Monday, September 6, 2010
Is Broker/Trader liable for what Broker-Dealer approves?
There is an interesting albeit short article in this month's edition of Corporate Counsel regarding Goldman Sachs and its very own "Fabulous Fab". As you may recall, Goldman settled with the SEC recently for $550 million (without admitting wrongdoing) for its role in allegedly selling a mortgage backed securities vehicle to its customers that Goldman allowed a hedge fund to both assemble and bet against. Goldman's trader Fabrice Tourre became infamous for not only reducing to writing his callous appreciation for the irony of Goldman's position, but also for dubbing himself "Fabulous Fab." Now wonder pride is one of the 7 deadly sins. But I digress. General Counsel notes that one of the defenses Fabulous is asserting in response to the SEC's claims against him is that the product and procedures at issue had been vetted and approved by Goldman's compliance and legal departments. General Counsel oddly characterizes this as a "novel defense." I'm not sure it is novel or without merit. Indeed, it reminds me of a case I worked on where I represented the former brokers of a large regional broker dealer that was sued by a state regulator for its role in the traditional sale, but unexpected liquidity demise, of Auction Rate Securities. The regulator sued the broker-dealer and its trading desk employees for failing to train and disseminating inaccurate information regarding the risks and characteristics to its sales force/registered representatives. But it also simultaneously sued the allegedly untrained and inadequately informed representatives that sold the product to investors (why chose a coherent theory of liability unless you have to?). Of course, as predicted, the regulator dismissed the suit against the individual brokers--one months away from dieing from cancer--once the broker-dealer coughed up millions of dollars. So while Fab's arrogance may provide some insight in to a culture on Wall Street that needs to evolve for the better, his affirmative defenses aren't so novel, and may just have some merit. It is one thing when a broker disregards compliance and legal and engages in negligent or self-serving conduct, but it seems to be an entirely different story when he or she is merely selling a product that has structural deficits literally designed by his employer and principle, including legal and compliance experts. Stay tuned.