Category: Marc’s Blog

FINRA Promissory Note Decisions Reflect Market Forces.

Early on in my legal career, I was a collection lawyer. In fact, I did collection work as a legal assistant while I was in law school. When I started doing collections in the securities business, I immediately starting working on promissory note cases. They go by many names, we called them Transitional Compensation.

At UBS (PaineWebber), they were called EFLs – for employee forgivable loans. Every firm on Wall Street had a different name. But one thing was for certain, in good markets, everyone got big money, even lower-end producers. And when acquisitions were on the way, even more money flowed. I called it “fattening the turkey”.
Well, those turkeys have come back to the turkey ranch. In an unscientific review of a large batch of recent arbitration awards, it sure felt like close to half of the awards were for promissory note cases. The excesses, and mergers, of just a few years ago have come home to roost. Producers that were hired to fill seats and desks washed out pretty quickly. Or, even worse, they were made to feel so unwelcome through a cut in support staff access and payout, they walked out because they couldn’t afford to work for peanuts any more.
Then there are the retention agreements. Firms provide “loans” or “bonuses” to employees to encourage them to stay after the merger of alleged equals (which it never is). A number of employees, who placed their faith in the smooth-talking executives whose bonuses counted on the short-term success of the merger, left their firms for many reasons. Most of the time it turned out that the grass was not greener on the other side.
For many years, one of my brokerage firm clients never gave out loans. They had an open door policy, meaning that the door was always open if the broker no longer wanted to work there. That firm was swallowed up – twice. It bears no resemblance to the firm it once was. And that’s a real shame. Because one never knows if the broker is moving for the culture or the money. And when the honeymoon is over, all that’s left is an arbitration to sort out the damage.
That’s the near-frozen view of one lawyer from Jupiter, Palm Beach County, Florida. I’m Marc Dobin.
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Employers’ Use of Computer Fraud Act May be Slipping.

My friends at Fisher & Phillips, LLP maintain the Non-compete and Trade Secrets Blog. I have known these folks for a long time and they’re good at what they do. They may be wrong (wink), but they’re good at what they do.

The reason I say that the may be wrong is that we don’t frequently agree on issues relating to stockbroker recruiting. Usually, my friends are representing the brokerage firm and I’m representing the soon-to-be victimized registered representative who’s just trying to earn a living. I’m much more in favor of freedom of movement than they are. And that’s what makes them wrong.

One of the tools in the former employer’s arsenal had been the Computer Fraud and Abuse Act. I have defended cases where the CFAA has been used as a weapon in an attempt to criminalize, or quasi-criminalize, the simple act of accessing one’s clients’ names and addresses to facilitate a move from one firm to the next. Brent Cossrow, of Fisher & Phillips, provides his analysis of a criminal proceeding that analyzes the CFAA and its limits.

The US District Court for the Southern District of New York held that accessing a computer using one’s authorized username and password, and obtaining information he/she was otherwise authorized to retrieve, but for alleged improper intent, is not a violation of CFAA. I’m pretty sure that Brent disagrees with the court’s holding, at least on behalf of his clients who would like to use the CFAA to scare a former employee into settlement. That’s OK. It’s a free country. For now.

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

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SEC suit raises disclosure questions for breakaway reps – Investment News

Investment News discusses a recent SEC action against an investment adviser who left a wirehouse and formed his own RIA. Many brokers are viewing RIA business as a magic bullet to solve their increasing unhappiness with the wirehouse life.

I have seen this before. But years ago, it was “wrap fees.” Brokers were tired of being accused of churning (executing trades solely to generate commissions) so they thought that a wrap fee, where a fee is charged as a percentage of assets. But then the SEC found that brokers were setting up wrap fee accounts and not performing any special services or executing trades. So this was not in the clients’ best interest either. A few major firms paid fines to FINRA and/or the SEC for failing to detect this “park and wrap” strategy.

So, how does an investment professional avoid these various potholes? Remember that the regulators do not want you lying to clients. Don’t tell them falsehoods to entice the clients to move to your new firm. If you’re going to have a wrap fee arrangement, make sure services are delivered in return. Simply placing a client in a wrap fee and moving on is not in the client’s interest.

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

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FINRA washes out broker’s mouth with soap and a suspension.

OK, so remember when your mother was allowed to wash out your mouth with soap for using “dirty” words? (Now I think it counts as child abuse.) I do. There is at least one person who does not.

In a recent FINRA disciplinary decision, a certain “forbidden” word was written in the opinion multiple times. I can’t recall ever seeing that word appear in a prior opinion, but it most certainly could have. The opinion is here. The interesting thing is that the word was used in quotes of statements made by the Respondent (the person whose license was in jeopardy.)

I am certainly no prude. Anyone who knows me knows that I can sling profanity with the best of them. But I make it a practice of not directing it at regulators (at least not in their presence). But this individual, who was represented by counsel and must have been embarrassed by his client’s conduct, simply let the FINRA employees have it, with both barrels and unvarnished. I don’t know WTF he was thinking.

But I can only imagine his reaction to the fact that the National Adjudicatory Council increased his fine from $12,500 to $50,000 and increased his suspension from 35 days to one year. I’ll bet he said more than WTF.

So what did we learn from this? Don’t curse at regulators, unless you’re related to one. Behave yourself in disciplinary hearings. And don’t threaten people that you will get them fired. Either get them fired or don’t. They don’t react well to mere threats. In all my time practicing, I can’t say that I’ve ever threatened a regulatory employee that I would make them lose their job. I’m thinking that they would resent that behavior. But that’s just me.

So, read the decision and let’s all say WTF together and thank our stars that we’re smarter than this one person who seems to have an anger management issue.

That’s the friggin’ view of one lawyer from Jupiter, Palm Beach County, Florida. I’m Marc “effing” Dobin. Have a great “effing” day.

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SunTrust Investment Services Disciplined for Unit Investment Trust Activities.

SunTrust Investment Services brokers, as I understand it, sit in banks. They wait for bank clients to come in and try to sell them securities. Generally, these clients are not experienced investors who are seeking out a stockbroker, active trading or margin accounts. They are customers who remember when CDs paid 5% per year and thought that was low.

In these low interest rate markets, it is not unusual for the average CD buyer to become a “yield hog” and look for something that is paying more than the 1 – 3% the bank is offering. These clients, for the most part, only look at current yield and don’t consider that the underlying value will fluctuate. Bank brokers have disclosures that they are required to make, but the customers frequently just don’t pay attention to them.

FINRA just ordered SunTrust Investment Services to pay $1.44 million in fines and disgorgement for unsuitable, mostly short-term, transactions in Unit Investment Trusts, Closed-End Funds and Mutual Funds. (when you click on the link, you will need to go to the last pages of the FINRA newsletter.) FINRA found that two brokers in the Maryland area were short-term trading these “packaged products” which was unsuitable.

The “packaged products” are not short-term vehicles. FINRA has pointed this out before. Branch Managers are supposed to pick this up. They are supposed to look for “red flags” indicating possible violations. In this case, the manager ignored the red flags and was suspended as a principal for six months and fined $10,000. One of the two brokers has been barred from the industry. The other broker still has charges pending.

The irony of this whole story is that these transactions last took place in 2006 and FINRA’s disciplinary system just ruled. So four years later, when one broker is gone, the manager suspended and the other broker still fighting, SunTrust pays a big penalty (for me, anyway) and moves on. That’s the cost of doing business. Will it change the way SunTrust does business, one would hope it would. But the systems were in place already and the warnings were ignored. Maybe next time?

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

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A good use for an iPhone with a broken screen – space adventurer!

This is pretty far off-topic, but I have to admit that this is a good use of an iPhone. A father and his young son sent an iPhone with a broken screen into space tethered to a weather balloon. This is very cool.

Homemade Spacecraft from Luke Geissbuhler on Vimeo.

I’m still not an iPhone fan, but at least we can say “Space Travel? There’s an app for that.”

That’s the extraterrestrial view of one lawyer from Jupiter, Palm Beach County, Florida. I’m Marc Dobin. Take me to your leader.

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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.

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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.

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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.

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