Thursday, December 31, 2015

SEC Victory in Protection of Whistleblowers

SEC Victory in Protection of Whistleblowers

A federal court of appeals ruled in early September that the 2010 Dodd-Frank financial reform law protected corporate whistleblowers who voice concerns to their company about possible wrongdoing prior to alerting securities regulators. The decision comes as a defeat for those who argue protection should not be granted if the individual does not first approach the government with their concerns.[i]

The Dodd-Frank Wall Street Reform and Consumer Protection Act, better known as Dodd-Frank, is an outgrowth of the 2008 Great Recession. It is a law intended to protect consumers and prevent a reoccurrence of abusive lending practices that brought about the collapse of major financial institutions.[ii]

Recognizing the feasibility of retaliation faced by those who bring attention to possible wrong-doing, Dodd-Frank created, “significant new whistleblower incentives and protections, including the creation of SEC and CFTF (Commodities Futures Trading Commission) whistleblower programs, expansion of current whistleblower protections under the Sarbanes-Oxley Act of 2002, and a new whistleblower cause of action for employees performing tasks related to consumer financial products or services.”[iii]

Judge Jon Newman, author of the federal appeals court opinion, suggested that, “expanding the protections would chiefly benefit auditors and attorneys who are barred from reporting alleged wrongdoing to the SEC until they have brought it to their employer’s attention.”[iv] Food for thought.

[i] Whistleblowers, SEC Are Winning in Ruling (2015, September 11) The Wall Street Journal, p. B4.
[ii] Dodd-Frank Act: CNBC Explains (2012, May 11) [electronic format] Retrieved from
[iii] Whistleblower Claims Under the Dodd-Frank Wall Street Reform and Consumer Protection Act: The New Landscape (n.d) New York State Bar Association [electronic format] Retrieved from
[iv] Whistleblowers, SEC Are Winning in Ruling (2015, September 11) The Wall Street Journal, p. B4.

Tuesday, December 22, 2015

How to Terminate, Discredit, and Interfere with a Financial Adviser: the U-5

I did not design the method I am about to share with you. Nor do I condone it. But I have observed its employment repeatedly during my legal representation of financial advisers. And although some of the players on the field participate unwittingly, there is always a motivating participant. So, this is how it often works:
  1. A FINRA broker-dealer needs a sacrificial lamb (or two) to satisfy a regulator, or a manager or large producer has an ax to grind, or a large producer is seeking to leave with a substantial piece of the broker-dealer's overall assets, or Compliance is too lazy to ferret out a false accusation against a financial adviser.
  2. The motivating participant employs Compliance to (unwittingly?) establish an alternative pre-textual basis for termination. Sometimes it is a sales or management practice that has been accepted or overlooked for years.
  3. The motivating participant and Compliance employ Legal and Registration, under cover of the attorney-client privilege, to approve and issue a sufficiently disabling Form U-5 disclosure1. Extra damage can be done by simply checking any of the “yes” boxes under U-5 question 7. This can be too-easily justified by expanding the scope of the term “industry standards” in question 7E. 7E will trigger a public disclosure and regulatory investigation.
  4. Delay #1: The broker-dealer has 30 days after the termination to file the Form U-5. It can also update it at any time should updates be necessary.
  5. Delay #2: State regulators will refuse to register the financial adviser until they can investigate the basis for the U-5 disclosure. They may take weeks or months to inquire of the financial adviser and broker-dealer, giving the unmotivated broker-dealer 30-60 days to respond to their request for information. Often times this lengthy response time is used by the broker-dealer to craft a letter that is misleading and refers to the financial adviser in the worst possible light. A copy is not sent to the financial adviser.
  6. Delay #3: FINRA will likely demand documents and explanations as well from all of the parties.
  7. During the pendancy of #'s 3, 4, and 5, the broker-dealer may aggressively enforce non-solicitation or non-compete provisions. The successor financial adviser will call the departing financial adviser's book and, among several tactics, claim that he/she does not have contact information for the departed financial adviser. He or she may also encourage the client to view any disclosures on BrokerCheck and to stay with the current broker-dealer2.
  8. Finally, a promissory note balance may be used to exert extra financial pressure or silence from the financial adviser.

This is the basic anatomy of a tortious scheme to interfere with a financial adviser's business relationships. If you are currently or about to be a part of this game, either as a victim or hesitant participant, I urge you to contact me3 immediately.

1Most U-5 disclosures, however, are free of defamatory content or tortious intent. In other words, most broker-dealers satisfy their obligation to ensure a full, fair, and accurate reporting.
2This is a critical footnote. One or more of the players may simply be mean-spirited or incompetent. While this person may be the motivating player, he or she is usually manipulated and used by the motivator. The ultimate financial adviser victim—typically our client—frequently has a character defect (like all of us) that is exaggerated and exploited.

3David Cosgrove has handled U-5 matters involving MetLife Securities, US Bancorp Investments, Questar, US Allianz, Edward Jones, Raymond James, Morgan Stanley, ING Financial partners, and others.    

Friday, December 18, 2015

A Wrinkle in the Arbitration of Broker Promissory Notes

Little did Laura Facsina know that when she joined Morgan Stanley (MS) in 2009 as a financial adviser (FA) she would battle, not only the wirehouse for gender discrimination, but MS’s right to arbitrate the matter.

After bringing suit in court against MS, Ms. Facsina received a forgivable loan settlement of $280,000. But, a FINRA panel subsequently ordered that she repay a $419,000 promissory note, which was upheld in district court. The panel’s ruling is now before the 6th Circuit U.S. Court of Appeals, where Facsina is claiming there is a crucial jurisdictional issue negating FINRA’s determination.

According to the suit, it was not Morgan Stanley Smith Barney (MSSB) that owned the note, but rather its non-FINRA member subsidiary Morgan Stanley Smith Barney FA Notes Holdings. As such, Facsina argues, FINRA had no standing to entertain the arbitration, as only members may compel use of the forum by associated persons and clients.

“Moreover, Facsina’s settlement states that unless approved by all parties, no portion of the agreement – including the promissory note – is assignable. Facsina never gave consent for the note to be assigned to MSSB FA Notes Holding.”[i] This, she claims, is just one example of an on-going deceptive practice in which the true holders of promissory notes have been hidden, with significant consequences for hundreds of brokers.

Citing the research of a former MS employee turned whistleblower, website Think Advisor in its article “Ex-Morgan Advisor, in Unusual Move, Takes FINRA Arb Case to Federal Court,” found that between June 2009 and August 2015, of the 382 cases against advisors, only 12 were won by (ex-)employees and 330 by the company. Of those, MSSB FA Notes Holdings were believed to hold 160 of the notes.

These promissory notes are the overwhelming majority issue heard by FINRA’s arbitration panels. Notably, the panels also serve as the basis counterclaims in defamation and tortious interference claims brought by FAs. Food for thought…

[i] Ex-Morgan Advisor, in Unusual Move, Takes FINRA Arb Case to Federal Court (2015 November 24). Retrieved from