Author: Marc Dobin

The Other Shoe Falls – Jesup & Lamont Securities Files for Bankruptcy.

To anyone with a pulse and half a brain, this should come as no surprise. Jesup & Lamont Securities Corp., the poorly-run broker-dealer that swallowed up other broker-dealers, has filed for bankruptcy protection under Chapter 11. Using Chapter 11, the firm could reorganize and emerge from the other side. Frankly, it should convert to Chapter 7 and be euthanized.

There are enough broker-dealers on this earth. There are certainly plenty with the questionable reputation of Jesup & Lamont. Much of that has to do with the firm’s former management, most of whom have lost their jobs. It’s unfortunate that they’ve lost their jobs, but if they had done their jobs in the first place, like controlling the firm’s general counsel, perhaps they wouldn’t have ended up on FINRA‘s radar screen.

But all that is behind Jesup now. The firm will go through bankruptcy and, perhaps, end up being owned by the very people who hold judgments and awards against it. Wouldn’t that be ironic?

That’s the view of one lawyer from Jupiter, Palm Beach County, Florida. I’m Marc S. Dobin.

Is the FINRA Proposal for Public Arbitrators a Good Idea?

My initial answer is no. Suzanne Barlyn, a reporter with Dow Jones and the Wall Street Journal, reports that FINRA is planning to make its “pilot” program permanent.

The pilot program provided the opportunity for public investors to have three public arbitrators and no industry-affiliated arbitrators. The results of the pilot program are that 17 of 23 cases resulted in an award to the customer. This is viewed as a 70% “win” rate. I’m not sure this is a statistically significant number when compared with FINRA’s much larger universe of over 4,800 cases heard to completion since January 2005. The win rate over time is less than 50%.

Again, I’m not sure that’s a bad thing. On average, during the same time period, approximately 20% of all filed cases went to hearing. This means that, on average, 80% settled or went away in some fashion. (I think that involuntarily dismissed cases are few and far between.) But this is a big sample, not like looking at 23 cases and declaring a trend.

There could be a number of reasons why the number is higher in the pilot program. Statistical anomalies for one thing. Another could be the types of cases being handled in the pilot program. I also have concerns that a purely public panel may lose the benefit of the knowledge of an industry panelist’s experience.

Vociferous plaintiff’s lawyers and their pals at NASAA say that the process is unfair because of the industry panelist. But how about switching it around? Is the process now fair because one party, the brokerage firm and its broker, will be judged by 3 people with no industry experience. Or does fairness only exist when the process is stripped of any industry insider experience? This makes no sense to me.

Will I choose an all-public panel for cases where I’m representing customers? I don’t know. I’m still not convinced that it helps me. I’m sure someone will be keeping score.

That’s the view of one lawyer from Jupiter, Palm Beach County, Florida. I’m Marc Dobin.

FINRA changes arbitrator list – And then there were two?

In case you don’t normally handle FINRA securities arbitrations, after the Statement of Claim and Answers are filed, the parties receive a list of arbitrators. The classification of arbitrators, public vs. non-public (these used to be called industry), is usually a total of sixteen choices in public (broken down into two 8-person lists) and one 8-person non-public list. Each party was entitled to four “peremptory” strikes, forcing out up to four people “just because”. The remaining names were ranked from 1 through, up to, 8 depending on the number of strikes.

Once FINRA received the list, the ranked arbitrators common to both lists were combined and the rankings are added up. The arbitrator with the lowest combined ranking (meaning most desirable from the combined list) is contacted first, then the next, and so on. But if both parties exercised all of their strikes, then it was possible that there were no names in common and FINRA would have to select names, on its own, at random. The parties, theoretically, then have no input on who the next two arbitrators are.

This selection process will change on September 27, 2010. Under the new rules, which you can read about here, each list will have groups of 10, not eight. However, the number of party strikes will not increase. This could lead to some unintended consequences.

For example, let’s say that the Claimant and Respondent use each of their strikes on four separate people, striking a total of eight. This leaves two people, who could have been ranked as numbers 5 and 6 by both parties. So the parties end up with their least desired arbitrator candidates (which they could not strike). While this may end up removing an administrative burden on FINRA, I’m not sure the parties are going to be happier.

On the other hand, my own experience led me to believe that the previous procedure was not so “random.” It seemed to me that the many of the same arbitrators would get the call as an off-list choice. But that could just be my perception.

So now, we will likely be assigned a name that we know, but not necessarily one that we like. It is rare that both sides agree on which arbitrator candidates they like, so it will be interesting to see how this new process changes the dynamics of list selection.

And finally, here’s another twist. When multiple parties are represented by the same lawyer, they get one set of strikes – four per listing of 10. When multiple parties are represented by separate counsel, each lawyer gets a set of strikes, four per lawyer per listing of 10. If both the broker and the firm are named respondents, then the entire list can still be stricken. A loophole? Perhaps.

That’s the view of one lawyer from Jupiter, Palm Beach County, Florida. I’m Marc Dobin.

Marc S. Dobin, author of Lawyers Are From Jupiter, featured in Law Technology News.

Those of you who know me, know that it is hard for me to keep my mouth shut. Sometimes this is a detriment.

I recently wrote to the editor of Law Technology News, Monica Bay, concerning my opinion about Thomson Reuters’ acquisition of some software I am using. We got to “talking”, via email, and next thing I know, she asked me to write a story about the firm’s use of technology. So I did.

And now I’m published. I love the title “Once and Again Solo” which is pretty much the way I’ve felt over the last two years. I had a firm, then I was solo, then I was with a firm, then solo again.

If you read the article, I hope you enjoy it. I enjoyed writing it. It pointed out to me exactly how complex it can be just to run a two-lawyer practice. And that my wife definitely can be described as “long-suffering.”

That’s the view of one Lawyer from Jupiter, Palm Beach County, Florida.

Small Broker/Dealer faces closure as FINRA tightens the noose.

Investment News reports that a small California broker-dealer, Pyramid Securities, has been told by FINRA to close its doors for net capital violations. This is a result of a securities arbitration award against the firm in the amount of $339,000. From reading the article, it appears that the firm does not have the money, or insurance, to pay the award.

And that brings up the scary part of doing business in today’s environment. The entry cost is fairly low for anyone to set up a broker-dealer and then do significant damage. I have represented customers in arbitration claims where I have heard, more than once, “if you win, you’ll put us out of business.” Given what I’ve seen, that would not necessarily be a bad thing.

But Pyramid does have some money. It hired a lawyer to get an injunction to stop FINRA from shutting the firm down. The Federal judge has said no, for now. Which means that Pyramid will go the way of Jesup & Lamont, another firm with net capital issues.

I don’t pretend to know how to calculate net capital. I think computers do it, for now. But the question an investor should ask of him or herself is “what happens if something goes wrong? Who stands behind the guy who is selling me this idea? What if I need legal recourse?” In a number of instances, the broker-dealer is only worth as much as the credit line on the owner’s credit card.

Some of you may say “What about SIPC?” SIPC may cover some unauthorized trading losses, if the firm goes out of business. But SIPC is not an insurer or guarantor against market losses. Neither is a brokerage firm. But there are bad apples out there. There are brokers whose sole interest is lining their own pockets. When that occurs, arbitration is generally the recourse. And if you win against one of these small firms, you may be able to use the award to wallpaper your bathroom, but that’s about it.

So ask questions? What insurance do you have? How much in cash reserves do you have? Who stands behind your company? And get it in writing.

That’s the view of one lawyer from Jupiter, Palm Beach County, Florida. I’m Marc Dobin.

Google adds telephone calls to Gmail and Gmail Voice

I love technology. It usually makes my life easy. I love saving money. I love technology that helps me save money. And I must add that I am a big Google fan. I have a Gmail account. I have a Google Voice number. My business email is hosted by Google.

I noticed something new in my Gmail account today. It told me, in the Chat section, that I could make telephone calls with my Gmail chat client. I tried it. I called my friend, Joel Beck in Atlanta to try it out. He remarked that I sounded like I was on a good quality speakerphone. In effect, I was. I was using the microphone on my laptop and the speakers on my desk.

Joel sounded great. Then we did Google video chat. Unfortunately, there’s only so much a webcam can do for the subject (sorry Joel). Google has said that it will keep the service free through the end of the year and then see what happens.

That’s the technological view of one lawyer from Jupiter, Palm Beach County, Florida. I’m Marc Dobin.

Citigroup executives get a slap on the wrist – Brokers get a punch in the face.

There are times when I just wonder where the justice is. I represent, and have represented, former Citigroup (Now Morgan Stanley Smith Barney)brokers in arbitration claims filed by the firm seeking recovery of promissory note money. Citigroup isn’t alleging that my clients did anything wrong other than refusing to pay back the money Citi claims that it is owed.

On the other hand, my clients’ careers have been devastated, for the most part. The past several years have not been great ones to be a broker, particularly a low to mid-level producer at a firm looking to make itself look pretty for a suitor. That was the case with Prudential Securities brokers in 2002-2003 and it was the case more recently when Smith Barney and Morgan Stanley were doing the dance. Morgan Stanley and Smith Barney made it very clear that honest, hardworking (though not financially successful) brokers were not going to be able to hang around the firm any longer.

It did not matter if the broker came to work every day. It did not matter that the broker had no customer complaints or regulatory problems. It did not matter that the broker needed what little money the firm was willing to pay, even at a 20 or 25% payout. The broker just wanted to work and have the opportunity to build up his or her book of business. Instead, of course, the firms made it impossible to make a living and forced the brokers through the door. Then, Citigroup files an arbitration to recoup the money that the brokers were living on because their business collapsed.

Meanwhile, at the top of the food chain, two senior executives were caught by the SEC telling untruths about Citigroup’s exposure to sub-prime mortgages. They did it “unintentionally” we are told. Who cares. They did it, they messed up and their total fines were $180,000. You can read about it here.

According to Citigroup’s proxy statement, Gary Crittenden, who paid a $100,000 fine, received compensation totaling over $12,000,0000 in 2008. How is he supposed to learn from this experience?

In the 2009 Proxy Statement, it was disclosed that he received a $350,000 housing allowance, including a car and a driver, for the slightly more than six months he worked at Citigroup in 2009. My clients are lucky to to have a car that starts in the morning. This means that he had to give up less than 30% of his car allowance in 2009. I hope he was able to survive on what was left over from 2008.

That’s the angry view of one Lawyer From Jupiter, Palm Beach County, Florida. I’m Marc Dobin.

The fat lady is singing – Jesup & Lamont, Inc. files for bankruptcy.

According to this website, Jesup & Lamont, Inc. filed for Chapter 11 bankruptcy protection today. Perhaps this phoenix will rise from the ashes, but I doubt it will do so under current management. A sixth grade lemonade stand might have been run better.

It’s a shame, too. Jesup was a storied name, but so were Oldsmobile, Pontiac and Mercury. But they all suffered from the same problem – bad management and more desirable competitors. And let’s not forget that there are FINRA employees who have broken out the champagne and are doing cartwheels in the hallways. (Although they would never admit it.)

I fell badly for some of the employees, too. (But not their management team.) At least some of their registered representatives have landed with another firm, Anderson Strudwick of Richmond, Virginia. I wish them the best. Maybe they’ll flourish without the burden of working for their former employer.

The interesting question now is, what will happen to all the brokers who were named in arbitrations while Jesup employees. Being a broker formerly employed by a now-defunct brokerage firm is akin to being the last member of Saddam Hussein’s private army, and you didn’t find out that Saddam surrendered. You keep fighting the fight, but you have only your own resources to back you up. We shall see.

That’s the view of one Lawyer from Jupiter, Palm Beach County, Florida. I’m Marc Dobin.

Madoff Investors Face Clawback Fight.

The Wall Street Journal reports that Irving Picard, the Madoff Investment Trustee, intends to sue about 1,000 investors who withdrew more than they put into the Madoff fraud. Mr. Picard faces a December 2010 filing deadline to start his lawsuits. This is not just going to be an inconvenience for some people, it could mean the end of their lifestyle as they know it.

This will leave these investors with a predicament. Do they spend down some of their remaining money to fight the lawsuit and argue that they don’t owe the money back? Do they argue that it is unfair because they didn’t know about the fraud, or that they spent the money? Do the try and cut a deal with the Trustee, who seems determined to treat everyone “equally”.

And fairness issues become very tangled. What happens to the person who spent the money in an unrecoverable manner, like a round-the-world trip, or something less extravagant like a grandchild’s college education? Will Mr. Picard try to drill down and recover the funds? Will he require the sale of long-held assets that were unrelated to the fraud? These are difficulty legal, practical and moral issues that the trustee will have to address.

In the meantime, it is likely that a cottage industry of Madoff defense lawyers will develop. They will develop some sort of strategy to deal with the Madoff Trustee’s lawsuits. Time will tell.

That’s the view of one Lawyer from Jupiter, Palm Beach County, Florida. I’m Marc Dobin,