Steven Larson and Michael Standley owned Oakbridge Financial Services along with Kathy Winter. All three of them functioned as registered representatives of the broker-dealer as well. The three were also associated with a state registered investment adviser, Private Label Money Management (PPMM). Late last year Winter agreed to pay a small fine and submit to heightened supervision due to her alleged administrative failures as president of PPMM. She was also barred from operating as a supervisor for either a broker-dealer of RIA for two years. Not long before that, Winter had been suspended by FINRA for selling unregistered promissory notes that went sour.
This month her two former co-owners were barred for their failure to supervise Robert Boyer, II of the Heroic Life Assurance Company. Larson was also tagged for over-concentrating some of his clients’ portfolios with reverse convertible securities, also known as “recons.” Recons are: “…complex, structured products that contain a put option held by the issuer that triggers if the underlying equity falls below a certain barrier price and stays there at the end of the term. When the equity price triggers the put option, the investor gets a certain number of shares of the equity at the ‘strike price’. Whether or not the barrier price is breached, the investor gets income during the term of the Recon at an above market interest rate. The interest rate is a function of the volatility of the underlying equity. The higher the volatility and closer the barrier price to current price, the higher the interest rate. Recons are sold in $1,000 increments.”
All three orders can be reviewed here.
Friday, May 18, 2018
Wednesday, May 9, 2018
If you receive a letter demanding information and documentation from a state securities division, I hope you find this blog before you rifle off a response. As a former Commissioner of Securities, I am frequently retained by individuals who are the subject of a state securities division investigation. Unfortunately, and far too often, the individuals hire me after they have sent in a response to the initial demand letter. Some even wait until after they have been through a recorded interrogation at the division.
A request for information is not a friendly or harmless inquiry. How you respond and the documents you provide could damn you, or at least make it very difficult to defend you once you hire us. Going through an on-the-record exam (“OTR”) is even worse. You will not be properly prepared, no matter how smart and innocent you perceive yourself to be. Moreover, the Securities Division will likely not provide the attorney you will eventually need with a transcript of the interrogation. This will leave you and your counsel at a marked disadvantage throughout the proceedings. In sum, when you get the letter, pick up the phone and hire an attorney experienced in defending state securities prosecutions. Food for thought.
Friday, March 9, 2018
The New York Legislature has two bills pending in the Assembly and Senate which would make public, for the first time, details of private arbitrations. A09769 and S07146, sponsored by Matthew Titone and Brian Kavanagh respectively, are both crafted to provide information related to private arbitrations to the public. Information such as:
· the name of the non-consumer party,
· the state and zip code in which the consumer party resided at the time of arbitration, the type of
· whether the consumer was the prevailing party,
· on how many occasions, if any, the non-consumer party has previously been a party in an
arbitration or mediation administered by that same private arbitration organization,
· the date the private arbitration organization received the demand for arbitration,
· the date the arbitrator was appointed,
· the date of disposition by the arbitrator or private arbitration organization,
· the type of disposition of the dispute, if known,
· the amount of the claim,
· the amount of any award or settlement, and any other relief granted,
· the name of the arbitrator,
· the arbitrator's total fee for the case,
· and the percentage of the arbitrator's fee allocated to each party.
The bills also define and prohibit certain financial conflicts of interest. Recurring parties as paying customers to the arbitrators is not listed as a financial conflict of interest and still remains a concern for consumers. The bills do provide for private causes of action and civil penalties for violations. The New York Attorney General would enforce the provisions. Neither Bill is retroactive.
The Senate bill was referred to the Consumer Protection Committee, but has not moved. The Assembly bill, however, was referred to the Consumer Affairs and protection Committee and passed on March 6, 2018. Should one of these bills pass, the impact on private arbitration in favor of consumers would be significant. Currently, businesses can bind customers with an arbitration agreement, have multiple arbitration claims brought against them and other customers and the general public would never know. Under these bills, customers would have access to the arbitration history a specific business has with a particular arbitration company. Should this pass, given arbitration’s significant and increasing prevalence, it is likely other states will look into passing similar consumer protections in an effort to shed light on the currently opaque arbitration process.
While these bills seem to strive to protect consumers by making important information public, some may argue the bills go too far by requiring the amount of a settlement, which is typically confidential. The bills could likely get to the same destination of providing important information to the public about companies without requiring this information.
Monday, April 17, 2017
It wouldn’t seem likely that elders and athletes would have much, if anything, in common. But they do. They are frequently blessed with substantial semi-liquid assets, and are therefore the targets of fraudulent or reckless investment schemes.
Much has been written about why professional athletes are frequent victims. And the last professional athlete I represented possessed many of the following common attributes:
· Young and inexperienced with finances;
· Rapidly accumulating substantial wealth;
· Easily identified as a person with substantial wealth subject to potential investment;
· Highly focused on meeting the demands of a career requiring singular attention, frequent travel, and unplanned relocations.
As a result, the media is littered with accounts of massive investment losses suffered by current and former athletes. Some of the statistics are shocking. For example, from 1999-2002 78 NFL players lost over $40 million to fraud. According to a Sports Illustrated article, approximately 60% of NBA players are “broke” within five years of their retirement from the league. And in 2014 former Yankee star Jose Pasada sued two financial advisers that allegedly bilked him of $11 million through real estate and hedge-fund investments.
The National Football League Players’ Association took action in 2002 and created a Financial Advisors Program. The Program required advisers to apply and be screened for approval for inclusion in the program. But it was not sufficiently robust. For example, just a few years after the program was initiated, an approved financial adviser lured several active players in to a hedge fund. The players lost almost $20 million and the adviser was convicted of securities fraud and money laundering. Moreover, some approved advisers use their NFLPA registration as a marketing tool. One even suggests that their athlete clients can be free of financial distractions while the adviser constructs a “bulletproof” financial retirement plan. That type of pitch seems to encourage the very characteristics that lead to the financial victimization of athletes. Laurence Landsman wrote an excellent article that was published in the National Sports Law Institute’s Journal in 2010. He called for reforms to the NFLPA program. And the NFLPA made them in 2012. Now when will the NBA, NHL, and MLB get on board?
There are strong parallels between the methodology and prevalence of financial exploitation of athletes and elders. Our firm has represented several elder investors over the years. And all of us are former securities regulators that witnessed the pace and pattern of financial elder abuse. Elders frequently have a large accumulation of wealth available for investments, and they are prone to over-trust and over-rely on their financial advisers.
In 2012 Stephen Dunn published in Forbes a list of do’s and don’ts for professional athletes. They are, however, equally applicable to our elders. Just a few of them are:
· An adviser’s trustworthiness is paramount;
· Invest with advisers associated with a well-established firm;
· Don’t pretend you are a business mogul. Kurt Schilling’s saga may be a good tale of caution, and;
· Avoid complex investment schemes.
And I have one final self-serving but sound piece of advice: retain an attorney that is independent of your financial adviser and who is also sophisticated in investment matters. That attorney should be called upon to interface with your adviser and help you evaluate the wisdom and risk of your adviser’s proposals, background, etc. Food for thought.
2. ESPN's "Broke" : https://www.youtube.com/watch?v=Elfw0ESih-A
2. ESPN's "Broke" : https://www.youtube.com/watch?v=Elfw0ESih-A
Friday, March 24, 2017
Kokesh v. SEC: Implications for the Statute of Limitations for Missouri Securities Enforcement Actions
Kokesh v. SEC, Docket No. 16-529 (oral argument date April 18, 2017) – Implications for the Statute of Limitations for Missouri State Securities Enforcement Actions.
By John R. Phillips, Counsel for Cosgrove Law Group, LLC and former Director of Enforcement for the Missouri Securities Division, Office of the Secretary of State.
Kokesh v. SEC is an appeal to the U.S. Supreme Court from the 10th Circuit Court of Appeals, in which the Court will be asked to decide whether a disgorgement award in favor of the SEC constitutes a penalty or forfeiture within the meaning of 28 U.S.C. § 2462, which therefore must be brought within that section’s five year statute of limitations. This verdict from New Mexico, affirmed on appeal by the 10th Circuit, awarded the Securities and Exchange Commission (“SEC”) a disgorgement award of $34.9 million, plus $18.1 million in prejudgment interest, and a penalty of $2.4 million for Charles R. Kokesh’s (“Kokesh”) misappropriation of funds from four SEC-registered business development companies (“BDC”). The BDCs raised money from investors through public securities offering and invested in private start-up companies that focused on technology, biotechnology, and medical diagnostics. From 1995 through 2006, Kokesh directed the BDCs to take $23.8 million to pay salaries and bonuses to BDC Advisers, including Kokesh himself, and to take $5 million to cover office rent. In 2000, Kokesh also had the BDCs distribute $6.1 million in payments described as “tax distributions.” See SEC v. Kokesh, 834 F.3d 1158, 1160-61 (10th Cir. 2016). The jury found “(1) that Defendant knowingly and willfully converted the Funds’ assets to his own use or to the use of another and (2) that he knowingly and substantially assisted the Advisers in defrauding the [BDCs], in filing false and misleading reports with the SEC, and in soliciting proxies using false and misleading proxy statements.” Id. at 1161. The trial court held that disgorgement of $34.9 million “reasonably approximates the ill-gotten gains causally connected to Defendant’s violations.” Id.
The Tenth Circuit: Disgorgement Is Remedial, Not a Penalty or Forfeiture
The 10th Circuit held that disgorgement is not “a penalty or forfeiture within the meaning of § 2462.” Id. at 1167. First the 10th Circuit held that “disgorgement is not a penalty under 2462 because” it “does not inflict punishment” but rather “is remedial.” Id. at 1164. “[I]t does so…by depriving the wrongdoer of the benefits of wrongdoing.” Id. (citing SEC v. Contorinis, 743 F.3d 296, 301 (2d Cir. 2014)). However, the 10th Circuit acknowledged that “in common English the words forfeit and disgorge…capture similar concepts,” and that the “definitions in the leading legal dictionary…also have similarities”: Black’s defines “disgorgement” as a “legal compulsion” to “giv[e] up something (such as profits illegally obtained),’” and “forfeiture” as the “’loss of…property because of a crime, breach of obligation, or neglect of duty.’” The 10th Circuit believed that § 2462 used “forfeiture” in a narrow historical sense—as “an in rem procedure to take ‘tangible property used in criminal activity.’” Id. at 1165 (citing U.S. v. 92 Buena Vista Ave., 507 U.S. 111, 118 (1993)). In end, the 10th Circuit affirmed the disgorgement award.
Petitioner’s Argument: Circuit Split and Consequences of No Statute of Limitations for Disgorgement
Kokesh appealed to the U.S. Supreme Court, presenting the question of whether: “[u]nder 28 U.S.C. § 2462, any ‘action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise, shall not be entertained unless commenced within five years from the date when the claim first accrued.’ Does the five-year statute of limitations in 28 U.S.C. § 2462 apply to claims for “disgorgement?’” Pet. Brief at i, Docket No. 16-529 (2016).
28 U.S.C. § 2462 sets a five-year limitations period for claims seeking certain sanctions and states:
Except as otherwise provided by Act of Congress, an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise, shall not be entertained unless commenced within five years from the date when the claim first accrued if, within the same period, the offender or the property is found within the United States in order that proper service may be made thereon.
Kokesh argues that Gabelli v. SEC, 133 S. Ct. 1216 (2013) mandates that § 2462 applies to disgorgement awards because disgorgement is a form of penalty or forfeiture. Gabelli also rejected the SEC’s request for the application of the “discovery rule” to the § 2462 statute of limitations as that “would leave defendants exposed to Government enforcement action not only for five years after their misdeeds, but for an additional uncertain period into the future.” Id. at 1223. Gabelli expressly reserved the question of whether § 2462 applies to claims for disgorgement. Id. at 1220 n. 1.
As an initial matter, all parties agreed that there is a circuit split on the question of whether § 2462 applies to claims for disgorgement. The 11th Circuit has held that “§ 2462’s statute of limitations applies to disgorgement,” finding that disgorgement is a “forfeiture” within the meaning of the statute. SEC v. Graham, 823 F.3d 1357, 1363 (11th Cir. 2016). The underlying Graham district court held that “disgorgement…can truly be regarded as nothing other than a forfeiture…, which remedy is expressly covered by § 2462.” 21 F.Supp.3d at 1310-11. By contrast, the 1st and D.C. Circuits (and the 10th Cir. in Kokesh) held that § 2462 does not apply to actions for disgorgement. SEC v. Tambone, 550 F.3d 106, 148 (1st Cir. 2008); Riordan v. SEC, 627 F.3d 1230, 1234 (D.C. Cir. 2010)(“there is no statute of limitations for SEC disgorgement actions”).
In Kokesh, the SEC did not bring its disgorgement claims against Petitioner until 2009, yet the district court entered a $34.9 million disgorgement order based on securities-law violations that occurred as far back as 1995. Pet. Brief at 2. “In the Eleventh Circuit, all the SEC’s claims that arose before 2004 would be untimely under § 2462, and the SEC has conceded that this rule would preclude all but $5 million of the disgorgement order against Petitioner. Id. (citing Pet. App. 26a-27a).
According to Kokesh, if §2462 does not limit disgorgement actions, then sweeping disgorgement liability will be limitless in time. Statutes of limitation aim to provide “security and stability to human affairs,” reflecting the settled wisdom that it would be “’utterly repugnant to the genius of our laws’” if actions “could ‘be brought at any distance of time.’” Gabelli, 133 S. Ct. at 1223 (quoting Adams v. Woods, 6 U.S. (2 Cranch) 336, 342 (1805)). Moreover, the difference it would make to recoveries in SEC actions is sizeable. For Kokesh, it would mean at least $29 million in disgorgement liability would be erased. And writ large, in 2015 alone, “the SEC extracted $3 billion in disgorgement payments. That amount dwarfs the SEC’s money penalties, which were just $1.2 billion, and is also growing faster: Disgorgement collections have jumped 60% since 2011, compared with just a quarter increase in penalties.” Pet. Br. at 3.
SEC: There Is No Statute of Limitations For Disgorgement Actions
The SEC’s argument is surprisingly simple: there is no statute of limitations for disgorgement and § 2462 does not apply to bar SEC disgorgement actions. See generally, Res. Br. The “equitable relief” power under 15 U.S.C. § 78u(d)(5) includes authority to order disgorgement. Porter v. Warner Holding Co., 328 U.S. 395, 398-99 (1946); see, e.g., SEC v. Masson, Inc., 465 F.3d 1174, 1179 (10th Cir. 2006), cert. denied, 550 U.S. 905 (2007).
Congress has not specified a statute of limitations for an SEC enforcement action alleging a violation of the Exchange Act, the Advisers Act, or the Investment Company Act. Res. Br. at 2. But Congress has enacted a statute of limitations (28 U.S.C. § 2462) that governs “penalty provisions throughout the U.S. Code.” Gabelli, 133 S. Ct. at 1219. The purpose of disgorgement is “not to inflict punishment but to prevent an unjust enrichment.” Res. Br. at 8 (citing Sheldon v. Metro-Goldwyn Pictures Corp., 309 U.S. 390, 399 (1940)). Disgorgement “differs greatly from…damages and penalties,” because it has a quintessential remedial nature. Id., (citing Porter, 328 U.S. 402).
Apart from that general recitation of the purpose of disgorgement and the implications of the Circuit split, the SEC’s argument was very simple, if only by implication: there is no statute of limitations for the disgorgement remedy and the SEC should be able to reach back as far as disgorgement can be “reasonably approximate[d].” SEC v. Kokesh, 834 F.3d at 1161.
Reply and Amicus (Chamber of Commerce): Disgorgement to Injured Victims Is Distinguishable Because That is Remedial And “Forever Liability” Could Result in Potentially Crippling Monetary Awards
Kokesh’s reply focuses primarily on the nature of disgorgement that the SEC routinely seeks, as it is “a legal obligation to pay money to the government, imposed as a consequence of wrongdoing—a classic form of punishment.” Pet. Reply at 1. Kokesh then also distinguishes Porter and Sheldon as cases where the disgorgement went to injured victims: rents to tenants in Porter and profits from copyright infringement in Sheldon. Id. at 1-2. “In those cases restitution order had the remedial effect of restoring property to its rightful owner,” whereas in Kokesh’s case the disgorgement money goes to the SEC. Id. at 2.
The Chamber of Commerce’s amicus brief took head on the SEC’s argument that there was no statute of limitations for disgorgement:
a defendant in an agency enforcement action is forever liable for potentially crippling monetary awards that may never be discharged. This is an extraordinary position. Statutes of limitation “promote justice by preventing surprises through the revival of claims that have been allowed to slumber until evidence has been lost, memories have faded, and witnesses have disappeared,” Order of Railroad Telegraphers v. Railway Express Agency, Inc., 321 U.S. 342, 348-349 (1944), and provide “certainty about…a defendant’s potential liabilities,” Rotella v. Wood, 528 U.S. 549, 555 (2000).
Amicus Br. at 3.
The Chamber proceeded to argue that disgorgement is a penalty because it “goes beyond remedying the damage caused to the harmed parties by the defendant’s actions.” Amicus Br. at 5 (quoting Johnson v. SEC, 87 F.3d 484, 488 (D.C. Cir. 1996)). Disgorgement is animated by a deterrent purpose, which is a hallmark of punitive remedies. Id. (citing SEC v. Rind, 991 F.2d 1486, 1490 (9th Cir. 1993)(“The theory behind the remedy is deterrence and not compensation.”)). The SEC’s “public statements about its enforcement actions” confirm this deterrent purpose by highlighting the “deterrent and retributive effect of its disgorgement orders.” Id. at 6 (citing SEC, Press Release No. 2005-93 (June 28, 2005)).
The Chamber argued further that disgorgement is particularly punitive when the defendant has not retained the benefit of all the ill-gotten gains—where for instance those monies were expended on rent/salaries. Amicus Br. at 6-7. Moreover, a disgorgement claim that cannot be ascertained with sufficient certainty “takes on the character of a plea for punitive relief.” Id. at 7 (citing SEC v. Wills, 472 F.Supp. 1250, 1276 (D.D.C. 1978)). The SEC is only required to provide a “reasonable approximation” for disgorgement. Id. (citing SEC v. Teo, 746 F.3d 90, 107 (3d Cir. 2014). Finally, the disgorgement awards go to the U.S., not victims, and therefore are by nature punitive. Id. at 8 (citing SEC v. Cavanagh, 445 F.3d 105, 117 (2d Cir. 2006)).
In a final piquant point, the Chamber points out that the SEC has taken the position that disgorgement orders are non-dischargeable in bankruptcy because they fit within the “fine, penalty, or forfeiture” language of the discharge exception. Id. at 11-12 (citing In re Telsey, 144 B.R. 563 (Bankr. S.D. Fla. 1992); see also IRS, Office of Chief Counsel, Memorandum, No. 201619008, at p. 9 (May 6, 2016)).
Implications for Missouri and Other States Which Do Not Have an Express Statute of Limitations for Administrative or Civil Securities Enforcement Actions
Current Statute of Limitations for Missouri State Securities Enforcement Actions
The Missouri Securities Act of 2003 (“MSA”) was based on the Uniform Securities Act of 2002. It contains provisions for administrative, civil, and criminal enforcement, as well as a private cause of action. Section 409.5-509, RSMo. is the private cause of action under the MSA and has very clear statutes of limitation: one year for the violation of the provision prohibiting the offer and/or sale of an unregistered security (§409.3-301, RSMo.); two years after discovery of the facts for any other violations of the Act, with a five year statute of repose. See § 409.5-509(j), RSMo. However, administrative, civil, and criminal actions do not carry specific statutes of limitation under the Act.
Clearly, a statute of limitation would apply to criminal actions under Section 409.5-508, RSMo., likely Mo. Rev. Stat. § 556.036.2 (three years for any felony). However, without a specific provision, the statutes of limitations for civil and administrative enforcement actions are not clear. Section 409.5-509(j), RSMo., does not apply, leaving a series of possible candidates in the general civil statutes of limitations. And it is in this context that Kokesh may be relevant to interpreting civil and/or administrative enforcement actions under the Act.
Sections 409.6-603 and 409.6-604, RSMo., address the SEC enforcement action corollary for the state of Missouri, allowing the Commissioner, through the Attorney General, or the Commissioner him/herself administratively, to pursue penalties and/or an order of rescission, restitution, or disgorgement for violations of the Act. However, the Act is “remedial” in nature and court decisions interpreting the securities laws have construed these acts to achieve broad investor protection. See Uniform Securities Act (Last Revised or Amended in 2005), § 608(b), and Official Comment 5 (citing SEC v. W.J. Howey Co., 328 U.S. 293, 299, 301 (1946).
Hence, it is likely that the several Missouri statutes of limitation that apply to “penal statutes” would not apply to actions under Sections 409.6-603 and 409.6-604, RSMo. See Mo. Rev. Stat. §§ 516.380 (1 year from violation), 516.390 (2 years from violation), and 516.400 (3 years from commission of offense). Indeed, precedent suggests that those statutes of limitation are for actions where the primary focus is penalties, such as for clean water act violations, rather than for enforcement actions where a broad penumbra of remedies are available. See State ex rel. Nixon v. Summit Inv. Co., LLC, 186 S.W.3d 428 (Mo. App. S.D. 2006).
A better analog for assessing the proper statute of limitations would be the Missouri Merchandising Practices Act (“MMPA”), section 407 et seq., as it likewise is a remedial statute with multiple remedies in enforcement actions brought by the Missouri Attorney General, as well for private rights of action. For the MMPA, courts have applied one of two statutes of limitation:
(1) Mo. Rev. Stat. §516.120.2 (5 years) for “[a]n action upon a liability created by a statute other than a penalty or forfeiture;” or
(2) Mo. Rev. Stat. §516.130.5 (3 years) for “[a]n action upon a statute for a penalty or forfeiture, where the action is given to the aggrieved, or to such party and the state…”
There is a general consensus in courts that section 516.120.2, RSMo., applies for all actions under the MMPA. Huffman v. Credit Union of Texas, 758 F.3d 963, 967 (8th Cir. 2014)(citing Ullrich v. CADCO, Inc., 244 S.W.3d 772, 778 n. 3 (Mo. App. 2008); Owen v. Gen. Motors Corp., 533 F.3d 913, 921 n.6 (8th Cir. 2008)). However, there has been discussion that section 516.130.5, RSMo., may apply. Huffman, 758 F.3d at 966; Schuchmann v. Air Services Heating & Air Conditioning, Inc., 199 S.W.3d 228 (Mo. App. S.D. 2006). The Missouri Securities Act carries similar remedies to the MMPA, and likewise would be an “action upon liability created by a statute other than a penalty or forfeiture.” Thus it is reasonable to assume that whatever the statute of limitation is for a civil enforcement action by the Attorney General under the MMPA would also apply to civil and administrative enforcement actions under the Securities Act.
Missouri Securities Enforcement Actions After Kokesh – Some Statute of Limitations Will Apply
Kokesh might have application for Missouri state securities enforcement actions by virtue of the debate between whether the MMPA (and by implication the MSA) has a 3 or 5 year statute of limitations under sections 516.120 or 516.130, RSMo. If disgorgement is considered a “penalty” for federal securities enforcement actions, then the MSA itself, or actions for disgorgement under it, may very well also be considered actions on a “penal statute,” and therefore fall under the provisions of section 516.130(2), RSMo. The third, less likely scenario, is that “penalty” actions under the MSA, including for disgorgement if Kokesh find the remedy penal, would be limited to three years by section 516.130(2), RSMo., while restitution and other remedies could be brought up to five years after the violation under section 516.120(5), RSMo. Obviously, the way in which the SEC makes use of “disgorgement” as a remedy makes that remedy look quite penal, particularly under the facts of Kokesh. Thus the usage of disgorgement by the Attorney General or Commissioner in a Missouri enforcement action may be distinguishable from Kokesh on its facts.
What is clear irrespective of whether disgorgement is characterized as “penal” or “remedial,” is that Gabelli is persuasive authority that some statute of limitations applies to state enforcement actions for violations of the Missouri Securities Act, even if there is no such specific statutes of limitation and the existing general statutes of limitation are poor fits. A holding by the Kokesh Court that disgorgement is “penal” in nature would be persuasive authority that, notwithstanding precedent labeling the MSA “remedial,” the MSA is a “penal” statute by virtue of providing equitable “penalties” such as disgorgement, and therefore subject to a 3 year SOL under section 516.130 (or the more restrictive limits under other statutes). At the very least, it would be persuasive authority that where the Commissioner or Attorney General seeks disgorgement, he/she can reach back only 3 years, instead of the five contemplated under section 516.120, RSMo., which would be a hybrid approach essentially applying two different statutes of limitations to causes of actions under one statute.
Conversely, if the Supreme Court finds that the SEC’s disgorgement remedy is not time barred by 28 U.S.C. §2462, then it is persuasive authority for the proposition that the equitable remedies under the Missouri Securities Act likewise are not time barred. That seems an unlikely outcome. Gabelli strongly infers that the Supreme Court would not countenance there being absolutely no statute of limitations for actions under sections 409.6-603 and 409.6-604, RSMo. On the other hand, the variety of remedies under the MSA speak to labeling it as a “remedial statute,” even though the MSA also contains certain penal provisions. Hence the five year statute of limitations under section 516.120, RSMo., would be most appropriate, even if Kokesh finds that disgorgement is subject to the statute of limitations for penalties under 28 U.S.C. §2462.
 Because of the hybrid nature of the remedies, it seems unlikely that MSA enforcement actions would ever be “penal statutes” for the purposes of the statutes of limitation in sections 516.380, 516.390 and/or 516.400, RSMo. But that also would remain an open question.
Friday, February 24, 2017
Financial advisors facing an arbitration claim or regulatory inquiry often count on their broker-dealer or registered investment advisor for legal counsel. These “employers” will frequently provide them with an ostensibly independent “conflict counsel” after they retain their own counsel. Unfortunately, however, it is arguably little more than a charade when the “independent” attorney either has, or one day hopes to represent the broker-dealer or registered investment advisor.
Consider viewing the situation in the context of an attorney's ethical duty of loyalty, her fiduciary duty to put the client's interests first, and her obligation to avoid even the appearance of failing to do so. If you (the attorney) have been hired and paid by a large client that you covet to represent an individual financial advisor that you will never see again, would you not be hesitant to suggest the financial advisor save herself – even if it injures the interests of the large corporate client? Would you really warn the advisor if you caught wind of the broker-dealer's or registered investment advisor's intention to throw him or her under the bus, or even put their interests before your client's in just a small way? And these are not mere hypotheticals. I have seen these situations, and even been caught up in them.
Loyalty and independent judgment are essential elements in the lawyer's relationship to a client. Concurrent conflicts of interest can arise from the lawyer's responsibilities to another client, a former client, or a third person or from the lawyer's own interests. For specific Rules regarding certain concurrent conflicts of interest, see Rule 4-1.8. For former client conflicts of interest, see Rule 4-1.9. For conflicts of interest involving prospective clients, see Rule 4-1.181.
Many years ago, I was in a fairly “steady relationship” with a large broker-dealer. But my firm was more like a second fiddle to a larger law firm they had used for years. Upon the advent of a large regulatory action, the broker-dealer hired me to represent some of their former advisors and executives. I became uncomfortable with this arrangement when it became apparent to me that many of my clients had a strong defense to the allegations, in that the broker-dealer was in large part responsible for my clients' alleged omissions. But before that day of reckoning arrived, something happened. The broker-dealer's primary attorney decided to file what appeared to me to be a frivolous motion that would not be in the best interests of my individual clients. I informed the primary attorney that my clients would not be joining the motion as he had directed. I received a major ass-chewing from him, and an order to get in line. Long story short is that I did not comply with that demand, and the broker-dealer got sanctioned for the motion. My individual clients were relieved, and ultimately dismissed from the case for zero fines or sanctions. But the broker-dealer never hired me again.
In another case, a financial advisor hired me to file a breach of fiduciary duty action against his former broker-dealer's attorney. That attorney initially represented both the broker-dealer and the advisor during a regulatory investigation. That same attorney then proceeded to play an instrumental role in throwing that financial advisor under the bus. When the dust had settled, no pun intended, the broker-dealer and attorney paid almost $4,000,000 to my client for their respective roles in the subsequent U-5 defamation and breach of fiduciary duty.
Finally, in a more recent situation, the attorneys for a broker-dealer's employee never even broached the subject of a resolution between my client and her individual client. Her firm covets their relationship with the broker-dealer far more than I had even dared to imagine. Things went south fast in our previously cordial relationship when I had the audacity to raise the “appearance” issue with her. Nothing changed in terms of proper legal representation, other than the tenor of the relationship.
The moral of these stories is this: if you are in hot water together with your employer, avoid the temptation of having your employer pay your legal bills and pick your lawyer for you. And if you are representing a broker-dealer and they ask you to serve as an unbiased loyal counsel for an employee or independent contractor, “just say no." Food for thought.
1 Comment to: RULE 4-1.7: CONFLICT OF INTEREST: CURRENT CLIENTS (https://www.courts.mo.gov/courts/ClerkHandbooksP2RulesOnly.nsf/c0c6ffa99df4993f86256ba50057dcb8/d06710dff1830d2686256ca600521205?OpenDocument)
Wednesday, February 8, 2017
In re Behrends: FINRA Arbitration Awards May Not Be Dischargeable In Bankruptcy But Make Sure To Register Them As Judgments.
11 U.S.C. §523(a)(19), which was part of the Sarbanes-Oxley Act of 2002, states that a discharge [in bankruptcy] does not discharge an individual debtor from any debt that
(A) is for:
(i) the violation of any of the Federal securities laws…, any of the State securities laws, or any regulation or order issued under such Federal or State securities laws; or
(ii) common law fraud, deceit, or manipulation in connection with the purchase or sale of any security; and
(B) results before, on, or after the date on which the petition [in bankruptcy] was filed, from:
(i) any judgment, order, consent order, or decree entered in any Federal or State judicial or administrative proceeding;
(ii) any settlement agreement entered into by the debtor; or
(iii) any court or administrative order for any damages, fine, penalty, citation, restitutionary payment, disgorgement payment, attorney fee, cost, or other payment owed by the debtor.
In re: Behrends, No. 15-1420, (10th Cir. Nov. 14, 2016)(appeal from In re: Behrends, No. 14-cv-03247 (D. Colo. September 30, 2015), involved a proceeding in a Chapter 7 bankruptcy whereby a creditor had obtained a FINRA arbitration award against the debtor for selling “$623,560.53 worth of five highly speculative securities offerings which [they] represented as suitable for retirees like Claimants who were looking for safe income producing investments.” https://www.ca10.uscourts.gov/opinions/15/15-1420.pdf. Claimants also maintained in the arbitration that the offerings were “’non-exempt public securities offerings conducted in violation of state and federal securities laws’ which were ‘the subject of SEC enforcement actions for fraud in the sale of securities.” Id. Their FINRA statement of claim asserted breach of fiduciary duty, fraud, violation of the Colorado Securities Act, violation of the Texas Securities Act, and negligence. Behrends filed an answer to the FINRA arbitration, but did not appear at the scheduled hearing even though he had notice. The FINRA panel concluded that the claimants had proved both liability and damages and issued a written Award stating that there were “multiple violations of Colorado state and federal securities law…” and finding Behrends jointly and severally liable for compensatory damages, as well as solely liable for a portion of compensatory damages.
Behrends thereafter filed his Chapter 7 bankruptcy case. The bankruptcy court granted claimants relief from the automatic stay, and plaintiffs confirmed the judgment in Colorado state district court. Behrends did not oppose confirmation of the award. Claimants then filed an adversary proceeding in the bankruptcy court seeking to have the debt declared non-dischargeable under 11 U.S.C. § 523(a)(19).
The bankruptcy court found both requirements of (a)(19) to be met, and that collateral estoppel barred it from reconsidering the merits of the plaintiffs’ FINRA claim. Behrends appealed. The Tenth Circuit affirmed that the debt was non-dischargeable in bankruptcy. Among the Tenth Circuit’s findings was that (a)(19) does not require the securities violation to be “actually litigated,” as Congress departed from the common-law understanding of collateral estoppel and issue preclusion principles. Section 523(a)(19) “permits a determination of nondischargability based on ‘any judgment,’ (emphasis added).” Id.; See also, Tripodi v. Welch, 810 F.3d 761, 766-67 (10th Cir. 2016).
Behrends also challenged the finding because he claimed the FINRA arbitration award was not sufficient to show a securities law violation, including which securities law he violated, the acts or omissions on which the violations are based, which facts support the damages awarded, and what standard of proof the panel applied. The Tenth Circuit again disagreed, holding “all that is required is a determination that the award satisfied the requirements for nondischargeability described in § 523(a)(19)."
Behrends also conceded that the Denver County District Court order confirming the award and entering judgment thereon “qualifies as a judicial order memorializing the debt.”
The implications herein are significant, but at this point largely unpublicized. According to a PIABA report, as much as $62.1 million in customer awards issued in 2013 alone were unpaid, and an many as $1 of every $4 awarded is unpaid. https://piaba.org/system/files/pdfs/Unpaid%20Arbitration%20Awards%20-%20A%20Problem%20The%20Industry%20Created%20-%20A%20Problem%20The%20Industry%20Must%20Fix%20(February%2025,%202016).pdf.
To the extent these FINRA arbitration awards are unpaid because the Respondent declared bankruptcy, and the judgment is properly registered, In re Behrends indicates that pursuant to 11 U.S.C. § 523(a)(19), such awards would not be discharged in bankruptcy.