Monday, February 22, 2010

Continued Pursuit of New Defendants for Lehman Losses

The collapse of the financial markets that began in mid-2008 has spawned quite a bit of litigation, and at the forefront of much of that litigation is Lehman Brothers. That is not too much of a surprise, given the fact that the government refused to prevent its bankruptcy. Once Lehman went under, any security that was based on its creditworthiness also collapsed. See,  Investors Filing Claims Against Lehman BrokersLehman Note Sales Under Fire, and Lehman Principal Protected Note Arbitrations On the Rise.

Investors have been filing, and in some cases winning, cases against UBS, who sold a significant amount of principal protected notes to the investing public. Last week, investors scored another victory in Lehman related litigation - a federal court judge in New York denied, in part, a motion to dismiss a class action complaint against Lehman, its affiliates, and certain individuals who signed registration statements for the offering statements for one group of Lehman offerings.

The complaint seeks damages for alleged violations of the Securities Act of 1933 in the issuance, distribution and sale of over ninety separate offerings of mortgage pass-through certificates by affiliates and subsidiaries of Lehman Brothers Holdings, Inc. (collectively, "Lehman") between September 2005 and July 2007. The Certificates are a form of mortgage-backed security ("MBS").

The complaint alleges, in part, that the registration statements for the securities failed to disclose certain material facts, and were therefore misleading. The complaint seeks damages from the individual defendants for these alleged misstatements and omissions under Section 11 and 15 of the Securities Act of 1933, on the theory that they signed the registration statements and on the theory that they controlled Lehman Brothers, Inc., the depositor in the securitization process, and the trusts that issued the Certificates.

The defendants include include certain officers and directors who participated in the registration and sale of these securities. They moved to dismiss the complaint as against them.

Legally, in order to win a claim under Section 11 of the Securities Act of 1933, the plaintiff must allege that (1) it purchased a registered security, (2) the defendant adequately participated in the offering in a manner giving rise to liability under Section 11, and (3) the registration statement "contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading." Section 15 creates liability for individuals or entities that "control[led] any person liable" under Section 11.

The court dismissed the claims in 88 of the subject offerings, since the plaintiffs did not purchase securities in those offerings, and therefore lacked standing to bring those claims. However, the court denied the motion to dismiss as to the remaining 6 offerings, leaving the individual defendants to defend themselves in the class action. We can also reasonably assume that another case will be brought, with investors in the other 88 offerings as plaintiffs.

Investors continue to seek out new defendants in order to recoup their losses in investments that were tied to Lehman, and we can expect to see more of the same in the future.


Technorati Tags: , ,

Friday, February 19, 2010

Finra Cracks Down On Arbitrator Credentials

According to Financial Advisor Magazine, FINRA is plugging a loophole that has allowed many of its 6,200 arbitrators to serve on its panels without first checking their credentials. According to the article, FINRA began background verification of arbitrators in October 2003. However, the bona fides of those who had joined its ranks before then were not checked—until now. More>>>

Wednesday, February 17, 2010

Brokers Being Trashed Again By FINRA

We all know that FINRA, along with the SEC, has been taking a beating over the past year for its failures to uncover significant frauds that have costs investors millions of dollars. There is no need to re-hash all of that, but now FINRA is attempting to do something to fix its image.

And that something is to expand BrokerCheck. Not increased survelliance of brokerage firms, not better education of examiners, not more training for the examination teams - they are going to expand the disclosures on BrokerCheck to further defame and discredit individual brokers.

There has been a discussion over recent months to keep brokers information on BrokerCheck for more than two years after a broker leaves the industry. There are a number of good arguments on both sides of that debate, but FINRA is going ahead with a proposal to keep those records online for an undisclosed period of time after the broker is no longer under its jurisdiction.

At the same time FINRA also announced that it wants to expand the civil and criminal complaint histories of its BrokerCheck service, which would give the general public more information on brokers. Sure, more information is always good, right?

Wrong. FINRA is proposing to include information that is not reportable on Form U-4 and is going to do so on the Internet. Certain reporting items, such as customer complaint letters that are filed, but never pursued, are not reportable on Form U-4 after two years have passed. The rationale for non-disclosure is clear and simple - a customer filed a complaint, he never filed an arbitration or a lawsuit, and the firm and broker never paid him any money. There is no reason to continue to report that complaint, since there is no finding of wrongful conduct, and an implication that the complaint was not a meaningful complaint, since the customer never pursued it.

Having taken that position for decades, and while continuing to maintain that position, FINRA is now proposing to disclose these non-meaningful, unsworn and unproved complaints on BrokerCheck! A customer sends a complaint letter, accusing his broker of all sorts of wrongful conduct, never pursues the complaint, never files an arbitration, and FINRA wants to make that complaint public. Sure, that will ehance the public's respect for FINRA, at the expense of the tens of thousands of brokers who have such an item in their history.

FINRA also takes the position that an arbitration claim that is settled for less than $15,000 is not reportable, for similar reasons. Suddenly, while maintaining that these decisions are not meaningful or significant, they are proposing to put them on BrokerCheck as well.

The disclosures that brokers must make are intrusive, and unnecessary to the regulatory purposes. The argument has always been that the information about arrests that are dismissed, complaints that are never proven, are all part of the mix of information that is necessary to properly regulate the industry. Fair enough, and since the information was not going to be publicly disclosed, there was not too much of a debate about the disclosures.

Now FINRA is changing course, and going to make that information public, as if that information would have stopped the 50 billion dollar fraud that FINRA's examiners missed year after year.

Why is it that FINRA attempts to address its own regulatory failings by trashing brokers. Why not clamp down on misconduct at the firm themselves?

Could it be that brokers are easy targets, with no trade organization, and have no meaningful voice in the process that affects them so profoundly?


Monday, February 8, 2010

Advisers Sue State Securities Regulator

Years ago I wrote a column for Research Magazine titled Fight Back, an analysis of a litigation strategy for advisers when faced with frivolous customer complaints. The article created something of a stir among securities lawyers, which was a good thing. Sometimes regulated professionals are too timid to stand up for their rights.

Two former financial advisers have taken this a step further, and have sued the Utah Securities Commission for conducting what the advisers claim was an over-zealous campaign against them.

According to press reports, the two advisers, who were who were barred from the securities industry, have sued Utah for $357.6 million, accusing state regulators of targeting them without proof of wrongdoing.

The advisers allege that the Securities Division heaped dozens of allegations on each of them without giving them a chance to appear before a judge in a timely manner. They claim that they were put out of business and forced to declare bankruptcy as a result of the agency's actions. The press reports contain some serious allegations, including alleging that the Division bribed clients, downloaded the entire contents of one adviser's office computers without permission or a warrant and issued a press release announcing the action that contained false information.

I reviewed the complaint as filed in Court, which is available here. While the complaint itself is not the model of clarity, it does make some very serious allegations against the Division.  The complaint is a bit rambling, and some of its allegations may be the result of misunderstanding of securities regulation, but the allegations are disturbing.

This case may have legs. In 2008 the Utah state Senate conducted an audit of the Division as a result of a number of adviser complaints against the Division. The Audit report states that the examination was conducted because " [t]he credibility of the Division of Securities (division) within the Department of Commerce has been challenged by those investigated by the division. Their primary concerns are with procedural errors, an alleged overzealous pursuit of securities violations, and the perception that those investigated do not receive fair treatment." The report is available here.

The 47 page report is an eye-opener, and a look inside a securities regulatory agency with serious problems. For example, the report critized the Division's practice of having the Director of the Divison taking an active role in the investigation and case management of his office, and then serving as the hearing officer for the resulting hearing. (No one knew this was a problem?). In one case, he did not recuse himself as the hearing officer, even though he had been the person who drafted the complaint.

The report also details significant issues with the enforcement process, which the former director admitted existed, but claimed that the problems were caused by one overzealous employee. The audit committee found that the procedural problems were more widespread. According to the report, "[o]ur review of case files resulted in a number of questionable actions including: inappropriate publicity, emphasis on punishment rather than compliance, the use of intimidation tactics, violating terms of settlement agreements, failure to notify those being investigated, and inconsistent case management."

The division has publicized administrative actions without giving the individuals being investigated an opportunity to defend themselves. The former director began issuing multiple press releases for developing cases and publishing a quarterly newsletter shortly after he was hired.

During the audit, and before the release of the report, the head of the Utah Securities Division resigned. Press reports at the time reported that he was resigning following allegations of mismanagement and misuse of authority. The original investigation into the Division arose from allegations made by employees of another brokerage firm.

The Division was also sued by the Securities Industry Association in a claim that the Division overstepped its authority. The SIA obtained a preliminary injunction, on consent, preventing the Division from enforcing the new regulation.

I have dealt with overly aggressive regulators before, but that means regulators who want to permanently bar individuals for innocent mistakes or oversights. An aggressive regulator can be a problem; an over-zealous one can be a nightmare


Wells Fargo To Add 1,400 Advisors

Stories about Merrill adding trainees surfaced last week, now we learn that Wells Fargo Advisors is looking to add 1,400 financial advisors. A published report said that the advisors will be a combination of 1,000 recruits from other firms and 400 trainees. More>>>

Technorati Tags: ,

Sunday, February 7, 2010

Raiding Case Costs Raymond James $12 Million

In a case involving 20 advisers in 4 branch offices, a securities arbitration panel has ordered Raymond James Associates Inc. to pay $12.1 million to Wells Fargo Advisors LLC for alleged raiding.

The award does not provide any detail of the case, but ordered 10,500,000 in compensatory damages, 1,500,000 in attorneys fees and costs. A copy of the award is available here.

The offices were, at the time, Wachovia offices, and according to published reports, Wachovia Securities allegedly lost $5.3 million in production from the departures of these advisors.  FA Magazine has more>>>

Friday, February 5, 2010

Bad Advice -Ignore FINRA Social Media Guidance

Securities regulation is a big deal for those in the industry. The mix of rules, regulations and regulators is a dangerous web of potential violations, fines and suspensions. But those who are in the industry know that the regulators are serious, that they are looking for violations, and will bring actions for those violations.

Maybe it is a sign of the Madoff times, but I can't help but shutter when I read comments from supposedly educated and experienced people who comment on rules and regulations. We all know that FINRA has released its social media guidelines. And we know that like most topics, there can be more than one opinion on the impact of new pronouncements.

Some think that the guidelines are too vague, and therefore meaningless. The vagueness that they are referring to is a desire to meet two goals - first to insure that new rules and regulations address a wide range of situations, and second, to allow firms to create their own supervisory system to meet the challenges of their particular mix of issues. For the inexperienced, bright line tests are better because they are easier. The experienced prefer principle-based regulation - tell me what you want to accomplish, and I will figure out the best way for me and my firm to get there.

But that claim of vagueness has led to another unfortunate, and potentially dangerous conclusion. From a legal blog today, talking about FINRA's social media guidelines:

Investing blogs seem to be eyeing the rules with a wary eye, but the consensus seems to be something a long the lines of "it's impossible for them to enforce this, and they're probably not going to be too aggressive anyway."

I hope that any financial professional who is guided by that statement has my business card on his desk. He is going to need it shortly.

FINRA is taking this seriously, and is already requesting documents regarding the use of Facebook, LinkedIn and Twitter. It is not impossible for them to monitor the use of social media, they will do so, and will seek sanctions for misuse.

Thursday, February 4, 2010

Investors Filing Claims Against Lehman Brokers

Investors are starting to file arbitration claims against their Lehman brokers, in an attempt to collect their losses on investments in Lehman principal protected notes. I warned of this eventuality some time ago, as customers who lost money in the notes are going to look to recover those losses. Obviously suing Lehman is not going to accomplish anything, but some customers and their attorneys believe that suing the broker just might.

Lehman brokers have been through quite a bit. These professionals relied management's statements that "all is well" with the company, and were blindsided by the failure of Lehman.  The demise of Lehman was devastating for many, for not only did they lose their jobs, they lost their investments, their deferred compensation and for many, their retirement funds, which were invested in Lehman stock.

Now the other shoe is dropping. Many Lehman brokers recommended the principal protected notes to their customers, relying on the information provided to them by Lehman itself. With the corporation gone, these brokers are being forced to defend themselves from claims for those losses - in effect paying twice for the failure of their employer.

Those claims are going to be difficult for the customers to win, but the brokers still have to defend themselves from the claims. Should a customer prevail in an arbitration and obtain an award, that award has to be paid in 30 days, or the broker's securities license will be suspended. And an arbitration award can be confirmed in a court, at which time it becomes a judgment, enforceable like any other judgment.

The solution? Unfortunately there is no good solution. If customers are going to blame their broker for the demise of Lehman, the brokers must defend themselves. Using an experienced securities arbitration defense attorney is the first step, and hiring one who is familiar with Lehman principal protected notes is another. These cases will be difficult for the customer to win, but the experience of the attorney will not only provide a better chance for success, it might even result in reduced defense costs, as there is no learning curve.
Mark Astarita, Esq. is a securities attorney who represents brokers and firms in every aspect of their litigation, compliance and regulatory matters. He can be contacted at 212-509-6544 or by email at

Merrill Hiring Rookies

In order to combat the mass of brokers who left ML since the BofA takover, Bank of America plans to rebuild its brokerage force in 2010 by adding rookie advisors rather than competing for talent in the industry’s expensive recruiting war according to a story in Registered Rep and Financial Times. Maybe Merrill is rethinking its "strategy" of firing brokers for trumped up reasons and forcing others to leave?

Tuesday, February 2, 2010

FINRA Fines Firm $300,000 For Failing to Verify Account Identity

For those readers who think that the requirement to verify the identity of account holders is not a big deal, think again. FINRA has fined Pinnacle Capital Markets $300,000 for failing to do exactly that.

The FINRA press release does not have any comments from the firm, but I suspect that because the accounts were sub-accounts, the firm may have believed that verification was not necessary. I am guessing of course, but the point is $300,000 is a pretty hefty fine for not obtaining proper account documentation. More>>>

Brokers, Advisers, LinkedIn and Twitter

I was a panelist in January for a webinar on Investment Advisers and LinkedIn. We were all set to go, my slides were all prepared and submitted, and the day before the webinar FINRA released Regulatory Notice 10-06 – Guidance on Blogs and Social Networking Web Sites.

The timing of the release caused me to scramble a bit to re-work my presentation for the webinar, but it all worked out. It was a great webinar, as the other three panelists were experts on marketing and business practices for financial advisers, with significant experience using social media for marketing. A replay is available at

As to the release itself, there was nothing very surprising, but the guidance from FINRA was very helpful. The most significant part of the release was the discussion of Twitter, and its use by financial professionals.

A basic premise that underlies all of this is that the use of the Internet, in whatever form, is advertising, or a communication with the public, by FINRA and for investment advisers, the SEC as well as the state regulators. FINRA has specific rules regarding advertising and public communications. However, the rules are somewhat convoluted, and sometimes it is not intuitive when you attempt to apply those rules to new technologies.

One basic tenant of advertising rules that is true across the board – advertising and public appearances must be supervised, archived, and stored. And therein lies the challenge for Twitter and other real-time communications.

FINRA had two choices with Twitter – either treat it as a discussion in a chat room, or treat it as a web site. It’s like a chat room, in that it is real-time, but it is also permanent and lasting, like a web site. The difference is significant, since a web site requires pre-approval by the firm, and a filing with FINRA. A chat room discussion does not require pre-approval or filing. Both require archiving and storage.

For brokers and compliance departments, the distinction is not important; the question is how do you want me to treat these communications? Without guidance, most firms will do what was done with email – they will ban it.

Fortunately, FINRA’s approach to real-time social media, which includes Twitter, Facebook status updates and LinkedIn network updates, is reasonable, and workable. FINRA was faced with two choices, but adopted a third choice – treat tweets and similar posts like email.

Tweets and updates are not like emails from a regulatory perspective, since FINRA has always treated one-on-one emails and one-to-many emails differently, but kudos to FINRA for taking a reasoned and practical approach. The release states that firms may adopt supervisory procedures similar to those outlined for electronic correspondence (email) as set forth in Regulatory Notice 07-59. That notice provides that firms may employ risk-based principles to determine the extent to which the review of incoming, outgoing and internal electronic communications is necessary for the proper supervision of their business.

Allowing firms to treat tweets like email, and permitting firms to decide the best practice for their own business model, is a significant step. Some firms will continue to ban tweets, but others will use software similar to that used to monitor email, and allow their brokers to use Twitter.

This will require firms to adopt written supervisory procedures and train and approve brokers who are going to use social media, and the modification of the software that is used to monitor emails, but that is reasonable, once the software vendors upgrade their systems.

Writing the procedures and providing the training in the newest electronic communications methods may not be a simple task for some firms. However, Twitter has proven itself to be an excellent communications and marketing platform, one that innovative firms, and their brokers, will benefit from.

My next post will deal with LinkedIn and financial professionals. One heads up – think about recommendations and third party links!
Mark Astarita, Esq. is a securities attorney who represents financial professionals nationwide on all aspects of their business and compliance needs. He has been online for over 20 years. Follow him on twitter at

Obama's Hedge Fund Tax

I am certainly no tax maven, but do represent hedge fund managers. According to Bloomberg News "[t]he budget proposes to require general partners at private-equity firms and other investment partnerships such as venture-capital firms and hedge funds to pay ordinary income-tax rates on their compensatory share of profits called “carried interest,” which currently qualifies for the 15 percent capital-gains treatment. That proposal, which would exempt real- estate partnerships, would raise $24 billion.

President Obama's Budget Contains $1.9 Trillion in Tax Increases

From the Tax Professor Blog:

Follow the link for a roundup of press and blog coverage of the tax increases:

* Associated Press, Obama Budget Would Impose Host of Tax Increases
* ataxingmatter, Obama's FY 2011 Budget
* Bloomberg, Obama Budget Drops Plan for $87 Billion Tax Rise on Companies
* Bloomberg, Obama Seeks $1.9 Trillion Tax Rise on Rich, Business
* Dow Jones, Obama Budget Includes $400 Billion In Business Tax Hikes
* Reuters, Obama Tones Down International Corporate Tax Aims
* TaxVox, Obama’s Mind-numbing Budget
* Wall Street Journal, Budget Would Raise Tax Rates on Wealthy, Limit Deductions
* Wall Street Journal, Plan Would Raise Taxes on Businesses More>>>