The shoe is on the other foot – Schwab sues other broker/dealers for alleged misrepresentations.

Holy crap this can be fun sometimes. Let’s see, customers have filed numerous arbitrations against their firms for mortgage-backed securities. Charles Schwab may have been among those firms, I haven’t taken a deep dive into the FINRA Awards database or Brokercheck, but I would venture a guess that there’s at least claim.

So Schwab thinks it’s been lied to, Investment News reports. So what does Schwab do? It files suit alleging misrepresentation against a number of the big players on Wall Street.

Notice that I said “suit” and not “arbitration.” Apparently someone at Schwab missed that part of the FINRA Constitution and Rules. So the first move should be to compel arbitration. I’m guessing that this is a strategic move to scare the broker/dealers into a settlement rather than face exhaustive discovery, either in court or arbitration, against a well-funded and angry opponent.

It seems like Claimants’ lawyers everywhere may want to see a bouquet of flowers to the General Counsel at Schwab.

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

Investment Advisor Representatives Face New Public Disclosure

FINRA registered representatives have faced public disclosure for quite a while. In fact, public disclosure, including time before it was on the web, has been around for close to 20 years I think.

Initially, a request was made in writing or by telephone. Then the NASD, as it was known at the time, would print out a report and send a copy to the requestor. The firm and the broker would also receive notification of the request. That has gone by the wayside. Like so many other things, the Internet has changed things.

Now, anyone who’s interested can simply log on to FINRA Brokercheck, follow the instructions and you’ll see what’s available from FINRA. Many states, Florida included, will give a requestor a copy of the broker’s complete CRD record, which is much more thorough. This worked for stockbrokers, but investment advisor representatives were a different animal.

For instance, a broker could lose his/her license and still get a job with an investment advisor. The public customer might not think to look at either the Brokercheck or CRD reports. So the broker might have issues in his/her past that would give the client a reason to move on. But without a coherent reporting system, the client was operating in a vacuum.

Things have now changed. The SEC has significantly upgraded its online disclosure system, which used to be called IARD. It is now called IARD and you, dear reader, can find it here.

Disclosure is good. On the SEC system, one can search by representative name or firm name. The reporting is not perfect, but it is much better and more extensive than it was before. So the next time a good-looking, smooth-talking, salesperson is sitting across your kitchen table pitching his/her firm’s great management abilities, get out your laptop and log on to the IAPD. Maybe you’ll find something that will make you think twice, or at least ask more questions.

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

Put a fork in Jesup & Lamont, they’re done.

In a terse press release, Jesup & Lamont announced that it is reducing its staff to a minimum. Jesup stated that it is terminating “all non-essential personnel.”

One can only hope that the firm’s general counsel, Todd Zuckerbrod, is shown the door. I don’t think it’s a coincidence that his treatment of FINRA put the firm in regulator’s crosshairs. And with the pending motion to confirm/cross-motion to vacate of the Devore decision, things will probably get worse. Devore is the case that Jesup actually won on liability but was sanctioned $60,000 for discovery violations.

And word on the street is that Jesup lost its big case with the former clearing firm for Empire Financial, Penson, and was ordered to pay Penson’s legal fees. I’m still waiting to see that award.

Mr. Zuckerbrod is not the only person to blame. The executives at Jesup allowed him to conduct himself in this manner. They ratified his boorish behavior, as described in the press, and kept him in place. In doing so, they encouraged him to act in a manner that appears to have resulted in a fight with FINRA that, ultimately, led to the firm’s near-death experience. Congratulations, boys, you managed to sully the name of an institution that survived any number of market crashes, economic downturns and the like.

But you just couldn’t survive your own bad behavior.

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

Securities America – A leopard with the same spots.

Yes, I have a few miles on me and more than my share of gray hair (although my driver’s license says it’s brown). But that sometimes gives me a good perspective. 7 years ago, my law partner and I handled a customer case against Securities America. At the time we handled the case, Securities America was a subsidiary of American Express Financial Advisors, itself a subsidiary of American Express.

The case involved a stolen identity for the broker, failure to supervise by the firm and giant damages award to our clients, including attorneys’ fees. One of the witnesses in the case was the head of compliance for Securities America, David O. Spinar. His underlings conducted an “audit” of the branch in question that I described as a “drive-by.” The arbitrators seemed to agree with that assessment.

Mr. Spinar is in the news. He apparently had misgivings about Securities America’s marketing of Medical Capital Associates and its affiliate products. Investment News reports that he voiced his concerns about the lack of audited financials. Interestingly enough, Mr. Spinar saw this as a warning sign. In the case we handled some years ago, there were plenty of red flags, but no one seemed to notice, until it was too late.

So it looks like Mr. Spinar, who no longer works for Securities America, will be in the witness chair again. At least, this time, American Express won’t see its name in the headlines. But Ameriprise, the spinoff that has since merged with H&R Block Financial, is likely to be fighting many battles to come.

But you have to ask yourself, what was Securities America doing selling this crap anyway? The Medical Capital Associates saga will likely continue for some time. Stay tuned.

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

Lack of funds is no excuse – FINRA

I call it the “30-day rule.” Way back when, arbitrators issued awards and FINRA, then known as the NASD and New York Stock Exchange, really didn’t pay attention once the award was entered. The prevailing party, if owed money, was left to the courts to enforce the award through a motion to confirm the arbitration award. And the prevailing party was left to its collection devices.

Then, things changed. The regulators got interested. FINRA created a rule that required that the award or settlement be satisfied within 30 days of issuance. The “or else” was a summary suspension of the firm’s or broker’s license. This was accomplished through a Rule 9554 proceeding, essentially a “show cause” hearing.

One of the defenses that FINRA had been allowing is the “I can’t pay” defense. A firm or broker could demonstrate that there was a “bona fide inability to pay” and continue to be a broker, defeating the application for a suspension.

All that is changing now. Effective July 2, 2010, if a firm or broker receives a 9554 notice, advising that their license will be suspended, the registrant’s inability to pay is no longer a valid defense. FINRA has issued Regulatory Notice 10-31 explaining its position. Essentially, a loser in an arbitration now has three choices, pay (in one lump or over time), move to vacate the award or file for bankruptcy. If you can’t pay, FINRA says you can’t play.

This makes sense. Why should a broker continue in this business if they can’t honor a properly issued arbitration award? This flies in the face of the FINRA precept of highest standards of commercial honor and just and equitable principles of trade. Sometimes FINRA and I don’t see eye to eye. This time we do.

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

Enron’s Skilling gets another bite at the apple (not an iPhone)

Today the Supreme Court vacated the criminal conviction of Jeffrey Skilling stemming from the collapse of Enron. Some of you may remember that Skilling served as the CEO of Enron until August 14, 2001. Less than 4 months after his departure, Enron spiraled into bankruptcy. On May 26, 2006, following a 4-month trial and nearly 5 days of deliberation, the jury found Skilling guilty of 19 counts, including honest-service wire fraud, money-or-property fraud, and securities fraud.

The Supreme Court vacated Skilling’s conviction because it found the “honest-services” wire fraud statute, 18 U.S.C. § 1346, to be void for vagueness. The Court held that the honest-services fraud statute is limited to schemes involving bribes and kickbacks. Since the government did not allege that Skilling solicited or accepted side payments from a third party in exchange for making the misrepresentations about Enron’s fiscal health, the Court determined that Skilling did not commit honest-service fraud and vacated his conviction.

Don’t worry, the Supreme Court did not give Skilling a get out of jail free card. So your 401k is still safe (at least for the time being). A new trial is likely in the works. The case has been remanded to the Fifth Circuit Court of Appeals for further proceedings.

That’s the Enron-free view of one other Lawyer from Jupiter, Palm Beach County, Florida. He’s James Duffy.

Another Fraudulent Investment Scheme – In My Own Backyard

I can’t believe it. The SEC announced that it charged an investment adviser in Palm Beach Gardens, Florida with fraud for running a Ponzi scheme. Here is the Litigation Release.

OK, listen up. The release says that this “adviser” claimed to be making returns of 8% per month. Huh? Have we not learned anything? Surprise! They were lying.

Let’s repeat this again. If an investment return is too good to be true, they are going to steal your money. If you think that you’ve discovered the only investment adviser on the planet who can consistently deliver returns that are 30% better than the market, you are going to lose your money, your house, your dog and everything else you own.

That’s the angry view of one lawyer from Jupiter, Palm Beach County, Florida. My name is Marc Dobin.

No surprise here – 300 reps in limbo as Finra shuts down Jesup & Lamont Securities

You will recall that I have discussed the behavior at Jesup & Lamont in two prior postings. And it didn’t take long for the predicted result to occur. On Friday, FINRA shut down Jesup & Lamont Securities Corp., a principal unit of Jesup & Lamont, Inc.

You can read about it here. I don’t take joy in seeing these 300 brokers losing their livelihood. I don’t take joy in the stress caused to the unwitting customers of the firm. I only get to say “I was right.” Frankly, these 300 brokers will be better off working someplace where management seems to have a clue on how to run a brokerage firm.

I said this in a prior posting – don’t pull on Superman’s cape.

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

FINRA proposes an increase in the arbitrator list.

In the “old” days, there was an arbitrator list. Then the rules changed and there were two lists. Then there were three lists. As it stands now, if a party gets an arbitrator list from FINRA, each of the three sub-lists has eight names on it.

Under the current rules, each party is permitted to strike four names from each of the three lists. So, mathematically, the parties could end up striking all 24 names on the list. When this occurs, FINRA dives back into the pool and chooses three arbitrators that no party selected. This is supposedly random, but my experience shows very little randomness to it.

FINRA has proposed a change. They want to send out lists with ten names on each sub-list, but continue to give the parties only four strikes. In a two-party case, that would, theoretically, leave two names. Also theoretically, these could be the two people on each sublist that the lawyer disliked slightly less than the four that were stricken. In other words, the parties could end up agreeing on arbitrators that they still don’t like, but not as much as the four they each struck.

This is intended, I believe, to remove some of the administrative burden on FINRA staff. If they are guaranteed to have two arbitrators left on all three sub-lists, in most cases, then they don’t have to go back into the pool for new arbitrators. In theory, this might work. What it may also do is remove what appears to be the lack of randomness when the parties strike all the names. At least two names will remain and the parties will not be surprised by the designation to the panel.

I think this is a bit of “the devil you know is better than the devil you don’t know.” Like I said, at least the panel will have names ranked by a party, in most cases. I can’t even decide if this is a good or bad thing. I think it’s good. Only time will tell.

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