Since the beginning of the Bernard Madoff scandal, I have stated that the people who need to be scared (other than Mr. Madoff and his cohorts) are the “feeder funds.” They may have money. They probably have some duty and they’re still in existence. This is a stark contrast to Madoff’s entities.

I have spoken with several Madoff investors. As I explained to them, it is unfortunate to have this happen to them and that they had a direct relationship with Madoff. In this circumstance, they are simply creditors of Madoff’s entities and have to deal with the receiver and SIPC Trustee. On the other hand, I always said that a good claim could probably be made against the solicitors and feeder funds.

This appears to be the case in at least one situation. HedgeFund.net reports that a Madoff investor was successful in asserting a breach of fiduciary duty claim in arbitration against Ascot Investors, a feeder fund. This article and others report that the arbitrators found that the Ascot Fund was 99% invested with Madoff and that the fund’s management was “neither equipped nor willing to seriously probe what he was told by Madoff.” I’ll bet they were able to spend the money they were making, though.

This decision came to light by way of a Motion to Confirm the Arbitration Award made by the former investor. Such a Motion is necessary to turn the arbitration award into a court judgment. This means that Ascot has not voluntarily paid the award. In fact, Ascot’s attorney is quoted as saying that the arbitrators “manifestly disregarded the law.” That’s usually lawyer-speak for “we’re not paying without another fight.” Good luck, fellas, you’ll need it.

The other interesting part seems to be that there was a confidentiality provision of some sort. The investor’s lawyers are seeking to lift that restriction. This does not appear to be a FINRA arbitration.

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

I have been in this business along time. I have been through the 1987 crash, the 1989 mini-crash, the “tech wreck” of 2000 and the crash of 2008-09. Some of these crashes were caused by economic factors, but some have been blamed on human error and computers. The SEC will sift through the wreckage (including my newly-created Roth IRA conversion) and figure out who to blame.

TheStreet.com has its own analysis that includes the Greek crisis and the “trading error” theory. It is the latter theory that concerns me. The 1987 and 1989 crashes were blamed on technical trading mechanisms, usually referred to as “program trading”, that were triggered by market events. In 1987, the crash occurred on the day when the October options and futures expired on the same day. This is believed to have caused the crash.

The 1989 crash started when UAL, the parent company of United Airlines, announced that its management buyout had failed. Many speculators were using a short put strategy as a proxy for buying UAL stock. This could later be described as a failed put strategy. When the covering started, this caused another downward spiral that took the rest of the market with it as the computers took over.

One of the suspects in this most recent crash is a trading error in one stock, Procter & Gamble. It has been reported that some genius entered an order to sell one billion shares of the company’s stock instead of one million shares. Apparently he skipped the lesson in Mrs. Smith’s fourth grade class that covered the difference between one billion and one million.

Anyway…this erroneous order supposedly indicated to the new bad guys in the markets, the “high-frequency” traders, that the market was going to fall. So these automated traders – “program trading” again – started to sell. When there is an oversupply of sell orders, prices drop. When prices drop, more sell orders are generated and before you know it, the computers caused my IRA to lose 10% of its value in an instant.

I have been concerned about this “high-frequency” trading since it came on the scene. It seems to me that this type of trading is harmful to the markets overall and is another reason for the entire “main street v. wall street” debate. A retiree sitting in his living room in Peoria cannot access the markets in the same manner as some “high-frequency” trading computer in a server farm in New Jersey. To make matters worse, it seems that the New York Stock Exchange is encouraging this behavior.

In my humble opinion, this is a result of the NYSE becoming a public company and placing profits over fairness in its markets.

That’s the 10% down view of one Lawyer from Jupiter, Palm Beach County, Florida. I’m Marc Dobin.

FINRA is seeking to close a loophole. As many people know, if a broker or brokerage firm is found liable in an arbitration, the responsible party has 30 days to pay or move to vacate or modify the arbitration award. This is quite a hammer to have.

But there is an out. If the broker states that he/she does not have the funds to pay the award, then FINRA can allow the broker to stay in the business, service clients and look to the world as if he has not a care. This is probably frustrating to claimants and their lawyers.

FINRA is looking to change this state of affairs. In a proposed rule filing, FINRA is suggesting that “inability-to-pay” is no longer a defense for failing to pay. If you can’t pay, you can’t work, says FINRA (the proposed rule can be found here.. FINRA’s solution? Let the broker file for bankruptcy.

My question is this – how does a bankruptcy cure this? If the broker doesn’t have money, then the client doesn’t get paid. If the broker has money, but is pretending to be broke, eliminates the defense but doesn’t necessarily get the client paid. If the broker is willing to lie about being broke, what makes FINRA think that the broker will say “OK, you got me.” and pay off the award. Not bloody likely.

But still, it makes sense that, if a broker is destitute and in debt beyond his/her eyeballs, bankruptcy may be the better solution. And as FINRA points out, getting the broker under oath under the penalties of perjury is probably a better place to air this out.

And besides, my sister could use the work.

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

A while back I was asked to comment on a lawsuit where a Citigroup broker was arguing that upfront money deals were illusory and unenforceable. Now, depending on the circumstances, an argument can be made that a note is unenforceable or should be set off against other claims. In fact, there are arbitrators who have agreed with me on occasion. And there are others who haven’t. But I digress.

Investment News reports that the judge in New York has ruled that the the lawsuit is “baseless”. The article is here. Since I didn’t quite understand the points raised in the court complaint, I would have to agree with the judge.

Where this will get interesting is when one combines this “victory” with Morgan Stanley Smith Barney’s other announcement – that it will be closing 120 branches. And MSSB announced that it will grow organically. What, exactly does that mean? Will they be putting cow manure in the branches?

This doesn’t mean that every broker has to pay back every loan. Each relationship between broker and firm is too unique to say that. But to argue that, across-the-board, promissory notes should not be enforced because the contracts were illusory went a little too far. Nice try, though.

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

In the category of “Don’t try this at home” we have Steven Mandala. According to an article in Investment News, Mr. Mandala significantly overstated his earnings when negotiating with Merrill Lynch to join the firm. IN wrote that he said he earned $765,000 in a year when his true earnings were $100,000.

So what did he do with his upfront money? Well, he bought a Ferrari (in his father’s name), for which I salute him. Unfortunately, I think his resignation from Merrill Lynch, now owned by Bank of America, within two months of joining the firm might have sent up a red flag. But he clearly made someone angry.

Usually the upfront loan cases, sometimes called EFLs (“Employee Forgivable Loans”) or Transitional Compensation Agreements, go to arbitration. I am handling a few right now. It’s rare that the firm goes to the prosecutors. But it appears that Merrill did and now Mr. Mandala won’t have to worry about arbitrating the claims. Instead, he’s going to be selecting a bunk in the big house.

What can we learn from this boys and girls? How about – DON’T LIE TO PROSPECTIVE EMPLOYERS. I think that about sums it up.

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

A few weeks ago, I discussed the manner in which Jesup & Lamont was dealing with FINRA. For your ease of reference, the post is here. I suggested that this was a foolhardy approach to dealing with the organization that decides whether or not you stay in business.

Investment News described Jesup as “feisty” and described its dispute with FINRA and Penson Financial Services, its former clearing firm, as “nasty.” Now another adjective can be added to the list – “sanctionable.” In a recent FINRA arbitration award a FINRA arbitration panel gave “feisty” Jesup its requested relief on the Claimant’s employment claim, which was a zero. And then the panel, which contained two arbitrators that I know are experienced, assessed sanctions against Jesup in the amount of $60,000. I can honestly say that I have never before seen a discovery sanctions amount in arbitration that was more than $10,000. There is a fair bit of discussion in the award about the discovery issues in the case. At one point, Jesup was told to produce documents or face a daily fine of $500.

Who represented Jesup in this most recent case? According to the award, it is none other than the company’s general counsel, Todd Zuckerbrod. And what of the dispute with Penson? Jesup lost that case, too. No sanctions were awarded there, though. Mr. Zuckerbrod was listed as counsel of record in that case, too.

It’s only my opinion, but I don’t think “feisty” is the adjective one would want applied to one’s broker/dealer. Of course, “the firm that was sanctioned $60,000 for failure to comply with discovery” isn’t very attractive either. If Jesup had simply lost $60,000 in damages, that’s pretty easy to deal with. Each case has its own facts and the cases rise and fall on those facts. But it is foolish to give your future opponents the ability to say the following “Mr. or Mrs. arbitrator, it should be no surprise that we have discovery problems with Jesup, here is a copy of the award where the firm was sanctioned $60,000 for failure to comply with discovery.” In my opinion, that’s much harder to explain away.

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

Sometimes I wonder. FINRA is the organization responsible for administering the vast majority of the securities arbitrations in this country. One of the items FINRA decides is the location of the hearing. When I was a younger lawyer in New York (I’m still young), there were hearing venues in only a handful of locations, although we were grateful for Fort Lauderdale in the winter.

FINRA started adding venues within the last few years, in part as a reaction to some court decisions relating to the unenforceability of an arbitration agreement where there was no hearing venue within the state. FINRA now has hearing venues in all 50 states. I am currently scheduled for two hearings in Honolulu, Hawaii. It’s a tough job, but somebody has to do it.

The weirdness comes, as the Hawaii cases show, when the customer lives outside the United States. The claimants in the Hawaii cases live in Australia, so Hawaii is the closest venue. I had a case where my client lived in Belgium. His broker was in Florida. He chose me, a lawyer in Florida, for that reason. FINRA set the case in New York City, the closest hearing venue to Belgium (I guess we’re lucky they didn’t set it for Portland, Maine, which I think is closer.)

FINRA, in announcing the recent amendment, used another example. If a customer lives in Hoboken, New Jersey, the hearing would have been set for New York City, because NYC is closer to Hoboken than Newark, the next closest venue. Of course, Newark is usually easier to get to than NYC if you’re trying a case. So FINRA has amended its rules to provide for the primary choice for venue to be in your own state instead of being a slave to Google maps.

At least I’ll always have Hawaii.

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

Marc S. Dobin, P.A. is pleased to announce that James J. Duffy has joined the firm as an associate.

James is a Florida native and, to prove that, he is both a Gator (graduated with BS in Finance in 2006) and a Hurricane (graduated from University of Miami Law School, cum laude, in 2009). James comes to us after a Fellowship in the Foreclosure Defense Project of University of Miami Law School.

One thing that is interesting about James is his two internships. He interned at both the SEC and FINRA in their respective Enforcement divisions. James is very interested in the securities industry and these two internships gave him great exposure to the regulatory side of the securities business.

We welcome James and look forward to sharing his talents with our clients and friends.

I remember the U-4 and U-5 when it was short. I remember when defamation cases relating to U-4s and U-5s were few and far between. Now the U-5, when it is printed, is many pages long, but most of the time it is completed online using the WebCRD system.

But here’s the changes that drove people nuts. In the “old” days, the U-4 was required to be amended when the registered representative was the “subject of ” a consumer-initiated, investment-related complaint in excess of a specified dollar amount (which, by the way, was not adjusted for inflation). Then, for reasons that escaped me (and no one asked), the rule required that the stockbroker be a named respondent in an arbitration or named in a written customer complaint. So there was this big loophole for brokers who were not named in an arbitration or the subject of a verbal complaint.

The loophole was changed in May 2009 but it appears that it is taking some time for firms to catch up. The new rule, which is almost a year old, has reverted to the old rule. A broker who caused the complaint, but is not named, will still see the complaint on a U-4 or U-5 amendment. A verbal complaint will now be treated the same as a written complaint.

Why does this matter? Product cases are one example. Let’s say a broker sold a whole lot of Auction Rate Securities. Prior to the change, an arbitration claim that stated that the client was told by the broker that the product was “safe” would not result in an amendment to the U-4 or U-5. That would be because the customer’s lawyer did not name the broker as a respondent.

Now the same allegation will result in an amendment. This makes the broker unhappy, because the broker does not like amendments, particularly in product cases. This makes the claimant’s lawyer unhappy, because an unhappy broker is usually an uncooperative one.

I’m not sure why the rule was amended during the intervening years. It did not make sense to me. And while the “new” rule will result in more reporting, it seems to make sense to me. And very few things do…

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

Click on the image above for the third pane.

I keep wondering if this is like the Spinal Tap “This goes to 11.”