Tuesday, July 19, 2016

84 Year Old Takes on Edward Jones for Unauthorized Trading

An elderly St. Louis man has filed a FINRA arbitration claim against Edward Jones and one of its financial advisers. The elderly client alleges that the financial adviser over-rode his objections to liquidating over a thousand shares of Cigna. Those shares were held in the client’s 401(k) before rolling over to an Edward Jones IRA. The financial adviser informed the client that Edward Jones would not permit him to retain such a high concentration of one share in the IRA once the rollover was completed. According to the client, he didn’t give a damn because he had dedicated his life to his employer, which ultimately became Cigna.

As bad luck would have it, the elderly gentleman had a good thing going with his Cigna shares. But the young FA liquidated almost all of them, using the proceeds to purchase favored mediocre-performing mutual funds. The commissions must have been smashing but the retirement account missed out on approximately $900,000 in appreciation in the Cigna shares.

According to the Statement of Claim, which contains allegations that still must be proven, the FA’s murky self-serving account notes do not jive with what the FA admitted to the elderly gentleman’s wife and daughter. Notably, there isn’t a single piece of paper signed or initialed by the client which evidences his consent to the liquidation of his beloved shares. Wouldn’t you think that is something a broker-dealer would want to obtain as a matter of course? Who knows - maybe you can use discretion in a non-discretionary account, as long as you stick a trade confirmation in the mail. But what if you are a broker-dealer that is willing to change trade confirmations after the fact? Food for thought. And once again folks – these are mere allegations until proven to the satisfaction of a Panel.

For more information regarding unauthorized trading, see Douglas Schulz's article "Unauthorized Trading, Time and Price Discretion & the Mismarking of Order Tickets:" http://www.jurispro.com/files/documents/doc-1066206599-article-2051.pdf

Friday, July 8, 2016

Broker-Dealers Using Compliance as a WMD

There seems to be a new trend in town: broker-dealers unleashing compliance or “reputation managers” upon rich-target independent branch operators.  Perhaps it isn’t really that new of a trend.  Indeed, after handling several such matters over the years, I am able to at least describe the modus operandi for these “internal raids”.

First, the broker-dealer’s “business side” identifies a branch with a substantial AUM.  As it stands, the broker-dealer is sharing in a small fraction of the revenue the branch is generating.  Coupled with an external factor, such as a desire to satiate regulators or even a mere personality conflict, executives at the highest level of the organization decide to raid the branch.  But they do it under the pretense of a newly born compliance concern, and they respond to old concerns with an utterly disproportionate sanction – termination without notice.  No Letter of Caution or fine, of course, as this would merely give the target rich financial adviser the opportunity to escape the WMD.

Upon termination the broker-dealer is oddly well prepared to immediately file a devastating U-5, send a highly prejudicial warning/solicitation letter to the adviser’s clients, and/or offer immediate home-office supervision or new OSJ opportunities to all of the branch’s financial advisers.  The impact upon the financial adviser is massive, as he is unable to become registered with a new broker-dealer until a na├»ve state regulator slowly plods through its investigation of the opportunistic and frequently defamatory U-5 disclosure.  The raiding broker-dealer will be slow but “cooperative” in responding to the regulator’s requests for documents.  In terms of private legal counsel, the financial adviser’s source of revenue will dry up at the very moment he or she needs to retain an army of lawyers.  The non-terminated financial advisers will cherry-pick their old boss’ clients.  (They will be ripe for the picking after the nasty letter they received about their now-terminated broker.)  By the time the adviser is registered with a new broker-dealer, his or her book is all but gone.

I have previously written a blog about the causes of action available to a financial adviser who has been raided in such a fashion.  But until FINRA panels start fully compensating the victims of these internal raiding schemes and awarding substantial punitive damage awards – the bombings will continue.  Moreover, state regulators need to issue provisional registration states to such financial advisors while they conduct their investigation.  Food for thought. 

See alsohttp://securitiesandinvestmentblog.blogspot.com/2015/12/how-to-terminate-discredit-and.html

Wednesday, June 22, 2016

Ignore At Your Own Peril: “Training Fees” Provisions in Financial Industry Employment Contracts

It has long been the practice of many broker-dealers, wire houses, and other financial firms to put provisions in employee contracts allowing them to recover so-called “training fees” after a broker or financial advisor (“FA”) leaves.  Precisely how these firms decide the value of the training they provide remains a mystery, but they tend to reach nice round numbers, like $25,000, $65,000, or $75,000.  Over the years, these provisions have given enough heartburn to brokers and FAs to keep Pepto Bismol, Tums, and whoever else you can think of, in business in perpetuity.  Most of the time, training fees provisions apply during the earlier stages of a broker or FA’s career.  In other words: the time when they cannot afford to repay them.  Accordingly, the enforceability of such provisions has been subject to much speculation, and, unfortunately, some wishful-thinking.

Some believe that financial firms will never follow up on their demands for payments.  Some think that a simple counterclaim will be enough to scare a former employer away.  Some find the idea of paying back training fees so patently unfair that they refuse to entertain the notion at all.

Whatever one may think about the fairness of “training fees” provisions, the fact remains that the decision of whether to take legal action to enforce them lies with the employer.  Further, although perhaps not in every case, financial firms are doing it, and winning. 
           
Take, for example, Wells Fargo, which, in 2012, obtained an Award against one of its former employees for $25,000 in training fees.  See Wells Fargo Advisors, LLC v. Shawn Orin Higley, FINRA Case No. 11-03197.  To add insult to injury, the broker was ordered also to cover Wells’ filing fee.  Id.  The very next year, Wells got another Award, this one worth $37,000, against another former employee.  See Wells Fargo Advisors, LLC v. Austin Jambor, FINRA Case No. 13-02681. 

In 2014, Merrill Lynch obtained an award of $20,000 in training costs.  See Merrill Lynch Pierce Fenner & Smith Incorporated v. Jason B. Morgan, FINRA Case No. 13-01809.
Showing a long-term commitment to these types of actions, in 1997 Merrill received an award of $19,000 in training costs, plus an additional $18,908 in attorneys’ fees, and $2,912 in costs against a former broker.[1]  See David A. Grasch v. Merrill Lynch Pierce Fenner & Smith Inc., NASD Case No. 97-01469. 

In 2007, Edward Jones pursued arbitration and won an award against a former employee over only $9,375.00 in training fees.[2]  See Edward Jones & Co., L.P. v. James A. Valis, NASD Case No. 06-02903.  It did the same thing the next year.  See Edward D. Jones & Co., L.P. v. Giovani Difiore, FINRA Case No. 07-02532.

We could go on listing such cases for quite a while.  The point, however, is that “training fee” agreements cannot be taken lightly.  But, it’s not all “doom and gloom.”  Financial firms do not always win these cases, and certainly do not always recover the full amount they ask for.  See RBC Capital Markets, LLC, FINRA Arbitration 12-02576.  (Employer’s claim for training costs, among others, was denied.)  See also Wells Fargo Advisors, LLC vs. Aaron Hansz, FINRA Case No. 10-04938.  (Wells recovered only $22,000, including attorneys’ fees, of the $75,000 in training costs and $21,221.25 in attorneys’ fees it sought.)  Among other available defenses, the training fees provisions in these contracts often look more like penalties (which are generally unenforceable) than liquidated damages provisions (which are permissible).  Some of them also may be subject to arguments that they are unenforceable by reason of being unconscionable.  Nonetheless, the balance of the cases referenced above shows that financial firms are winning enough of these claims to warrant taking them very seriously. 

If you receive a demand from a former employer for the training costs that you promised to repay in your employment contract, ignoring it could have dire consequences.[3]  Your best bet is to contact competent legal counsel that is knowledgeable in this area, and has experience in front of FINRA.  In many cases, financial firms may be willing to settle their claims for a fraction of the fee listed in the contract.  As time goes on, however, and their attorneys generate fees through repeated attempts to collect, these firms often become less open to the idea.  Obviously, if settlement isn’t on the horizon, and you’re ready to go to the mat to defend yourself, you’ll need attorneys with arbitration experience.

By retaining counsel to resolve your matter early, you may be able to save yourself substantial time, money, and heartburn.  If an early resolution isn’t possible, you still want to make sure that you’ve got the right team protecting you.  Put down the Pepto and pick up the phone.  Your gut will thank you.




[1] In the interest of fairness, however, it should be noted that Merrill’s award came from counterclaims it filed in response to an arbitration initiated by its former broker.
[2] Jones was, however, also awarded partial payment of arbitration costs.
[3] Having an unsatisfied Award outstanding can have licensing implications.  If the Award is converted into a judgment, you now have an event that must be reported on your U-4, and will be available for potential clients to see on brokercheck.org.

Monday, May 23, 2016

DOL Fiduciary Rule P II: The SEC Story


While the previous post discussed the Department of Labor’s (DOL) fiduciary rule, it is not the only government agency tackling the issue. In 2010, President Obama signed into law the Dodd-Frank Act, which authorized the Securities and Exchange Commission (SEC) to create its own uniform standard of care for financial advisors. To aid in this endeavor, it also authorized the creation of an Investor Advisory Committee (IAC) whose purpose was to submit recommendations to the SEC regarding, amongst other things, the regulation of securities products and the protection of investor interests.[i] In November 2013, the IAC issued a report endorsing, “that advisory services offered as a part of a transaction-based securities business can and should be conducted in a way that is consistent with a fiduciary standard of conduct.”[ii]

SEC Chairwoman Mary Jo White supports tighter regulations for those making funding recommendation to investors. At an industry conference, Ms. White stated that it was her “’personal view’” that brokers and those for whom the Commission provides oversight should be required to put “clients’ interests ahead of personal gain.”[iii]  Arthur Levitt, SEC chairman from 1993 to 2001, believes the SEC should have addressed the issue long before now, given the complexity of the products being presented to investors by brokers. “’I do not accept the notion that a broker is an order taker. If he’s a good broker, he’s much more than that.”[iv] Industry leaders, including Kenneth Bentsen, president and chief executive of the Securities Industry and Financial Markets Association, have expressed support in the SEC taking the lead in this matter. “’They’ve got the technical expertise.’”[v]

In testimony before the House Subcommittee on Financial Services and General Government Committee on Appropriations, Chairwoman White would not offer a timeframe for the completion, but made it clear that the SEC would be issuing its own fiduciary standards. Though the purposed rules may be similar, she stated that the SEC’s would differ from that of the DOL’s, even though the SEC did provide “’substantial technical assistance’” in crafting the DOL version.[vi]

Mark Trupo, DOL spokesman, claims there was close coordination between the two departments and that, “engagement with the SEC was comprehensive, and that the SEC’s input was incorporated into the plan.”[vii] The SEC refused to comment. Others, however, were more vocal in their questioning in the validity of the statement.

In his report, The Labor Department’s Fiduciary Rule: How a Flawed Process Could Hurt Retirement Savers, Sen. Ron Johnson, chairman of the Senate Homeland Security and Governmental Affairs Committee, claimed the DOL rule failed to address 26 significant concerns posited by the SEC. These included issues regarding the best interest contract exemption, “’conflicts with federal securities laws and [Financial Industry Regulatory Authority] rules, and a lack of cost-benefit analysis of alternatives.’”[viii]

So why hasn’t the SEC issued its own rule yet? It may have to do with administrative structure. While the DOL operates under a single administrator, the SEC has a five-person commission, complicating the approval process. Some believe the make-up of this commission would lead to a 3-2 vote on any fiduciary rule, given the current SEC commissioner and incoming commissioner, both republicans, are likely to vote against such a measure.[ix]

Only time will tell when the SEC releases its own fiduciary rule and how greatly it will differ from that of the DOL. Until then, one can only expect continued speculation and debate, a debate that many believe is long overdue.



[i] U.S. Securities and Exchange Commission (2012). “Investment Advisory Committee” [Electronic format]. Retrieved from: http://www.sec.gov/spotlight/investor-advisory-committee-2012.shtml

[ii] U.S. Securities and Exchange Commission (2013).  “Recommendation of the Investor Advisory Committee Broker-Dealer Fiduciary Duty” [Electronic format]. Retrieved from: http://www.sec.gov/spotlight/investor-advisory-committee-2012/fiduciary-duty-recommendation-2013.pdf

[iii] Baer, J. & Ackerman A. (2015, March 17) SEC Head Backs Fiduciary Standards for Brokers, Advisors [Electronic format]. Retrieved from: http://www.wsj.com/articles/sec-head-seeks-uniformity-in-fiduciary-duties-among-brokers-advisers-1426607955?mg=id-wsj

[iv] Ibid.

[v] Ibid

[vi] SEC, DOL Fiduciary Rules Will Likely Be Different, White Says (2016, March 22). [Electronic format] Retrieved from: http://www.thinkadvisor.com/2016/03/22/sec-dol-fiduciary-rules-will-likely-be-different-w

[vii] Barlyn, S & Lynch, S (2016, February 24) U.S. Labor Dept., SEC Clash Over Retirement Advice Rule: Report [Electronic format]. Retrieved from: http://www.reuters.com/article/us-usa-brokers-fiduciary-idUSKCN0VX0XZ

[viii] Senator Blasts DOL for Ignoring SEC’s Fiduciary Rule Concerns (2016, February 24). [Electronic format]. Retrieved from: http://www.thinkadvisor.com/2016/02/24/senator-blasts-dol-for-ignoring-secs-fiduciary-rul

[ix] Why SEC Fiduciary Rule May Be ‘Unattainable’ (2016, March 10). [Electronic format]. Retrieved from: http://www.thinkadvisor.com/2016/03/10/why-sec-fiduciary-rule-may-be-unattainable?ref=related-embedded

Monday, April 18, 2016

“Lumpiness” insufficient When the Ship is Going Down

Class action investors recently won a partial victory against Dolan Company in the 8th Circuit Court of Appeals.  I stress partial because, while the trial court’s dismissal was reversed, its severe limitation of the loss–causation period was sustained.

The plaintiffs alleged that Dolan Company made misleading public statements about the financial condition of one of its litigation-support subsidiaries.  Dolan allegedly knew as early as June of 2013 that the subsidiary, DiscoverReady, was on the brink of losing its primary customer, Bank of America.   Despite this knowledge, Dolan subsequently praised the subsidiary’s prior and anticipated revenue growth, only later merely cautioning that future revenues “may experience lumpiness on a quarter-to-quarter basis.”  Dolan made this statement on August 1, 2013 and apparently fell silent until November 12, 2013.  On that date it issued a press release and filed its Form 10-Q, revealing that its unexpected revenue decline was “largely due to a reduction in work from [DiscoverReady’s] largest customer.”  Dolan’s share price fell all the way to $.90 a share over the next 48 hours.  It filed a Chapter 11 bankruptcy about 6 weeks later.

Section 10(b) of the Securities Exchange Act makes it unlawful to use or employ, in connection with the purchase or sale of any security, any manipulate or deceptive device.  The implementation rule, 10(b)5, clarifies that it is unlawful to make any untrue statement of a material fact or to omit to state a material fact.  Both the statute and the rule require a showing of “scienter.”  Pursuant to the Private Securities Litigation Reform Act, scienter can be established by a deceitful or manipulative state of mind, severe recklessness, or motive and opportunity.  But without a showing of motive and opportunity, other scienter allegations need to be strong.  And since the Dolan executives did not sell their shares before they “came clean” in November, the District Court concluded that the class complaint lacked sufficient allegations of scienter.  The Court of Appeals disagreed.

On appeal the plaintiffs argued that they had “adequately pled scenter by alleging that Dolan had been ‘severely reckless.’”  Citing In re K-tel Intern, the Court of Appeals agreed, explaining in part that:
Without a showing of motive or opportunity, other allegations tending to show scienter would have to be particularly strong in order to meet the scienter standard for a securities    fraud claim.  “Severe recklessness,” for purposes of scienter requirement of a securities fraud claim, is defines as highly unreasonable omissions or misrepresentations involving an  extreme departure from the standards of ordinary care, and presenting the danger of misleading buyers or sellers which I either known to the defendant or is so obvious that the  defendant must have been aware of it.

The plaintiffs may have won that battle but then lost at least half the war, as the Court of Appeals sustained the district court’s dismissal of any claims running between November 12, 2013 and January 2, 2014.  Like the district court, it concluded that there was no “loss-causation” between those dates because the January 2, disclosures failed to correct what was said on November 12, 2013.  As such, the drop in stock prices after the November 12 disclosure could not be attributable to the earlier misrepresentations.  As such, only those individuals who purchased shares between August 1 and November 11 had actionable damages.  In other words, the drop in Dolan Company shares after the “record was corrected” on November 11 was likely caused by factors other than a revelation about the misleading nature of statements made in June.  Perhaps the Court of Appeals explained it better than I am able:
A drop in stock price is not necessarily caused by an earlier misrepresentation.  Lower stock prices “may reflect, not the earlier misrepresentation, but changed economic  circumstances, changed investor expectations, new industry-specific of firm-specific facts, conditions, or other events, which taken separately or together account for some or all of  that lower price.”  Dura Pharm., 544 U.S. at 343, 125 S.Ct. 1627.  Rand-Heart must show that Dolan’s fraud – “and not other events” – caused the price to fall after the January 2 press  release.  See Schaaf v. Residential Funding Corp., 517 F.3d 544, 550 (8th Cir.2008).

Nothing in the January 2 press release corrects previous misrepresentations.  “Corrective disclosures must present facts to the market that are new, that is, publicly revealed for the first time, because if investors already know the truth, false statements won’t affect the price.”  Katyle v. Penn Nat. Gaming, Inc., 637 F3d. 462, 473 (4th Cir.2011) (internal quotations omitted).  Announcing the appointment of a restructuring officer on Januar 2, does not correct a misrepresentation; it elaborates on the previously disclosed plan to restructure.  “In the financial markets, not every bit of bad new that has a negative effect on the price of a security necessarily has a corrective effect for purposes of loss causation.”  Meyer v. Greene, 710 F3d. 1189, 1202 (11th Cir.2013).  See also In re Williams Sec. Litig.-WCG Subclass, 558 F3d. 1120, 1140 (10th Cir.2009) (“To be corrective, the disclosure need not precisely mirror the earlier misrepresentation, but it must at least relate back to the misrepresentation and not to some other negative information about the company.”).

If you want to read the case for yourself, click here.  It is a fairly good primer on fraud in the market class action securities litigation.

Friday, April 15, 2016

DOL Fiduciary Rule: Part I

After much nail-biting by many in the industry, the Department of Labor (DOL) recently released its anticipated and long-awaited final fiduciary rule, which it touts as the fulfillment of its mission to protect the retirement of investors through education and empowerment.[i] In this first installment of a multi-part series, we take a quick look at the rule responsible for making waves in the American financial sector.

The rule is the culmination of a multi-year project to modernize the Employee Retirement Income Security Act (ERISA) of 1974, in response to the growth of unregulated market products. The consequence of this growth has been an array of investment professionals who could advise in the direction of their own personal gain over the best interests of their clients, so long as the recommendation was “suitable;” unacceptable behavior for fiduciaries.[ii]

The DOL rule expands the scope of those who qualify as “fiduciaries,” such as those related to individual retirement accounts or IRAs. “Any advisor who makes investment recommendations …in exchange for compensation will be considered a fiduciary (and)…are legally required to recommend investments that are in their client’s best interest, not their own.”[iii]  According to the White House, the conflicts of interest that exist when the client’s needs do not take precedent cost American families an estimated $17 billion a year.[iv]In the same manner, another goal of the rule was to curb billions of dollars currently being lost by investors in fees paid when transferring money out of 401ks and into IRAs.[v]

Some don’t consider this the fail-safe that the government is touting it to be. Situations in which conflicts are present, such as with mutual fund families and broker-dealers, will still continue to operate, only with the additional “Best Interest Contract Exemption” (BICE) disclosure.[vi]  As one author surmised, “Just picture the speed with which you click ‘Agree’ everytime (sic) iTunes does a software update, and you can imagine how little of an impediment this sort of thing represents.”[vii] 

The former head of the DOL’s Employee Benefits Security Administration, Brad Campbell, considers BICE to represent the most significant issue in the rule. “’There are frivolous litigation risks and liability risks in the BICE that still remain, and that are going to increase costs for small businesses where advisors are willing to use the BICE exemption at all.’”[viii]  There are others who have expressed concerns regarding the DOL rule, including the Securities and Exchange Commission, the insurance and securities industries, as well as politicians, which shall be discussed in future postings.

Still, many in the government feel the rule is a victory. Department of Labor Secretary Tom Perez expressed that putting the client first is, “now the law,”[ix] while Senator Elizabeth Warren (D., Mass) proclaimed the rule a day in which the government was working, “for the people.” [x]  This is assuming, of course, the next administration doesn’t kill it altogether before the final 2018 implementation deadline.



[i] United States Department of Labor. (2016, April 13) Department of Labor Finalizes Rule to Address Conflicts of Interest in Retirement Advice, Saving Middle-Class Families Billions of Dollars Every Year [Electronic format]. Retrieved from http://www.dol.gov/ebsa/newsroom/fs-conflict-of-interest.html
[ii] Ibid.
[iii] Brandon, E. (2016, April 8) The New Retirement Account Fiduciary Standard [Electronic format]. Retrieved from http://money.usnews.com/money/blogs/planning-to-retire/articles/2016-04-08/the-new-retirement-account-fiduciary-standard
[iv] The White House. (2016, April 13) Fact Sheet: Middle Class Economics: Strengthening Retirement Security by Cracking Down on Conflicts of Interest in Retirement Savings [Electronic format]. Retrieved from http://www.whitehouse.gov/the-press-office/2016/04/06/fact-sheet-middle-class-economics-strengthening-retirement-security
[v] Hayashi Y. & Prior A. (2016, April 6) U.S. Unveils Retirement-Savings Revamp, but With a Few Concessions to Industry [Electronic format]. Retrieved from http://www.wsj.com/articles/u-s-unveils-retirement-savings-revamp-but-with-a-few-concessions-to-industry-1459936802
[vi] Brown, J. (2016, April 6) Wall Street Dodged a Bullet on the Retirement Fiduciary Rule [Electronic format]. Retrieved from http://www.fortune.com/2016/04/06/retirement-savings-fiduciary-rule/
[vii] (Brown, J., 2016, April 6)
[viii] Campbell, B. (2016, April 11) DOL Fiduciary Rule: The Good, the Bad and the Ugly [Electronic format]. Retrieved from http://www.thinkadvisor.com/2016/04/11/dol-fiduciary-rule-the-good-the-bad-and-the-ugle
[ix] (Ebeling, A., 2016, April 7)
[x] (Hayashi Y. & Prior A., 2016, April 6)

Thursday, February 11, 2016

Even General Counsels Get Defamed

What happens when the media re-states bluntly what you tried to say cleverly? A jury might find you liable for defamation, even if your statement was made in a legal document.

This observation is one of many take-aways from the litigation victory achieved by Minnesota attorney Chet Taylor. A jury awarded Chet $600,000 for a defamatory statement his former broker-dealer made in a corrective action plan attached to a FINRA consent order. The defendant added another $250,000 after the initial verdict to end the case.

Would a broker-dealer really throw former employees, including its General Counsel, under the proverbial bus? Perhaps. In this instance, broker-dealer Feltl and Company implied in the corrective action plan with FINRA that the “replacement” of certain employees, including its General Counsel, would “enhance a culture of compliance at the firm.” The Wall Street Journal subsequently published an article about Feltl utilizing a direct summary of the rather ham-handed plan: “The firm also said it replaced its general counsel...to beef up compliance.” The jury obviously did not care that Chet was not identified by name in the corrective action plan or Journal article. But they certainly cared that Chet had voluntarily departed for private practice about 2 years before the execution of the Consent Order and plan. Food for thought.


David Cosgrove has obtained monetary awards and expungements for various members of the financial industry from broker-dealers such as U.S. Bancorp Investments, Raymond James Financial Advisers, and Questar. He has also achieved negotiated confidential resolutions on behalf of other advisers and employees.