bank Loan Funds Sales, Stockbroker Fraud Blog, June 4, 2013

FINRA Chief Ketchum Calls for Brokers To Better Inform Investors of Fixed Income, Structured Product Risks, Stockbroker Fraud Blog, May 29, 2013

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

June 20, 2013

“Ask and It Shall Be Received": Securities Brokers Can Wipe Complaints and Even Legal Claims Off Their Public Records

The New York Times is reporting that on May 24, a Financial Industry Regulatory Authority panel of arbitrators granted Wells Fargo (WFC) broker Michele Kief ‘s request that it recommend that the securities complaint, in which the bank settled for $125,000 allegations of fraud and negligence related to her actions, be deleted from her record. They also agreed that it be noted that the investments at issue were “suitable and safe. “There at least eight other client disputes on BrokerCheck against Kief. BrokerCheck is FINRA’s regulatory database.

Just two months before, FINRA arbitrators also consented to recommend the deletion of a securities arbitration complaint against ex-Charles Schwab (SCHW) executive Kimon P. Daifotis. This was the eighth such recommendation against Daifotis, who ran the Schwab Yield Plus fund that led investors to lose hundreds of millions of dollars.

“As FINRA publishes, advertises and encourages investors to check a broker’s record to gain information about their broker or a prospective broker, FINRA arbitrators often wipe that record clean.” Says William S, Shepherd, a securities attorney who represents investors in cases against brokers. “Everyone would like to wipe our credit record clean, maybe we just need to ask. Also, there is no educational requirement to become a securities broker, not even a high school degree. The only requirements are a 4-month apprenticeship and passing a multi-state state and a FINRA examination. Yet, securities brokers manage millions, some even hundreds of millions, of investors’ money. Their average six-figure income brokers places them in the highest percentiles of earnings in the U.S, along with other licensed professionals. Public disclosures are, and should be, important for those who often turn over their retirement accounts and even entire life savings to be handled by those who call to extoll their expertise.”

Some investor advocates say they wouldn’t criticize brokers’ efforts to clean up their records if only the latter were forced to contend with the same legal exposure as the defendants of lawsuits. Instead, brokers can insist that before setting up an account, customers agree to surrender their right to file a legal complaint in court, which means that Wall Street firms and their employees don’t have to deal with having a court record and allegations are resolved via private arbitration.

This means that broker check is the only place where an investor can find a record of securities allegations made against a broker, including client complaints, criminal histories, bankruptcies, liens, and regulatory actions. However, these brokers can get recommendations for deletions from FINRA if arbitrators conclude that a securities claim was wrong or false or the broker wasn’t’ actually involved in the alleged wrongdoing despite being named in association to it. A court has to confirm the recommendation.

In 2012, brokers sent state regulators, who are given the opportunity to protest when a broker requests to have information from BrokerCheck expunged, 519 requests that a FINRA panel’s expungement recommendation be allowed to proceed. That’s significantly up from 2011 when there were 110 expungement requests. The increase in expungement requests is in part a result of new disclosure demands that require that brokers report complaints if they were involved even though they weren’t named as respondents. Baruch College's Zicklin School of Business Professor Seth E. Lipner examined 150 expungement requests during the 2011 and 2012 fourth quarters, respectively, which were settled prior to there being a hearing and discovered in every case but five, arbitrators granted expungement.

Meantime, the SRO is expected to put out a proposal making it less difficult for accused brokers to expunge their records when a hearing and an actual arbitration decision are involved.

A Rise in Requests From Brokers to Wipe the Slate Clean, NY Times, June 10, 2013

BrokerCheck, FINRA


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

Former Merrill Lynch, Oppenheimer, Deutsche Bank Broker is Ordered by FINRA To Pay Investor $11M Over Alleged Securities Fraud, Stockbroker Fraud Blog, April 19, 2013

Former Broker Claims He is the Reason FINRA’s Regional Director Resigned, While Ex-JP Morgan Broker Files Arbitration Claim Against His Former Employer, Institutional Investor Securities Blog, June 18, 2013

June 5, 2013

FINRA Headlines: New ATSs Sweep Letters Issued, SRO to Provide Surveillance for Direct Edge Market Exchanges, Court Says Ex-AP of Defunct Member Firm Can Enforce Arbitration Pact, & Madoff Feeder Funds Are Not Required to Arbitrate Claims Against KPMG

FINRA Issues Sweep Letters About Alternative Trading Systems
The Financial Industry Regulatory Authority has put out a new round of sweeps letters asking for more information about its review of alternative trading systems. The SRO’s Trading Examinations Unit is reviewing the off-exchange trading venues.

FINRA wants firms to provide information about how subscriber order flow is identified within the ATS, whether they are tracking the different kinds of order types in use, and where the ATSs orders are routed. Sweep letters let the regulator determine how to better focus its exams and discover what new issues may have arisen.

FINRA to Provide Market Surveillance Services for Two Direct Edge Licensed Stock Exchanges
FINRA and Direct Edge, which is the biggest stock exchange operator in the country, have arrived at an agreement in which the SRO will provide market surveillance services for two licensed stock exchanges. This will give FINRA surveillance of over 90% of U.S. equities trading volume. Already, the agency conducts examination and disciplinary services for Direct Edge.

The agreement will go into effect during this year’s fourth quarter. Richard Ketchum, FINRA’s CEO and Chairman, said that not only does this strengthen the SRO’s ability to make sure that the market is integrity while protecting investors, but also, it will allow the regulator to do a better job of going after possible cross-market abuses. FINRA currently conducts market oversight and surveillance services for NYSE Euronext, Nasdaq, and others.

Ex-Associated Member of Defunct FINRA Member Firm CapWest Securities Inc. Can Enforce Arbitration Pact
The Fourth District of the California Court of Appeal held that third party beneficiaries of agents of a FINRA arbitration agreement can enforce that agreement by compelling arbitration even if the contracting member firm is not allowed to because its membership status with the SRO lapsed. Plaintiff Ronay Family Limited Partnership is suing Robert R. Tweed and Tweed Financial Services, Inc. over securities it bought that were offered by CapWest Securities, Inc. Tweed and his firm served as CapWest registered agents.

When the plaintiff opened an account with CapWest, it signed an agreement that included an arbitration clause with the defendants. However, after Ronay Family Limited Partnership sustained losses, it sued Tweed, his firm, and others, contending that the clause could not be enforced because CapWest had gone defunct and its membership with FINRA cancelled. The trial court agreed with the plaintiff. However, the California Court of Appeal disagreed.

Madoff Feeder Funds Not Required to Arbitrate Claims Against KPMG
The Massachusetts Court of Appeals says that investors in two Bernard Madoff feeder funds don’t have to arbitrate their claims against external auditor KPMG and, instead, they can proceed with their lawsuit. The plaintiffs, limited partners of the Rye Funds, sued fund manager Tremont Partners, its parent company Tremont Capital Management Inc., KPMG, and others after they lost $20 million in the wake of the Madoff Ponzi scam collapse. They are accusing KPMG of negligent misrepresentation, fraudulent inducement, and fraudulent inducement.

KPMG sought to throw out the claims against it, aruing that they were derivative and belonged only to the Rye Funds, which has arbitration agreements with Tremont. The court, however, says that the plaintiffs claims are direct, rather than derivative, and are therefore not subject to the arbitration terms noted in the engagement letter between Tremont and KPMG.

Targeted Examination Letters, FINRA

Direct Edge Selects FINRA for Market Surveillance, FINRA

Ronay Family Limited Partnership v. Tweed (PDF)

Askenazy v. KPMG LLP (PDF)

More Blog Posts:
FINRA Orders Wells Fargo & Banc of America’s Merrill Lynch Ordered to Pay $5.1M for Floating-Rate Bank Loan Funds Sales, Stockbroker Fraud Blog, June 4, 2013

FINRA Chief Ketchum Calls for Brokers To Better Inform Investors of Fixed Income, Structured Product Risks, Stockbroker Fraud Blog, May 29, 2013

LPL Financial Ordered to Pay $7.5M FINRA Fine Over E-Mail Failures, Institutional Investor Securities Blog,

May 15, 2013

FINRA Securities Activities: SRO Withdraws Proposal to Make Financial Firms Link to BrokerCheck, Gets Request from SIFMA to Modify ‘Inability to Pay’ Rule, and Says Broker-Dealers Can Give Investors PIP Data About ETPs

SRO Says Brokerage Can Institutional Customers PIP Data About ETPs Under Certain Conditions
Financial Industry Regulatory Authority staff have determined that under certain conditions, broker-dealers are permitted to include pre-inception performance information in communications with institutional investors about exchange-traded products, also known as ETPs. Staffers said that FINRA Rule 2210, which governs institutional communications, allows for the use of this data in the way that a fund company is proposing. ALPA Distributors is proposing using the PIP information just in institutional communications, per FINRA Rule 2210 and subject to certain criteria.

However, in “applying the suitability standards” for recommendations to institutional customers,” the SRO said brokerage firms should be cautious about putting too much “weight” on PIP information, while taking into consideration the correlation between performance of other, similar ETPs managed by the investment adviser, sponsor, or index provider and the PIP data. The staff’s letter was in response to a letter written by the fund company, which sees value in giving institutional investors the information for ETPs analysis.

FINRA Withdraws Proposed Rule Change Mandating That Firms Add BrokerCheck Web Link
FINRA has temporarily withdrawn its proposed rule change to Rule 2267 that would have upped investor use of information from BrokerCheck and mandated that member firms include a link and reference to the free online database on their respective websites. This resource, found on the SRO’s website, provides information about brokerage firms, brokers, investment adviser firms, and investment advisers. FINRA said it took back the filing to have more time to look at the comments it received regarding proposed rule change but that it intends to refile.

Although North American Securities Administrators Association, the Public Investor Arbitration Bar Association, and certain lawyers commented with their support of the proposal, the Investment Company Institute, the Securities Industry and Financial Markets Association, and a number of financial firms found the proposal “vague” and “unworkable.” They believe that the proposed rule change should be modified.

SIFMA Wants ‘Inability-to-Pay’ Rule Modified
The Securities Industry and Financial Markets Association wants FINRA to amend its Rule 9554 so that respondents would be precluded from making an “inability-to-pay defense” against a claimant. SIFMA says that should a respondent successfully bring up the defense, this should be reported to the public for the good of retail customers, regulators, and prospective employees.

Brokerage firms/a financial adviser can invoke the “inability to pay” defense when they are told to pay an arbitration award in expedited proceedings involving industry and customer claimants. While the SEC did approve FINRA’s proposal to preclude a respondent from raising this defense against a customer claimant., now SIFMA wants FINRA to amend the rule so respondents also are barred from raising this defense against industry claimants.

At Shepherd Smith Edwards and Kantas, LTD LLP, our securities fraud lawyers represent investors with claims against financial advisers and brokerage firms.

Read the FUND company letter

BrokerCheck, FINRA

SIFMA's letter (PDF)

More Blog Posts:
Medical Capital Fraud Lawsuit Against Wells Fargo Must Proceed, Institutional Investor Securities Blog, April 10, 2013

Previous Dissent by Arbitrator is Not Reason to Vacate Award Morgan Keegan Was Ordered to Pay Investors, Says District Court, Stockbroker Fraud Blog, April 8, 2013

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

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