January 5, 2012
October 29, 2011
Long Island Rail Road Disability Fraud Leads to 11 People Charged
This week, at least 11 people were charged over a fraud scam that allowed hundreds of Long Island Rail Road workers to falsely claim that they had disabling injuries in order to collect annual pensions. The scam could cost a federal pension agency over $1 billion. Among the defendants are seven ex- railroad workers (including an ex-federal railroad pension agency employee and a former union president) two doctors, and an office manager.
According to prosecutors, employees that took part in the Long Island Rail Road disability fraud claimed they were disabled when in fact they were still able to play golf, ride a bike, or engage in aerobics. The doctors reportedly filed the false claims so they could receive an extra benefit from the Railroad Retirement Board. Per the criminal complaint, Dr. Peter Ajemian recommended that at least 734 employees of LIRR be approved for disability. Dr. Peter Lesniewski recommended that 222 LIRR workers receive disability benefits. A third doctor is believed to have also been involved in the scam but he recently passed away. The doctors allegedly created false illness narratives and medical assessments for hundreds of retirees, receiving $800 - $1200 for each one, in addition to fees for false medical records to support the claims of disability. They also were paid millions in health insurance payments for treatments that were not actually needed.
Approximately $121 million was paid out to LIRR workers, whose disabilities were exaggerated or made up. For example, according to the New York Times, 62-year-old defendant Gregory Noone gets $105,000 in disability and pension payments annually and supposedly is in a lot of pain when he crouches, bends, or grips objects. Yet he manages to play golf and tennis frequently. 55-year-old Steven Gagliano, whose yearly payments are $75,000, took part in a 400-mile bike tour even though he claims to experience back pain that is so severe it is disabling.
The federal government started investigating the scam after the New York Times published a number of articles about LIRR employees abusing federal Railroad Retirement Board pensions in 2008. Per the newspaper, almost all of the railroad company’s career employees were seeking and getting disability payments—that’s three to four times the disability rate of the average railroad company. Also, said the Times, the federal Railroad Retirement Board appears to have been poorly run, with inadequate tests to determine whether disability claims is legitimate. Some railroad officials had even complained that disability benefits were frequently awarded for medical conditions even if a worker’s ability to work hadn’t been impaired. Few claims were turned down.
11 Charged in L.I.R.R. Disability Fraud Plot, NY Times, October 27, 2011
Local Docs Charged in $1B LIRR Disability Scam, Rockville Center, October 27, 2011
More Blog Posts:
“Investor’s Guide to Loss Recovery” Offers Key Information on How to Use Conflict Resolution to Get Your Assets Back, Stockbroker Fraud Blog, September 7, 2011
SEC’s Proxy Access Rule is Rejected by Appeals Court, Stockbroker Fraud Blog, August 5, 2011
No Need for New SRO Overseeing Investment Advisers, Says NASAA Official to Congress, Stockbroker Fraud Blog, April 10, 2011
Continue reading "Long Island Rail Road Disability Fraud Leads to 11 People Charged" »
September 7, 2011
“Investor’s Guide to Loss Recovery” Offers Key Information on How to Use Conflict Resolution to Get Your Assets Back
For many investors seeking to recover their lost assets from a Wall Street financial firm, the process can be daunting and confusing. This is why it is so important that you work with a stockbroker fraud law firm that can take you through process, knows how to successfully navigate the legal system, will protect your rights, and is committed to helping you recoup your losses. That said, any understanding you can acquire about the financial recovery process could only help your case, while also alleviating some of your concerns. The “Investor’s Guide to Loss Recovery” by Louis Straney is a reliable resource containing knowledgeable advice and guidance about the arbitration system, how it operates, and how to make it work in your favor.
The book offers detailed coverage and practical information about:
• Key litigation resources and strategies
• How to file an effective claim, as well as the outcomes you can expect
• Scripts of initial lawyer interviews, mediation, and arbitration
• How to organize the massive amount of documents that will be exchanged between parties
• Interviews with securities attorneys, investors, and experts
• An explanation of how new regulatory reforms are impacting the financial recovery process, as well as the options that are available to victims of financial fraud
• Charts demonstrating the major areas of litigation
• Empirical evidence about the growing awareness of investment misconduct
With over 30 years of experience working on Wall Street as a senior manager and director, Straney is an expert guide. He launched his own securities litigation consulting practice in 2007. In addition to having consulted or testified in over 200 engagements, Straney is the author of "Securities Fraud: Detection, Prevention and Control" and other works. He also is a published contributor whose writing has appeared in a number of publications, including the New York Times and the Public Investor Arbitration Bar Association Law Journal.
Shepherd Smith Edwards & Kantas LTD LLP Founder and Securities Fraud Attorney William Shepherd has this to say about Straney: “I have worked with Lou Straney for many years on cases representing clients who have lost money because of securities fraud and other wronging by those who sold the securities. I have also appeared with him in speaking engagements regarding securities fraud. Although we only met about five years ago, each of us had worked for decades for large Wall Street securities firms. Lou and I have discussed for many hours the steady erosion of character and standards in that industry. In his book, Lou covers this and other subjects. As a non-lawyer, his comprehension of legal issues is surprising. But, as a non-youth, Lou’s incredible level of energy is what amazes me the most.”
Securities Fraud Research and Training
More Blog Posts:
SEC Charges Filed in $22M Ponzi Scam that Targeted Florida Teachers and Retirees, Stockbroker Fraud Blog, August 29, 2011
Stifel, Nicolaus & Co. and Former Executive Faces SEC Charges Over Sale of CDOs to Five Wisconsin School Districts, Stockbroker Fraud Blog, August 10, 2011
Ex-UBS Financial Adviser Pleads Guilty to Defrauding Private Fund Investors, Stockbroker Fraud Blog, July 13, 2011
August 5, 2011
SEC’s Proxy Access Rule is Rejected by Appeals Court
The U.S. Court of Appeals for the District of Columbia Circuit has struck down a Securities and Exchange Commission rule that would have let company shareholders nominate one or two director nominees to their boards. The proxy access rule would have allowed groups with possession of a minimum 3% voting power of a company’s stock for a minimum of three years to nominate board candidates. Companies would have had to include information about these shareholder-nominated director candidates in their proxy materials.
The SEC had approved the regulation last year. It would have gone into effect in November, but the Commission stayed it after the US Chamber of Commerce and the Business Roundtable filed their legal challenge asking for the stay. The Business groups had said the rule was in violation of the Administrative Procedure Act and would “handcuff directors and boards,” exclude the majority of retail shareholders, and worsen the “short-term focus” considered among the main causes of the economic crisis. There were also concerns that the proxy access rule would let hedge funds, union-connected pension funds, corporate raiders, and hedge funds elect directors who would do as they directed.
The Chamber of Commerce and Business Roundtable also accused the SEC of disregarding studies and evidence that revealed the” adverse consequences of proxy access,” attempting to restrict the ability of shareholders to stop special interest groups from starting up expensive election contests, and not giving full consideration to state laws about access to principles about and related to proxy that already exist.
In its July 22 ruling the appeals court agreed with the two parties’ claim that the SEC behaved “arbitrarily and capriciously” when it failed to “adequately consider” how the rule would impact “efficiency, competition, and capital formation.” The court also said that the SEC did not “supported its predictive judgments,” failed to address the problems brought up by commenters, and “contradicted itself.”
Following the court’s decision, US Chamber of Commerce CEO and president Tom Donahue said: praised the court’s ruling, which refused to let “special interest politics” to be infused “into the boardroom.” Shepherd Smith Edwards & Kantas LTD LLP and stockbroker fraud lawyer William Shepherd, however, had this to say about Donahue’s statement: “This is an outrageous statement for the Kings of special interest politics to make! In fact, this story is really about special interest politics in the courtroom.”
While businesses that opposed the proxy access rule feared it would give environmental and labor union groups more power at corporations and that shareholder value would suffer, its supporters had argued that giving shareholders a bigger hand in who got to sit on corporate boards could have prevented the financial crisis.
According to Investment News, there is evidence that unions could use any additional voting influence to advance their interests. It was just several years ago that the California Public Employees’ Retirement System used its shareholder power in Safeway Inc. to try to vote out chief executive Steven Burd. It also pressured the company to resolve a strike under conditions that favored unions. CalPERS's efforts failed both times.
Our securities fraud lawyers are dedicated to protecting investors and helping their recover their losses sustained because of broker misconduct. Contact our stockbroker fraud law firm to request your free consultation.
Related Web Resources:
Striking a blow to SEC, court voids investor rule, Investors.com, July 22, 2011
U.S. Chamber Joins Business Roundtable in Lawsuit Challenging Securities and Exchange Commission, US Chamber of Commerce, September 29, 2010
Read the legal challenge filed by the Business Roundtable and the US Chamber of Commerce (PDF)
Read SEC's Proxy Access Rule (PDF)
More Blog Posts:
SEC to Propose Rule Banning “Felons and Bad Actors” From Involvement in Private Offerings, Institutional Investors Securities Blog, May 29, 2011
SEC Examines Proxy Advisory Firms, Institutional Investors Securities Blog, October 14, 2010
SEC Proposes New Rule to Verify Swap Transactions, Institutional Investors Securities Blog, January 27, 2011
April 10, 2011
No Need for New SRO Overseeing Investment Advisers, Says NASAA Official to Congress
Florida's Office of Financial Regulation’s securities director Frank Widman says Congress should ignore calls for a new SRO to help the Securities and Exchange Commission oversee any investment advisers. Widmann spoke last month at the North American Securities Administrators Association's public policy conference in DC.
Widmann, who previously served as NASAA president said that rather than set up a new SRO for IA’s, Congress should concentrate on making sure that state regulators and the SEC are fully funded so they are able to do their job. Widmann says that unlike the SEC, the federal regulator, and state securities regulators, SROs aren’t sovereign. Widmann says that giving SROs too much independence has proven problematic in the past.
As our stockbroker fraud law firm reported previously, SEC staff recently put out a report recommending that Congress either set up at least one SRO to oversee investment advisers, impose user fees on industry members to support Office of Compliance Inspections and Examination’s probes, or appoint the Financial Industry Regulatory Authority as the SRO for investment advisers. FINRA is already the SRO for broker-dealers.
Also at the NASAA Conference was SEC Commissioner Luis Aguilar, who said that the federal regulator was in the process of putting into place a system to gather and examine data from money market funds. He says funding limitations at the SEC have impeded the system’s implementation. Aguilar called on the financial services industry to “re-dedicate itself to basic principles,” including those of meaningful disclosure, fair dealing, integrity, and good business practices.
Related Web Resources:
NASAA Official Says Congress Should Ignore Calls to Create New SRO, BNA Securities Law Daily, March 29, 2011
Speech by SEC Commissioner Luis Aguilar, SEC, March 28, 2011
North American Securities Administrators Association
More Blog Posts:
FINRA Will Customize Oversight to Investment Adviser Industry if Chosen as Its SRO, Stockbroker Fraud Blog, April 8, 2011
SEC Staff Wants an SRO to Oversee Investment Advisers, Stockbroker Fraud Blog, January 31, 2011
March 24, 2011
Reductions to SEC’s Budget Will Cause Staff Furloughs, Says Schapiro
Securities and Exchange Commission Chairman Schapiro says reducing the agency’s budget to where it was at in 2008 would result in “significant’ staff furloughs. Other likely consequences would be the curtailment of crucial travel, including visits to registered entities, the cessation of technology infrastructure initiatives, and the curtailing of the SEC’s Dodd-Frank enforcement capabilities. House Republicans are the ones pushing for the budget reductions. Schapiro made her case earlier this month while testifying before the Senate Banking Committee’s Securities subcommittee. Our securities fraud law firm will continue to monitor the developments regarding this matter.
Schapiro says that the continuing resolution, which would find the agency at fiscal year 2010 levels, already makes it tough to close deals with top-rank industry experts she has recruited. She also says any steep cuts would impede the SEC's ability to oversee broker-dealers, mutual funds, investment advisers, and other participants in the retail investing market in “anything but the most cursory way.” Schapiro also expressed concern that credit rating agencies would be able to evade serious examination if the SEC’s budget was tightened.
Sen. Michael Crapo (R-Idaho.), a ranking subcommittee member, noted that while underfunding the SEC can make it hard for the agency it to do its job “aggressively” and “effectively,” he believes that in the wake of the financial crisis, it is now more than ever necessary for all levels of government to perform with greater efficiency. Crapo is calling for an “agency-wide examination” of where the SEC’s resources are going and an assessment of whether they can be “better utilized.” For example, is there technology that can compensate for a reduced staff? What about sharing technology costs over Dodd-Frank oversight needs with the Commodity Futures Trading Commission?
Schapiro also said that the SEC has been effectively implementing a 60-day comment period for most Dodd-Frank rulemaking, rather than just 30 days, to allow time for thoughtful feedback. Current SEC rules are also being examined to determine whether any of them are no longer applicable.
Related Web Resources:
Cuts will stifle, SEC chief warns, The Boston Globe, March 11, 2011
Schapiro Says SEC Will Have to Furlough Staff If House Republican Cuts Are Enacted, BNA Securities Daily, March 11, 2011
Continue reading "Reductions to SEC’s Budget Will Cause Staff Furloughs, Says Schapiro" »
March 7, 2011
SROs Immune from Broker-Dealer’s Lawsuit Over Bylaw Changes Related to Creation of FINRA, Says Appeals Court
Recently, the U.S. Court of Appeals for the Second Circuit dismissed Standard Investment Chartered Inc.’s lawsuit against the Financial Industry Regulatory Authority, New York Stock Exchange Group Inc., and NASD over alleged misstatements in a proxy to obtain member approval for bylaw changes that ultimately resulted in the creation of FINRA. In a per curiam decision, the court held that self-regulatory organizations and their officers are immune from lawsuits over bylaw amendments because these are “inextricable” from the SRO’s regulatory roles.
The plaintiff, broker-dealer and former NASD member Standard Investment Chartered Inc., claims that NASD and certain officials issued material misrepresentations in the proxy statement that solicited approval of bylaw amendments so that the merger between NASD and parts of NYSE Regulation Inc. that became FINRA would take place. The broker-dealer contends that the proxy statement misrepresented that $35,000 was the most that the Internal Revenue Service had authorized NASD to pay members over the union.
Last March, the U.S. District Court for the Southern District of New York dismissed Standard Investment Chartered Inc.’s lawsuit, as well as a similar claim submitted by NASD member Benchmark Financial Services Inc. The court said that the union between the SROs was “entitled to absolute immunity” because it was part of their delegated regulatory functions. Standard Investment Chartered appealed the ruling.
Now, the Second Circuit has affirmed the district court’s ruling. The court also noted that NASD can’t change its bylaws without Securities and Exchange Commission approval.
Other defendants in the lawsuit include Securities and Exchange Commission chairman Mary Schapiro, who was NASD’s CEO when the regulatory body merged with NYSE, Pershing LLC Chairman Richard Brueckner, and FINRA senior vice president Howard Schloss.
Related Web Resources:
Appeals Court Upholds Lower Court Ruling on Finra Damage Suits, Bloomberg, February 23, 2011
Court Finds SROs Immune From Lawsuit Over Bylaw Changes to Effect FINRA Creation, BNA - Securities Law Daily, February 23, 2011
Standard Investment Chartered Inc. v. NASD
February 28, 2011
China-Based Hackers Broke into Morgan Stanley Network, Reports Bloomberg
According to Bloomberg, Morgan’s Stanley’s network experienced a cyber break-in. The culprits were hackers based in China that broke into Google Inc.’s computers over a year ago. The break-in is documented in e-mails stolen from HBGary Inc, a cyber-security company that works for the investment bank.
Known as the Operation Aurora attacks, the break-ins took place in June 2009 and lasted for about six months. More than 20 companies were hit.
The HBGary emails don’t detail what data might have been stolen from Morgan Stanley or which of its multinational operations were hit. The broker-dealer reportedly considers the details of the cyber attacks confidential. Hacker activist group Anonymous stole the emails.
Morgan Stanley hired HBGary last year because of suspected hacker-linked network breaches that resulted in break-ins into the financial firm’s Internet security system. These attacks were not related to Operation Aurora. Per HBGary emails, the hackers that made those breaches were able to implant software for stealing confidential files and communications.
According to FBI Deputy Assistant Director Steven Chabinsky, hackers have stepped up efforts to obtain information involving mergers and acquisitions. The China-based hacker attacks did not help the growing tensions between China and the United States. Calls were even made for Secretary of State Hillary Clinton to look at Google’s claims about the raids and make her findings available to the public.
Following the cyber attacks, Google stopped censoring search results from Google.cn, its Chinese search engine. Google started shuttering its site following lengthy negotiations with officials in China.
Related Web Resources:
Morgan Stanley Attacked by China-Based Hackers Who Hit Google, Bloomberg, February 28, 2011
Operation Aurora, Techie Buzz, January 15, 2010
More Blog Posts:
Morgan Stanley Failed to Disclose Financial Adviser’s Felony Charge to FINRA, Claims Car Accident Victim’s Attorney, Stockbroker Fraud Blog, January 10, 2011
Wall Street Knew 28% of the Loans Behind Mortgage Backed Securities (MBS) Failed to Meet Basic Underwriting Standards, Stockbroker Fraud Blog, January 10, 2011
Continue reading "China-Based Hackers Broke into Morgan Stanley Network, Reports Bloomberg" »
January 31, 2011
SEC Staff Wants an SRO to Oversee Investment Advisers
Earlier this month, the members of the Securities and Exchange Commission's Division of Investment Management recommended that Congress either set up at least one self-regulatory organization that oversees investment advisers, impose “user fees” to fund examinations by the Office of Compliance Inspections and Examinations, or make investment adviser oversight the Financial Industry Regulatory Authority’s responsibility. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act’s Section 914, the SEC is supposed to assess itself and make recommendations for improvement.
Per the SEC’s report, there is at this time inadequate resources for examining the over 11,000 registered investment advisers—a number that will likely go down by 3,350 in July when Dodd Frank’s Section 410 goes into effect and advisers with assets under management valued at $100 million or less will have to register with the state where their main place of business is located. That said, the growth in the industry is such that by fiscal year 2021 there may be up to 13,908 registered advisors with a collective worth greater than $70 trillion.
However, while industry groups will likely endorse a more influential FINRA or a new SRO, investment advisers believe that self-regulation’s rules-based nature is not compatible with their business model and government oversight and regulation would be better for them. FINRA believes that an SRO will be able to “augment” government oversight. In the past, FINRA has expressed willingness to take on this role.
It is important that brokers and investment advisers are properly supervised to decrease the chances of investment fraud. Our investment fraud lawyers represent investors who have suffered financial losses because of investment adviser misconduct or securities fraud.
Related Web Resource:
Study on Enhancing Investment Adviser Examinations, SEC, January 2011
Office of Compliance Inspections and Examination
Division of Investment Management
December 30, 2010
Wall Street and its Friends in Washington Want Congress to “Crawfish” on Financial Industry Regulatory Reforms
The Committee on Capital Markets Regulation, a nonpartisan research group, is urging lawmakers to conduct oversight hearings on the way that financial reform legislation is being implemented. CCMR claims that the rulemaking process of the Commodity Futures Trading Commission, the Securities and Exchange Commission, and other regulators is “seriously flawed,” while “sacrificing quality and fairness for apparent speed, risking lengthy court challenges and poor rules.”
CCMR made its allegations in a letter to outgoing Senate Banking Committee chair Christopher Dodd (D-Conn), ranking member Sen. Richard Shelby (R-Ala.), outgoing House Financial Services Committee head Rep. Barney Frank, and ranking member Rep. Spencer Bachus (R-Ala.). CCMR says it is concerned that the Dodd-Frank Wall Street Reform and Consumer Protection Act requires a virtual full “rewrite” of current regulations for the country’s financial markets and that the specific deadlines are “overly ambitious.”
Now, the SEC has until July 2011 to write about 60 new rules—it wrote less than 10 a year in 2005 and 2006—and the CFTC has to issue almost 40 new rules—it made about 11 rules in the couple of years leading up to the economic meltdown. Also, per Dodd-Frank, the SEC has about 200 days to make a rule final. Before the financial crisis the agency would take 524 days for rule adoption from proposal to finalization. The CFTC has 238 to adopt a new rule. Previously the agency would take about 109 days. Also, whereas before, the public was given approximately over 60 days to comment on new rules, agencies on overage are now allowing about 30 days for comments.
CCMR claims that there are now conflicting rules in the asset-backed securities area and regarding over-the-counter derivatives. Recently, Bachus and House Agriculture Committee chairman-elect Rep. Frank Lucas (R-Okla.) wrote CFTC Chairman Gary Gensler and SEC Chairman Mary Schapiro about the direction and pace that swaps rulemaking was taking.
Per Shepherd Smith Edwards and Kantas Founder and Securities Fraud Lawyer William Shepherd, “No one wants to be told what to do, it is human nature, and government regulations should only occur as a ‘necessary evil.’ The test should be whether the evil regulation is better than the evil non-regulation. This one should be easy to answer! Look back at what just happened after Congress deregulated the financial industry over the past decade: Debacle! With taxpayers having to bail out the perpetrators. A little pain on Wall Street can be endured to prevent this from happening in the future. Perhaps these regulations are not perfect, but the de-regulation now in place has proven disastrous.”
Related Web Resources:
Committee on Capital Markets Regulation
Commodity Futures Trading Commission
Securities and Exchange Commission
Dodd-Frank Wall Street Reform and Consumer Protection Act (PDF)
Institutional Investors Securities Blog
November 29, 2010
Compliance with 1934 Securities Exchange Act Reporting Requirements During Annual Broker-Dealer Audits is Key, Say SEC Officials
Securities and Exchange Commission Division of Trading and Markets Robert Cook and Chief Accountant James Kroeker are reminding auditors that it is important that they comply with specific 1934 Securities Exchange Act reporting requirements when performing annual broker-dealer audits. Earlier this month, the two SEC officials sent a letter to American Institute of Certified Public Accountants Stock Brokerage and Investment Banking Expert Panel Chair Stephen Zammitti.
Per Kroeker and Cook, under the 1934 Securities Exchange Act’s Rule 17a-5, broker-dealers must file yearly reports, supplemental reports, and supporting schedules. They also noted that Under Rule 15c3-1, a supporting schedule must include required and actual net capital and, when applicable, computation of the customer reserve requirement, as well as information about possession or control requirements.
The two SEC officials issued the reminder that brokerage firms have to submit an accountant’s report about the supporting schedule from a registered public accounting firm and that the yearly financial report audits must meet accepted auditing standards. Cook and Kroeker also said that even though the Dodd-Frank Act gave the Public Company Accounting Oversight Board the authority to put forth an auditing and attestation standard for broker dealers’ PCAOB-registered auditors, per recent SEC interpretive guideline auditors should keep adhering to AICPA standards until further rulemaking. The two SEC officials emphasized the need for accounting firms to review internal accounting records, the accounting system, and procedures for safeguarding securities and that, per Rule 17a-5, the audit and review’s scope must be enough to provide enough assurance that any “material inadequacies… would be disclosed.”
Related Web Resources:
View the Letter (PDF)
Read the SEC Guidance (PDF)
The 1934 Securities and Exchange Act
November 26, 2010
Fiduciary Standard in Securities Industry Doesn't Need New Definition
Financial Industry Regulatory Authority Chairman and Chief Executive Officer Richard Ketchum says that there should be just one flexible, fiduciary standard for investment advisers and broker-dealers who offer personalized investment advice. Ketchum spoke at a conference earlier this month.
Ketchum noted that seeing as investment advisers and broker-dealers essentially work in the same business, it “doesn’t make sense” to act as if they work in different ones. He supports a flexible fiduciary standard that comes with a “few basic, simple rules.”
As to whether FINRA could play a part in supervising the imposition of a future fiduciary standard on broker-dealers, Ketchum said that if FINRA were to play this role it would do so with a discreet board that would include a minority of investment adviser professionals, as well as members of the public. While investment advisers currently have to comply with a fiduciary standard and are regulated under the 1940 Investment Advisers Act, broker-dealers must be in compliance with other standards, including an obligation to make sure that their recommendations to clients are “suitable” ones.
Securities and Exchange Commission Chairman Mary L. Schapiro has also shown a preference for a uniform fiduciary standard between the two groups. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC has until January 21, 2011 to turn in a report to the House Financial Services Committee about this matter. After completing its study, the SEC can write rules to establish a uniform standard of conduct for professionals who give retail clients personalized investment advice. However, the rule cannot be “less stringent” than current investment adviser standards.
Shepherd Smith Edwards & Kantas LTD LLP Founder and Stockbroker Fraud Attorney William Shepherd had this to say about a fiduciary duty: “There is no need for disagreement over what kind of language should be use to define fiduciary duty in the securities industry. The term ‘fiduciary’ comes from the Latin word fides, which means faith, and fiducia, which means trust. English Common law, upon which our legal system was founded, long ago defined a fiduciary duty as a duty of loyalty and care, in which the fiduciary must put the interest of his client before that of himself. Courts all across our nation today recognize this same duty in a variety of relationships. The meaning of 'fiduciary duty' has been established for hundreds of years, so why would Wall Street need to have its own special definition? If it ain’t broke, why fix it?”
Related Web Resources:
Fiduciary Standard, More Adviser Oversight Likely -Finra Chief, The Wall Street Journal, November 16, 2010
Investment Advisers Act of 1940
Continue reading "Fiduciary Standard in Securities Industry Doesn't Need New Definition" »
November 9, 2010
“Flash Crash” – Why is This So Hard to Understand?
“On May 6, 1010, the New York Stock Exchange was intentionally shut down for 90 seconds by those in charge,” recounts Shepherd Smith Edwards and Kantas Founder and Securities Fraud Lawyer William Shepherd. “When this happened there was no market (bid and ask quotes) for many large cap stocks, except on small exchanges and the 'third market.' Meanwhile trading programs continued to submit market orders.” Shepherd continued, “Market orders in a ‘thin’ market are always a recipe for disaster. The question people should be asking is: Who decided to stop trading on the NYSE without warning and why? Imagine how much money could have been made by anyone who knew of this shutdown in advance!”
Shepherd’s observations come in the wake of NYSE Euronext chief executive officer Duncan Niederauer’s address to attendees at a recent National Association of Corporate Directors conference. Niederauer acknowledged that there is more that needs to be done to understand the events leading up to the flash crash. He said that while the Commodity Futures Trading Commission and the Securities and Exchange Commission had put out a “very well done” report that explained why markets dropped 4 or 5% that day, the reason why prices for some individual stocks plummeted by almost 100% remain unclear.
The Dow Jones Industrial Average dropped by over 573 points during five minutes of trading that day before taking 90 seconds to reverse and regain 543 points. Although the CFTC and the SEC have determined that the flash crash was started by a mutual fund complex that used computer algorithms to quickly sell $4 billion in futures contracts, Niederauer has said that there is still both information and misinformation. He contends that to bar high-speed electronic trading is impractical despite the fact that the US market structure is “more vulnerable than we thought.” He said the NYSE stands behind a model that comes with market maker obligations that are clearly outlined and that this can be used to determine whether the market maker is “doing a good job.” More market structure rules are expected in January.
Related Web Resources:
Flash crash' shows need for price discovery and safeguards, NYSE
CFTC And SEC Release "Flash Crash" Report, FuturesMag.com
Read the SEC and CFTC Report (PDF)
Continue reading "“Flash Crash” – Why is This So Hard to Understand?" »
October 26, 2010
NASAA Recommends Best Practices After Finding Brokers Deficient in Five Areas
The North American Securities Administrators Association says that broker-dealer compliance programs throughout the country tend to exhibit deficiencies in several key areas:
• Registration and licensing
• Sales practices
• Operations
• Supervisions
• Books and records
Failure to follow written procedures and policy for supervision, variable product suitability, and advertising sales literature are considered the three most commonly noted problem areas.
NASAA issued its findings based on the 567 deficiencies in these five areas that were discovered by regulators in 30 states during 290 examinations that took place between January 1 and June 30. NASAA president and North Carolina deputy securities administrator David Massey says that the organization is flagging the deficiencies to assist brokers in reducing the risk of regulatory violations.
To remedy the deficiencies, NASAA is offering 10 best practices, including those that involve broker-dealers:
• Updating and enforcing written supervisory procedures.
• Developing standards and criteria that can effectively determine which investments are suitable for each client.
• Documenting “red flags” and resolving these promptly.
• Establishing a “meaningful” audit plan that includes unannounced visits and a follow-up plan.
• Obtaining regulatory approval of sales literature and ads before using them
• Setting up procedures that can prevent and detect unauthorized private securitization transactions.
• Ensuring that registered representatives’ outside business activities are reviewed before they take place.
• Effective monitoring of both hard copy and electronic correspondence.
• Acknowledging receipt of complaints and updating of a registered representative’s Form U-4.
• Conducting a thorough investigation of the allegations.
Investors that have lost money because of securities fraud or broker mistakes may be able to recoup their losses with the help of an experienced stockbroker fraud law firm.
Related Web Resources:
State Securities Regulators Offer Series of Compliance Best Practices, NASAA, October 12, 2010
Securities and Exchange Commission
Continue reading "NASAA Recommends Best Practices After Finding Brokers Deficient in Five Areas " »
July 6, 2010
Court Orders Southridge Partners Limited Partnership Dispute to Arbitration
The Delaware Chancery Court is dismissing Aris Multi-Strategy Fund LP's action to obtain access to Southridge Partners LP books and records and sending the case to arbitration. Aris is a Southridge limited partner. According to Chancellor William Chandler III, arbitration for this case is contractually mandated.
Aris is seeking access to Southridge’s records and books. Aris claims that Southridge has not responded to requests for information.
According to the court, because this dispute is one regarding “the partnership,” it is subject to the LP Agreement terms that mandate arbitration. The court also noted that the arbitration provision doesn’t limit the arbitrator from resolving disputes other than those involving the LP Agreement. Also, while parties may ask that an arbitrator limit its authority only to disputes involving the agreement, the arbitrator can say no. This means that the arbitrator is allowed to determine whether to resolve the books and records dispute.
Judge Chandler determined that the Delaware Revised Uniform Limited Partnership Act lets partners contractually agree to enter books and records actions to arbitration. The court also says that Aris’s contention that inspection rights cannot be determined by an arbitrator because the Chancery Court has exclusive jurisdiction is incorrect. It stated that 6 Del. C. §17-109(d) lets a limited partner wave its right to bring actions involving a limited partnership’s internal affairs or organization to the Delaware Courts as long as it agrees to arbitrate its actions.
Related Web Resources:
Aris Multi-Strategy Fund LP v. Southridge Partners LP, Del Court Opinion (PDF)
Delaware Revised Uniform Limited Partnership Act
Continue reading "Court Orders Southridge Partners Limited Partnership Dispute to Arbitration" »
June 22, 2010
As BP Oil Spill Reaches Crisis Mode, A Number of Wall Street Analysts Placed “Buy” Rating On the Company’s Plunging Shares
When BP oil spill in the Gulf Coast first became news, the company’s shares started to drop. According to the Huffington Post, the unfolding crisis incited a mad dash on Wall Street, with dozens of securities analysts encouraging investors to “buy, buy, buy” BP (BP.L: Quote, Profile, Research, Stock Buzz) (BP.N: Quote, Profile, Research, Stock Buzz).
Among those to jump into the fray were Credit Suisse, Citigroup, and Morgan Stanley. Thomson Reuters says that of 34 analysts that rated the BP shares as recently as May 11, 27 gave “buy” or “outperform” ratings. 7 rated the shares with a “hold.” None of the analysts gave the shares an “underperform” or “sell” rating.
As estimates of how much oil was being spilt grew and was coupled with news of BP’s unsuccessful efforts to stop the leak, BP stock kept dropping, destroying some $100 billion in shareholder wealth. Unfortunately, when Wall Street makes mistakes, it is the investors that end up losing money.
Some experts saying that with so many analysts making the wrong call, the BP crisis has exposed the problems that continue to plague the sell-side analyst community despite all the reform that has been implemented in the last 10 years. Some investment firms are afraid to be left out, which can contribute to what appears to be an existing “group think” mentality. Analysts may also be unwilling to challenge companies for fear of jeopardizing their relationship with leading executives—a classic case of conflict of interest.
Meantime, the analysts are coming to their own defense. They say that the Deepwater Horizon oil spill was unprecedented and therefore it was hard to predict its outcome and related financial ramifications. Granted, as the risks became more obvious, many on Wall Street downgraded their buy ratings to more cautious notes. Natixis and Goldman were among those that lowered their ratings from “buy” to “hold” or neutral.” There were also a small group of analysts that did accurately call the effects the oil spill would have on BP’s stock prices.
Related Web Resources:
Wall Street Said 'Buy, Buy, Buy' BP Stock As Gulf Crisis Unfolded, The Huffington Post, June 18, 2010
BP Stock Sinks Back Near Oil-Spill Low, The Street, June 22, 2010
A Timeline of the BP Oil Spill Crisis, WallStCheatSheet.com, May 6, 2010
June 21, 2010
LPL Investment Holdings, Inc. IPO Registration Gives Evidence of Disparities Between Wirehouse Broker-Dealers and Independent Brokerage Firms
According to InvestmentNews, LPL Investment Holding Inc’s recent IPO registration is clear evidence that the 4 wirehouse brokerage firms still dwarf the approximately 1,200 independent contractor broker-dealers when it comes to controlling client assets. LPL is an independent broker-dealer.
Currently, there are approximately 114,000 independent reps and about 55,000 wirehouse reps. Yet even though there are so many less wirehouse reps, they still are in charge of a larger pool of client assets than their independent counterparts. While wirehouse reps manage $3.95 trillion in client assets, independent reps handle about $1.8 trillion. This means that a wirehouse broker, on average, manages $71.8 million in assets, and independent reps manage about $16 million in assets.
Also, while both wirehouse and independent reps make about 1% in commissions and fees on client assets, wirehouse reps get a 40% average payout of the fees and commissions, while independent reps get about 85%. While the average independent rep makes under $134,000 annually, the average wirehouse rep makes about $287,000 a year.
LPL rep’s earn an average payout of about $155,360. Acquired by two private equity firms in 2005, LLP states in its IPO registration that due to its efficient operating model and scale, its payout to independent contractors far exceeds that of wirehouse firms. InvestmentNews says it is unclear how many of the $1 million plus-producing brokers joined LPL because they wanted the higher payout.
LPL is owned by private equity firms Hellman & Friedman LLC and TPG Capital. The brokerage firm has filed to raise up to $600 million in its IPO.
Related Web Resources:
Does LPL's filing reveal an unspoken truth about indie B-Ds?, Investment News, June 21, 2010
TPG-Backed LPL Investment Holdings Files for $600 Million IPO, Bloomberg Businessweek, June 4, 2010
June 17, 2010
House and Senate Negotiators Can’t Seem to Agree on Fiduciary Standard in Financial Regulatory Reform Bill
According to InvestmentNews, negotiators in the Senate and the House have reached an impasse regarding the fiduciary standard provision found in the financial regulatory reform bill. While the House wants the US Securities and Exchange Commission to impose a universal standard of care that would be applicable to anyone offering personalized investment advice to retail clients, such as investment advisers, insurance agents, and broker-dealers, to reveal conflicts of interests and act in clients’ best interests—the Senate only wants the SEC to examine the issue for a year before proceeding to rulemaking.
According to Securities Fraud Lawyer William Shepherd, “Virtually all advisory professionals have a fiduciary duty to their clients, and brokerage firms claim to be professionals. Having a ‘fiduciary duty’ means professionals cannot put their own interests ahead of their clients. All types of ‘financial advisors’ were considered fiduciaries, until some Wall Street-friendly judges said otherwise. Congress needs to pass a law restating that brokers are fiduciaries. If not, rest assured that Wall Street will use lack of clarification as proof they do not owe an affirmative duty to their own clients.”
While speaking before the Financial Industry Regulatory Authority on May 27, US Deputy Treasury Secretary Neal Wolin says that the White House is strongly in favor of making retail brokers subject to the toughest possible consumer protection while also having them abide by a fiduciary duty. Wolin also says that the Obama Administration wants heightened regulation of credit rating agencies, Volcker rule limits on banks’ proprietary trading activities, and effective resolution authority against failed companies.
Stockbroker Fraud Attorney Shepherd says “It is preposterous to even say that stockbrokers are not fiduciaries. The law (Investment Advisors Act of 1940) says that those who advise clients regarding securities are held to a fiduciary standard. Meanwhile, stockbrokers insist they are not just order takers – which people pay $8.00 to get online - but are instead ‘advisors,’ ‘financial consultants,’ etc. who can charge 10 to 100 times what online trades cost. Wall Street wants to make the big bucks, but not have any duties to their clients. It’s simple as that.”
Related Web Resources:
House-Senate negotiators hit impasse on fiduciary standard, InvestmentNews, June 17, 2010
Treasury’s Wolin Vows Fight for Broker Fiduciary Duty in Reform Law, Investment Advisor, May 27, 2010
Financial Regulatory Reform, New York Times, June 15, 2010
May 12, 2010
Supreme Court Nominee Elana Kagan Took Investors Side on Two Significant Securities Cases
The Wall Street Journal reports that as Solicitor General of the United States, US Supreme Court nominee Elana Kagan has sided with investor interests in two high profile lawsuits. In one securities fraud complaint that looked at when shareholders can sue mutual–fund mangers that had allegedly charged fees that were excessive, her office submitted a legal brief supporting investors. Kagan contended that a lower-court ruling make sure that there was enough of a check on potentially exorbitant fees. In another securities case, the Solicitor General’s office argued that Merck & Co. Inc. shareholders did not wait too long to file lawsuits accusing the pharmaceutical company of misrepresenting the safety of VIoxx. This spring, the US Supreme Court unanimously agreed with Kagan’s position in both cases.
However, The solicitor general’s office is siding with the business side in another investor lawsuit that awaiting resolution by the Supreme Court. She is contending that foreign investors shouldn’t be able to file a US securities lawsuit against National Australia Bank Ltd, which is a foreign company.
The Wall Street Journal says that by choosing Kagan as the latest Supreme Court nominee, the Obama administration is taking “a friendlier approach” when it comes to investor cases.
Related Web Resources:
Kagan Sided With Investors in Two Notable Securities Cases, The Wall Street Journal, May 10, 2010
Does Elena Kagan Support Shareholder Rights?, The Big Money, May 11, 2010
A Climb Marked by Confidence and Canniness, NY TImes, May 10, 2010
Office of the Solicitor General
May 3, 2010
Ranking Broker-Dealers According to Highest Average AUM Per Rep
Below you will find Investment News' list of the average assets under management per rep at the biggest independent broker-dealers. The information was compiled from data that came from the investment firms that took part in a yearly survey.
Ranked in the Top 10 were:
1. Wells Fargo Advisors Financial Network, with a $48,322,148 average AUM/rep
2. Commonwealth Financial Network, with a $39,208,423 average AUM/rep
3. Raymond James Financial Services Inc., with a $36,046,959 average AUM/rep
4. First Allied Securities Inc., with a $30,315,640 average AUM/rep
5. Uvest, a unit of LPL Investment Holdings Inc., with a $29,505,358 average AUM/rep
6. FSC Securities Corp., a unit of Advisor Group, with a $28,705,827 average AUM/rep
7. Ameriprise Financial Services Inc., with a $28,511,100 average AUM/rep
8. VSR Financial Services Inc., with a $28,089,888 average AUM/rep
9. M Holdings Securities Inc. (M Securities), with a $27,684,707 average AUM/rep
10. Securities America Inc., with a $27,418,520 average AUM/rep
“The average commission on money under management is about one percent (except for bond accounts which is lower), which means that brokers in the $50 million under management should generate about $500,000 in gross commissions per year (they receive 30% to 60% of this), says Shepherd Smith Edwards and Kantas Founder and Securities Fraud Lawyer William Shepherd. “Considering that one doesn’t even need a high school diploma to become a financial advisor, making an average income of $150,000 to $300,000 is not bad at all. Last time I looked, brokers at the large financial firms, on average, made a little less than doctors, but far more than lawyers. Seven years of education does not do much for professionals does it?”
Related Web Resources:
Ranking Broker-Dealers According to Highest Average AUM Per Rep, Investment News,
National Association of Independent Broker Dealers
