FINANCIAL ADVISER TERMINATIONS

It’s what we do here at Cosgrove Law Group, LLC.

              Believe it or not, there are instances in which a broker-dealer seeks out pre-textual reasons for a termination.  Some reasons are more frivolous than others.  For many advisers, an involuntary termination is nothing more than the first chapter of a multi-chapter nightmare.

            The broker-dealer has 30 days from the date of termination to file the U-5, a disclosure to FINRA that modifies the adviser’s U-4 with information regarding the termination.  The U-5 disclosure includes both narratives and the checking of “yes” or “no” boxes.  Notably, which boxes are checked or not will impact what, if any, information is added to the publicly accessible BrokerCheck Report.

            Once the U-5 is filed, and sometimes before that, FINRA and state regulators will make inquiry as to the disclosure.  Before that, however, potential employers will want to know what is, or will be, on the U-5.  During this early post-termination window, while the adviser is trying to get hired and registered, it is common for the former broker-dealer’s agents to solicit the departing adviser’s clients.  Sadly, these solicitations frequently cross the line between fair competition and tortious interference/defamation.

            It should be obvious from this brief summary that it is critical to retain counsel as soon as you begin to even sense that things are going south with your current broker-dealer.  Sometimes the legal department of the broker-dealer will step in and correct its clients’ improper behavior.  Moreover, there are times when the U-5 language initially intended can be modified to be, while still accurate, less prejudicial or inflammatory in nature.  If all else fails, filing an arbitration claim for compensatory and punitive damages and an expungement is a final avenue of recourse.  Please do not try to navigate these treacherous waters by yourself.

The attorneys of Cosgrove Law Group, LLC represent investment advisors, brokers, and other associated persons nationwide in securities employment and regulatory matters, including U-5 defamation matters. Our attorneys also practice in a variety of other areas of law.  If you have a legal matter or concern, please give us a call and speak directly with one of our experienced professionals.

Overview of FINRA’s Form U5 Reporting Requirements

FINRA Form U5, called the “Uniform Termination Notice for Securities Industry Regulation” is submitted to FINRA when a registered representative is terminated from a firm. A brief overview of Form U5 is contained below:

Currently, there are three different types of Form U5 filings: 1) a full Form U5; 2) a partial Form U5; and 3) amended Form U5. The full Form U5 is utilized when the individual terminates with the firm, while a partial Form U5 is utilized when the individual is terminated from certain jurisdictions or self-regulatory organizations. An amendment to Form U5 is used, for example, when the basis of the individual’s termination has been changed.

Information disclosed on Form U5 can have far reaching effects on financial advisors and stockbrokers because it may be made public through FINRA BrokerCheck. Here’s a closer look at the information FINRA is looking for in the submission of the Form 5:

In Question 7A, FINRA requires that the firm identify if the individual is subject of an investigation by a government body or self-regulatory organization having jurisdiction over investment-related business. Question 7B requires the firm to indicate whether the terminated individual has been subject of an internal review for wrongful taking of property, fraud or violating investment-related statutes, regulations, rules or industry standards of conduct. Firms must answer Question 7C in situations where the individual was charged or convicted of a felony while the individual was associated with the firm.

Question 7D of Form U5 concerns the disclosure of regulatory actions. Particularly, the firm is obligated to confirm whether the individual, when associated with the firm, had been subject of a self-regulatory organization or foreign government disciplinary action having jurisdiction over investment-related business. Disclosure is not mandated; however, when the incident was deemed a minor rule violation pursuant to a plan which the United States Securities and Exchange Commission (“SEC”) has authorized.

FINRA’s interpretative guidance further reveals that firms are not required to monitor the associated person to make sure that Questions 7C and 7D are answered correctly. FINRA calls for disclosure to be made by the firm when the firm has been expressly notified about the incident. In other words, disclosure is warranted if an agency contacts the firm’s staff concerning the incident, and the staff member knows, or should know, of the requirement to report the incident on Form U5.

FINRA is also concerned about whether the terminated individual has been the subject of formal disputes. Specifically, the firm is required to indicate whether, during the time that the individual was associated with the firm, the individual had been named in, or the subject of, certain investment-related, consumer-initiated arbitration or civil actions. Reportable actions include those that are pending, resulted in an award or judgment against the individual, or settled for $15,000.00 or more after May 18, 2009. Firms are even obligated to report certain instances when a customer files a complaint concerning the individual’s activities but did not pursue a more formal action.

In addition, FINRA requires the firm to disclose instances where the individual has been terminated after allegations of misconduct arose. Specifically, FINRA requires that the firms disclose when the individual has been discharged, permitted to resign, or even voluntarily resigned from the firm after allegations surfaced accusing the individual of (1) violating investment-related statutes, regulations, rules or industry standards of conduct; or (2) fraud or wrongful taking of property; or (3) failure to supervise in connection with investment-related statutes, regulations, rules or industry standards of conduct.

Form U5 is required to be submitted within 30 days of the registered representative’s termination. Firms also have an obligation to keep the Form U5 current; there is no expiration date on the firm’s duty to amend the Form U5 to address incompletions or inaccuracies.

Cosgrove Law Group, LLC has represented many advisers around the nation in situations where a broker-dealer reported false and defamatory information on a Form U5, helping them obtain settlements and awards ranging from $100,000.00 to $3,500,000.00. If you feel that you have been a victim to Form U5 defamation, call Cosgrove Law Group and speak to our experienced counsel today.

The attorneys of Cosgrove Law Group, LLC represent investment advisors, brokers, and other associated persons nationwide in securities employment and regulatory matters, including U-5 defamation matters. Our attorneys also practice in a variety of other areas of law.  If you have a legal matter or concern, please give us a call and speak directly with one of our experienced professionals.

A Closer Look At Regulatory Action Disclosures On Form U4

Financial advisors who become registered with a Financial Industry Regulatory Authority (“FINRA”) member firm should be knowledgeable about Form U4, as it addresses a broad spectrum of historical events that are required to be reported to FINRA. FINRA has offered some interpretative guidance, some of which is explained below, as it relates to Form U4 actions.

Question 14 of FINRA Form U4 concerns criminal disclosures, regulatory action disclosures, civil judicial disclosures, customer complaints, arbitrations, and civil litigation. To begin with, and perhaps to no surprise, an individual who has been charged or convicted of a felony is required to disclosure that information on Question 14A. Even, an individual who has even been pardoned for a crime must report the conviction, according to FINRA’s interpretive guidance.

Financial advisors should take note that misdemeanors are also required to be reported on Form U4 in certain cases. For example, an individual who has been charged or convicted of a misdemeanor involving investments, fraudulent conduct, or wrongful taking of property would be required to disclose those incident(s).

Question 14C prompts individuals to state whether they have been found to have committed certain types of misconduct by the Commodity Futures Trading Commission (“CFTC”) and Securities and Exchange Commission (“SEC”) including: making false statements or omissions; committing a violation of investment-related statues or regulations; and causing a business to have its authorization to do business revoked or suspended.

individuals are additionally required to report on Question 14C whether they have been found by the SEC or the CFTC to have willfully violated Securities Act of 1933, Securities Exchange Act of 1934, Investment Company Act of 1940, Investment Advisers Act of 1940, Commodity Exchange Act, or Municipal Securities Rulemaking Board (MSRB) rules. Disclosure is also mandated when the individual has been found to have aided and abetted a person’s violative activities, or failed to supervise another person responsible for committing violations in the securities industry.

Similarly, Question 14(E) requires that individuals report if they have been found by a self-regulatory organization to have made false statements or omissions, violated SEC rules; or caused an investment-related business to lose authorizations to conduct securities business. Any suspensions or expulsions from those self-regulatory organizations are required to be reported. Plus, disclosure is necessitated when there have been any findings of federal securities law violations committed by the individual, or someone who the individual supervised or aided.

FINRA confirms in Question 14G that individuals are required to disclose to FINRA when they are notified that they have become subject of a regulatory complaint or proceeding brought on by the SEC, CFTC, other federal agencies, state securities commissioners and self-regulatory organizations. Investigations, according to FINRA, are signaled by the issuance of a Wells Notice to the individual or the individual being notified from FINRA staff that formal disciplinary action has been recommended by FINRA. However, not all things mean an investigation to FINRA. For example, requests for information, regulatory inquiries and subpoenas, per se, apparently do not constitute investigations.

FINRA’s guidelines further reveal that when an individual has been subject to an order from a foreign regulatory agency that is later vacated, the individual generally has to report the order because of the advisor’s obligation to report the original findings. Exceptions exist, according to FINRA’s guidelines, where the regulatory agency not only vacates the order, but confirms an intent to make that order have retroactive effect.

Individuals who are the subject of a FINRA Acceptance, Waiver and Consent are also required to disclose this information so long as the AWC concerns findings as to the individual’s misconduct identified in Question 14(E). There are some situations; however, where violations of the rules do not have to be reported, including some “minor rule violations” where the fine is no more than $2,500.00 and the individual does not contest the fine.

Financial advisors and stockbrokers often wonder how to go about making disclosures concerning negative events. If you are in a situation that mandates disclosure, such as a pending regulatory investigation, it is best to consult with an attorney. If you need assistance, you may wish to consult with the experienced counsel at Cosgrove Law Group.

The attorneys of Cosgrove Law Group, LLC represent investment advisors, brokers, and other associated persons nationwide in securities employment and regulatory matters, including U-5 defamation matters. Our attorneys also practice in a variety of other areas of law.  If you have a legal matter or concern, please give us a call and speak directly with one of our experienced professionals.

SEC Affirms FINRA’s Findings of EKN Stockbroker’s Form U4 Violations

The Securities and Exchange Commission (“SEC”) affirmed a Financial Industry Regulatory Authority (“FINRA”) Decision in which EKN Financial Services Inc. stockbroker, Louis Ottimo, was assessed a $25,000.00 fine and two-year suspension in all capacities pursuant to findings that he willfully failed to accurately and timely update his Uniform Application for Securities Industry Registration or Transfer (“Form U4”) to reflect judgments, unsatisfied tax liens, and a bankruptcy filing. (In the Matter of the Application of Louis Ottimo, Admin. Proc. File No. 3-17930 (June 28, 2018).

Back on August 22, 2013, FINRA’s Department of Enforcement filed a Complaint against Ottimo alleging that he, inter alia, violated FINRA Rules 2010, 1122, NASD IM-1000-1, and Article V, Section 2(c) of FINRA’s By-Laws by deliberately failing to disclose facts on his Form U4. An Extended Hearing Panel found Ottimo to have committed the violations, and assessed a $25,000.00 fine and two-year suspension; however, sanctions were not imposed in light of Ottimo being barred by the Extended Hearing Panel for a more serious act: committing securities fraud in violation of Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5.

On appeal, the National Adjudicatory Council affirmed the Extended Hearing Panel’s findings of Ottimo’s Form U4 violations. Ottimo subsequently appealed to the SEC, who sustained FINRA’s findings with respect to Ottimo’s Form U4 violations.

Ottimo became registered with EKN Financial Services Inc. on March 9, 2009. Because he was registering with a FINRA member firm, Ottimo was obligated to submit a Form U4. Ottimo, like any associated person, was obligated by FINRA rules to keep his Form U4 current at all times. Under FINRA By-Laws Article V, Section 2(c), this meant that Ottimo was required to update his Form U4 within thirty days of learning facts or circumstances giving rise to the need to amend the form.

Question 14.M on the Form U4 prompted Ottimo to disclose whether he had any liens or judgments that were unsatisfied, and question 14.K prompted Ottimo to disclose whether he, or any organization that he controlled, filed a bankruptcy petition within the prior ten year period. The findings stated that after Ottimo commenced employment with EKN Financial Services Inc., he continually neglected to accurately and timely report information on his Form U4 concerning a bankruptcy filing, six unsatisfied civil judgments and seven unsatisfied liens.

Specifically, the findings stated that Ottimo failed to report five of the tax liens issued from January 2010 to April 2010 on his Form U4 until September 2010. In addition, a November 2010 tax lien was not reported by Ottimo on his Form U4 until June 2011, and a June 2011 tax lien was not reported until April of 2012. Evidently, Ottimo’s reporting of the liens occurred well after FINRA’s thirty day time limit for reporting. Critically, Ottimo revealed in a FINRA hearing that he was cognizant about FINRA’s requirements – but he obviously disregarded them.

Further, from March 2008 to April 2010, a total of six civil judgments had been entered against Ottimo, where Ottimo failed to accurately and timely report those judgements. One of the judgments against Ottimo on June 4, 2009 had been vacated on September 9, 2009. Despite Ottimo having amended his Form U4 on four occasions between June 2009 and August 2009, he failed to report that unsatisfied judgment. Notwithstanding the judgement being vacated, Ottimo was still subject to the reporting requirement.

In addition, Ottimo failed to report a bankruptcy petition for a company he founded and which he served as president, Wheatley Capital Corporation. The findings stated that Wheatley filed for bankruptcy on April 27, 2010, and the bankruptcy petition had been signed and submitted by Ottimo. Ottimo evidently neglected to make the bankruptcy known on his Form U4 until April 19, 2002.

In the Opinion, the SEC confirmed FINRA’s findings that Ottimo’s failure to make timely disclosures of liens, civil judgments and a bankruptcy was violative of FINRA By-Laws Article V, Section 2(c). SEC also found that by way of Ottimo’s Form U4 being misleading and inaccurate, he violated FINRA Rules 1122 and NASD IM-1000-1. And as a consequence of violating FINRA Rules 1122 and NASD IM-1000-1, the SEC confirmed that Ottimo violated FINRA Rule 2010.

Moreover, the SEC concluded that Ottimo was subject to a statutory disqualification because of his (1) willful conduct in neglecting to update his Form U4, and (2) material omissions relating to his Form U4. The SEC turned to Securities Exchange Act Section 3(a)(39)(F), which provides a basis for statutory disqualification when a FINRA member intentionally omits a material fact in applying for association with a member.  Finally, the SEC found Ottimo’s conduct willful given Ottimo’s knowledge of his disclosure obligations and the significance of that information (six unsatisfied civil judgements that totaled more than $440,000.00 and unsatisfied tax liens that totaled more than $260,000.00) to investors, employers and regulators.

Interestingly enough, the SEC reversed a part of FINRA’s fraud findings, and in so doing, set aside the barring of Ottimo and remanded the matter to FINRA to determine what sanctions it deems appropriate. The SEC invited FINRA to reconsider its decision not to impose sanctions against Ottimo for his willful Form U4 violations.

Financial advisors and stockbrokers often question whether to make disclosures concerning negative events. If you are in one of those situations, it is best to be careful versus taking a risk that could possibly end your career in the securities industry. If you need assistance with your Form U4 matter, call (314) 563-2490 today to consult with the experienced counsel at Cosgrove Law Group.

The attorneys of Cosgrove Law Group, LLC represent investment advisors, brokers, and other associated persons nationwide in securities employment and regulatory matters, including U-5 defamation matters. Our attorneys also practice in a variety of other areas of law.  If you have a legal matter or concern, please give us a call and speak directly with one of our experienced professionals.

FINRA Sanctions Against Oppenheimer & Co.

The Financial Industry Regulatory Authority (FINRA) sanctioned Oppenheimer & Co. Inc. more than $3.4 million in November of 2016 due to Oppenheimer’s failing to report required information to FINRA, failing to produce documents in discovery to customers who filed arbitrations, and for not applying applicable sales charge waivers to customers. The $3.4 million in sanctions included $1.575 million in fines and $1.85 million paid to customers. In regards to the customers who filed arbitrations, FINRA ordered Oppenheimer to provide the claimants with the documents that they failed to produce and pay said claimants more than $700,000. The remainder of the $1.85 million was paid to eligible customers who qualified for, but did not receive, applicable mutual fund sales charge waivers.

            These violations by Oppenheimer spanned several years and included failures to report “more than 350 required filings including securities-related regulatory findings, disciplinary actions taken by Oppenheimer against its employees, and settlements of securities-related arbitration and litigation claims.” Additionally, FINRA stated that Oppenheimer, on average, made these filings “more than four years late.” This incident was not Oppenheimer’s first run in with FINRA. Despite prior FINRA investigations resulting in Oppenheimer’s revision of its supervisory procedures, FINRA alleged that Oppenheimer had in fact failed to adopt adequate procedures for reporting regulatory events involving its employees. In March of 2015, FINRA fined Oppenheimer $2.5 million and ordered the firm to pay $1.25 million in restitution for failure to supervise former Oppenheimer broker Mark Hotton. In that instance, FINRA found that Oppenheimer “failed to make more than 300 required filings to FINRA about some of its brokers in a timely manner” with the filings being, on average, “238 days late.”

The FINRA news releases can be viewed at the following links:

http://www.finra.org/newsroom/2016/finra-sanctions-oppenheimer-co-34-million-reporting-violations-failing-comply

http://www.finra.org/newsroom/2015/finra-sanctions-oppenheimer-co-375-million-supervisory-failures

An example of a Motion for Sanctions in a FINRA arbitration can be found below:

FINRA Rule Helps Prevent Abuse

            FINRA Rule 2165 focuses on preventing the financial exploitation of certain “specified adults”.   The rule, put into effect on February 5, 2018, provides for a temporary hold on disbursement of funds or securities from the account of a specified adult.  Two rule changes put into effect include reasonable efforts required to get in touch with a “trusted contact person” and the ability to put a hold on the funds.

            A specified adult is defined as “a natural person age 65 and older; or a natural person age 18 and older who the member reasonably believes has a mental or physical impairment that renders the individual unable to protect his or her own interests.”

            A temporary hold may be placed on disbursement of funds or securities of a specified adult’s account under certain circumstances:

            1.         “The member reasonably believes that financial exploitation of the Specified Adult has occurred, is occurring, has been attempted, or will be attempted;” and

            2.         “The member… provides notification orally or in writing… of the temporary hold and the reason for the temporary hold…;” and

            3.         “The member immediately initiates an internal review of the facts and circumstances that has caused the member to reasonably believe that the financial exploitation of the Specified Adult has occurred, is occurring, has been attempted, or will be attempted.”

            The rule allows the member to get in touch with a “trusted contact person” about the hold on the account.  A trusted contact person is the person who may be contacted about the Specified Adult’s account in accordance with Rule 4512.  “The temporary hold authorized by this Rule will expire not later than 15 business days after the date” the hold was placed.

            These provisions “will allow firms to investigate the matter and reach out to the customer, the trusted contact and, as appropriate, law enforcement or adult protective services, before disbursing funds when there is a reasonable belief of financial exploitation.  It is a critical measure because of the difficulty investors face in trying to recover funds that they have inadvertently sent to fraudsters and scam artists.”

            This newly adopted FINRA Rule addresses a long-standing concern in the industry and provides an extra layer of client protection that brokers can utilize.  If you have concerns about your securities account or actions taken by your broker or financial adviser, please contact our firm to see if we may be able to help.

State Securities Regulators Jump in to the Crypto Fray

           The rules and regulations regarding cryptocurrency are still in a state of uncertainty. This is due to the meteoric rise in the market capitalization and popularity of cryptocurrencies overall. Regulation is currently lagging behind the technical innovations and practices involved in the world of cryptocurrency. Governments and regulatory agencies are still struggling to clarify how existing rules apply to cryptocurrencies and are in the ongoing process of creating and clarifying rules regarding the complex world of cryptocurrency. New rules specifically for cryptocurrencies are also likely to be implemented in the future. Therefore, issues revolving around cryptocurrencies are in a state of ongoing change.

            Of particular interest are Initial Coin Offerings (ICOs). Simply put, an ICO can be viewed in a similar manner as an IPO. Often, a newly created cryptocurrency begins with an ICO sale to gather capital. The volatile and risky nature of ICOs means that they attract more attention and scrutiny from regulatory agencies.           

            On May 21, 2018, the North American Securities Administrators Association (NASAA) announced a “coordinated series of enforcement actions by state and provincial securities regulators in the United Stated and Canada” in order to crack down on fraud in cryptocurrency related investment and fraudulent Initial Coin Offerings (ICOs). This series of actions was dubbed “Operation Cryptosweep” and the goal was to eliminate cryptocurrency investment scams. This involves stopping misinformation and fraudulent practices, with a particular focus on Initial Coin Offerings. Regulators “identified hundreds of ICOs in the final stages of preparation before being launched to the public” and “some were determined to warrant further investigation”. Even the major cryptocurrency exchanges have not been immune to investigation by state securities agencies. The Investor Protection Bureau of the Office of the New York State Attorney General has sent Information Demand Letters to Binance Limited, Bittrex, Inc., Coinbase, Inc., and Gemini Trust Company, among others. The actions taken by regional securities regulators against individual cryptocurrencies and cryptocurrency exchanges include Cease & Desist Letters, Emergency Cease & Desist Orders, Information Demand Letters, and Investor Alerts.

Additional information regarding Operation Cryptosweep can be found here.

Author: Kevin D. Chang, Cosgrove Law Group, LLC.

SEC Scrutiny of Cryptocurrencies and Classification as Securities

         The best way to navigate a new cryptocurrency ICO is to see whether or not it passes the Howey Test as stipulated by the Supreme Court in Securities and Exchange Commission v. W. J. Howey Co. 328 U.S. 293 (1946). A transaction will be considered an investment contract (and therefore subject to securities registration requirements) if it is (1) an investment of money in (2) a common enterprise with (3) an expectation of profits from the investment (4) due to the efforts of a promoter or a third party. Three relevant quotes from SEC v. Howey:

For purposes of the Securities Act, an investment contract (undefined by the Act) means a contract, transaction, or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party…

This definition was uniformly applied by state courts to a variety of situations where individuals were led to invest money in a common enterprise with the expectation that they would earn a profit solely through the efforts of the promoter or of some one other than themselves.

The test is whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others. If that test be satisfied, it is immaterial whether the enterprise is speculative or non-speculative or whether there is a sale of property with or without intrinsic value.

            If a cryptocurrency is indeed classified as a security according to the Howey Test, then it can expect to garner attention from the SEC and it will be required to register as a security with the SEC in accordance with the Securities Act of 1933 and the Securities Exchange Act of 1934.

            A press release from the SEC sheds some additional light on the issue. In the press release dated July 25, 2017, the SEC “found that tokens offered and sold by a ‘virtual’ organization known as ‘The DAO’ were securities and therefore subject to the federal securities laws”. This ruling shows that cryptocurrencies are not immune to investigation and review by the SEC. Furthermore, the SEC stated that “the federal securities laws apply to those who offer and sell securities in the United States, regardless whether the issuing entity is a traditional company or a decentralized autonomous organization, regardless whether those securities are purchased using U.S. dollars or virtual currencies, and regardless whether they are distributed in certificated form or through distributed ledger technology”.

            The SEC Report of Investigation provides an in-depth analysis of why DAO Tokens are securities. The Report states that under “Section 2(a)(1) of the Securities Act and Section 3(a)(10) of the Exchange Act, a security includes ‘an investment contract’”. The analysis used by the SEC is similar to the one used in the Howey Test in that the SEC defines an investment contract as “an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others”. In the case of The DAO, an important caveat is that in “determining whether an investment contract exists, the investment of ‘money’ need not take the form of cash”. ETH was exchanged for DAO Tokens and “[s]uch investment is the type of contribution of value that can create an investment contract under Howey”. Secondly, it was determined that purchasers of DAO Tokens “were investing in a common enterprise and reasonably expected to earn profits through that enterprise”. The SEC stated that profits include “dividends, other periodic payments, or the increased value of the investment”. Lastly, the investor’s profits “were to be derived from the managerial efforts of others”. The SEC noted that the limited voting rights of DAO Token holders spoke to how DAO Token holders lacked “significant managerial efforts or control over the enterprise”. This analysis can be applied to any new token or coin and yields similar results. Regardless of whether cash or cryptocurrencies are exchanged for a new token or coin, it will be an investment of money according to the SEC. Additionally, the term “profits” is broadly interpreted and can simply mean an increase in value of the investment. If a new token or coin is indeed a security according to the Howey Test, then the safest course of action is to register it as a security with the SEC.

         The SEC press release can be viewed in full here.

         The SEC Report of Investigation on “The DAO” can be viewed here.

Author: Kevin D. Chang, Cosgrove Law Group, LLC. 

Arbitration Panel Finds Merrill Lynch Defamed Former Employee

Merrill Lynch, Pierce, Fenner & Smith, Inc., a brokerage firm registered with Financial Industry Regulatory Authority (“FINRA”) and investment adviser firm registered with Securities Exchange Commission (“SEC”), as well as Merrill Lynch International Finance, Inc. (collectively, the “firms”), have been ordered by an Arbitration Panel to pay former employee, Miguel Andres Ballestas, $750,000.00 in compensatory damages based upon the firms having been found liable for defamation on FINRA Form U5 relating to the circumstances of Ballestas’ termination. (FINRA Office of Dispute Resolution Arbitration Award No. 14-01946, April 30, 2018).

According to the Arbitration Award, the firms brought an arbitration against Ballestas alleging unjust enrichment and breach of contract, contending that Ballestas failed to pay a promissory note executed on January 9, 2009. Ballestas counterclaimed, alleging that the firms, inter alia: breached duties of good fair and fair dealing; violated FINRA Rule 2010; wrongfully terminated Ballestas; breached fiduciary and contractual duties owed to Ballestas; and committed Central Registration Depository (“CRD”) Form U5 defamation pertaining to Ballestas’ termination from the firms.

In the “Termination Disclosure” section of the Form U5, the firms were apparently asked if Ballestas voluntarily resigned from the firms, or had been discharged or permitted to resign from the firms, after allegations were made that accused Ballestas of: (1) violating investment-related statutes, regulations, rules or industry standards of conduct; and/or (2) fraud or the wrongful taking of property. Evidently, those questions were answered by the firms in the affirmative.

The Arbitration Award revealed that the firms collectively sought: $407,451.40, which reflected the outstanding promissory note balance, as well as interest, costs and attorneys’ fees; and for Ballestas’ counterclaim to be completely dismissed. However, Ballestas sought a total of $26,000,000.00 in damages from the firms based upon the loss of Ballestas’ book of business, pension, and deferred compensation, and for having suffered from mental pain and anguish by the firms. Moreover, Ballestas sought for his promissory note to be cancelled or at least offset by service payments pertaining to his employment with those firms, and for his CRD Form U5 to be expunged. Evidently, on June 27, 2017, FINRA Office of Dispute Resolution was provided a notice of settlement regarding a portion of the claims made by the firms and Ballestas against each other.

After having considered the evidence, testimony and pleadings, the Arbitration Panel concluded that the firms were jointly and severally liable for CRD Form U5 defamation of Ballestas, and ordered the firms to pay Ballestas $750,000.00 in compensatory damages. Further, the Arbitration Panel recommended that the firms’ answers in the “Termination Disclosure” section of Form U5 be changed to “No” based on the firm’s initial responses being of a defamatory nature.

Cosgrove Law Group, LLC has represented former employees in several U5 defamation cases nationwide, helping them obtain settlements and awards ranging from $100,000.00 to $3,500,000.00. If you feel that you have been a victim to U5 defamation, call Cosgrove Law Group and speak to our experienced counsel today.

EX-CITIGROUP BROKER VINDICATED WITH $4M FINRA ARBITRATION AWARD

A Miami broker, formerly with Citigroup, won a nearly $4 million award in a recent FINRA arbitration case regarding wrongful termination.  Christian Gherardi “worked at Smith Barney and other Citigroup units in Miami from the start of his career in 1996 until he was fired in December 2015.”[1]  Gherardi alleged that Citi fired him because it was afraid he would leave the firm and it wanted to retain his $200 million book of business.

            Moreover, Citi was allegedly worried that Gherardi would leave because of a moratorium that had been imposed on the bank which prevented brokers from pursuing new business until the bank got some things in order with its anti-money-laundering program.  “Citi managers alleged that Gherardi had physically threatened other brokers who were trying to poach his accounts.”¹  Mr. Gherardi claimed the incidents were distorted by Citi in an effort to terminate him and take his book of business.  Gherardi was unable to take the majority of his substantial book of business with him to his new firm.

  

            The award included “$3.45 million in compensatory damages for wrongful termination, $150,000 for ‘lost quarter’ trail fees and almost $396,000 for deferred compensation.”¹  Ironically, Cosgrove Law Group, LLC has obtained awards and settlements of about the same amount for other defamed registered representatives.

            The arbitration award can be viewed here.

-Maria T. Eggert

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[1] https://advisorhub.com/ex-citi-broker-wins-4-million-wrongful-termination-case/

FINRA’S NEW DISCLOSURE REVIEWS MAY HELP LIFT BURDEN FOR FIRMS AND REPRESENTATIVES

Beginning July 9, 2018, FINRA will conduct an individual public records search on every applicant when a broker-dealer files a form U-4 application for registration.  FINRA currently performs this search for all registered persons—but only annually.  This additional records search—

which will satisfy the requirement to perform a search of records for judgments, bankruptcies, and liens only—will provide added benefit to member firms and registered persons, according to FINRA.  In FINRA’s May 18, 2018 Information Notice, FINRA claims this additional search is “likely to: (1) reduce the costs to firms associated with conducting these public records checks, which often involve finding and hiring a vendor; (2) result in more timely reporting of disclosure information to the benefit of regulators, investors and firms; and (3) result in a significant reduction of late disclosure fees related to judgments and liens[1].”

Numbers (1) and (2) seem like probable benefits to both the member firms and the registered persons.  Saying the same for number (3), however, appears to be a stretch.  Regardless, the burden of these public records searches is real, especially to smaller broker-dealers.  FINRA taking over this requirement is a welcome change and one that makes sense given that it is already performing the annual searches.  Firms and agents will still need to respond to and file any items that are found in these searches, but the searches themselves will no longer have to be performed in-house or by a third-party vender for each registered hire. 

Finally, firms and registered persons are still required to report unsatisfied liens and judgments within 30 calendar days of learning of the event as long as the agent is registered and to report other activity, such as certain criminal matters per FINRA Rules.

Cosgrove Law Group, LLC regularly assists registered persons with disclosure matters, regulatory inquiries, registration matters, and other matters related to industry registration compliance.  We also have experience assisting broker-dealers with regulatory inquiries related to their registration filings.

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[1] Firms and registered persons are required to report unsatisfied liens and judgments within 30 calendar days of learning of the event. FINRA determines whether a filing is late based on the date the registered person learned of the judgment or lien and, if it is late, will assess the late disclosure fee based on that date. See Information Notice 8/17/12 (Late Disclosure Fee Related to Reporting of Judgment/Lien Events). Occasionally, an individual is unaware of the existence of a judgment or lien. The public records search facilitates the identification and timely reporting of these events

Missouri Securities Division Bars Two Former Owners of Local Broker-Dealer

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.

WHEN YOU GET A LETTER FROM THE STATE SECURITIES DIVISION

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.

The Opaque World of Arbitration Might Soon Become Clearer in New York

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  

  dispute involved,

· 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.