ARE YOU A FINANCIAL ADVISOR WITH A WRONGFUL TERMINATION OR DEFAMATION CLAIM?

            Advisors terminated by their broker-dealer should immediately retain experienced legal counsel.

The broker-dealer has 30 days after termination to file the mandatory U-5.  Legal counsel can help you negotiate fair and accurate language for this critical and potentially public disclosure.  Moreover, how the U-5 is completed above and beyond the narrative “reason for termination” can be pivotal.

          Many advisors fail to appreciate that, for the most part, their broker-dealer can terminate them without cause.  But there are contractual and public policy exceptions to this general rule that must be evaluated.  Cosgrove Law Group has extensive experience working with financial advisors who have been terminated, including not just U-5 issues, but also issues such as promissory notes and other compensation matters.

Two New Arbitration Cases

            April 26, 2022, brought us two new arbitration rulings to sink our teeth into. One ruling was issued by the Supreme Court and the other by the Court of Appeals. I think the court of Appeals decision might get reversed.

            In Car Credit, Inc v. Pitts, the Supreme Court considered a challenge to a judgment confirming an arbitration award. The appellant claimed that the award should be vacated because the arbitration forum designated in the arbitration clause was not utilized because it was unavailable. In my opinion, the Supreme Court (and Federal courts) go out of their way to confirm arbitration awards. This case was no different, but it relied upon a rule that the Supreme Court has repeatedly articulated. It is highly technical but lawyers in this field need to know it. The Court found that the arbitration agreement contained an enforceable delegation clause and the appellant failed to challenge the validity and enforceability of that clause.

         The appellant did challenge the AAA arbitrator’s authority to hear the case on jurisdictional grounds. The arbitrator denied that challenge. But the appellant failed to challenge the arbitrator’s jurisdiction to make that ruling. Regardless, the Court of Appeals ruled in her favor. But the Supreme Court reversed, noting in part that “the delegation provision is an agreement to arbitrate threshold issues concerning the arbitration agreement”, citing the Seminal case of Rent-A-Center, W., Inc. v. Jackson.

            In what may be the next arbitration ruling to be reversed by the Supreme Court, the Court of Appeals ruled in favor of the appellant in Wind v. McClure. In that case, the Court of Appeals held that the Circuit Court was correct in refusing to enforce an arbitration agreement because its language and format failed to comply with state law mandates. To be specific, the arbitration agreement failed to include certain large font warnings, regarding the existence of an arbitration clause.  The requirement in question, however, is not included in the Federal Arbitration Act, the supremacy of which the Supreme Court strictly enforces. Perhaps the appellate will not appeal. Food for thought.

5th Circuit Strikes Down SEC Administrative Proceedings Framework for Securities Fraud cases

          In Jarkesy v. Securities and Exchange Commission, Case No. 3-15255, a panel of the U.S. Court of Appeals for the Fifth Circuit ruled on May 18, 2022, in a 2-1 decision that the U.S. Securities and Exchange Commission (“SEC”) may no longer use its own administrative proceedings framework to enforce SEC securities fraud cases. Instead, the SEC must bring such actions in federal district courts where respondents may exercise their rights to civil jury. This is a stunning development for the SEC because the case finally recognizes that the SEC should not be acting as both prosecutor and jury in securities fraud cases nor require respondents to exhaust their administrative remedies before having their day in court.

In Jarkesy, the SEC brought administrative enforcement proceedings against the respondents alleging securities fraud. From the inception of the matter, however, respondents challenged the SEC’s right to bring such a matter administratively because it deprived them of their rights to civil jury. The administrative law judge ruled against respondents as did the SEC upon review and ordered respondents to cease and desist from committing further violations, pay a civil penalty of $300,000, and to disgorge nearly $685,000 in alleged ill-gotten gains.

“The case finally recognizes that the SEC should not be acting as both prosecutor and jury in securities fraud cases nor require respondents to exhaust their administrative remedies before having their day in court.”

On appeal, the 5th Circuit vacated the SEC’s judgment and held that the SEC’s administrative proceedings were unconstitutional for at least two reasons: (1) respondents were deprived of their Seventh Amendment right to civil jury; and (2) Congress unconstitutionally delegated legislative power to the SEC by failing to give the SEC an intelligible principle by which it could determine what matters it could use its administrative proceedings framework and what matters it was required to file suit in federal district courts. It remains to be seen whether the SEC will request a rehearing before the entire panel of the Fifth Circuit or seek redress from the U.S. Supreme Court, and whether other circuits of the U.S. Court of Appeals will follow suit. But as of now, the SEC should no longer use its own administrative enforcement proceedings in securities fraud cases.

For further guidance on Jarkesy or SEC enforcement proceedings in general, feel free to give us a call at (314)-563-2490.

Author: Brian St. James