Merrill Lynch fined for trying to avoid arbitration.

I thought this smelled when I first heard about it. When Merill Lynch merged with Bank Of America, the retention awards were made by an entity called Merrill Lynch International Finance, or some such nonsense. And I heard that there was a specific waiver of counterclaim rights in the agreement. Of course, brokers signed these agreements. What are the chances that they read them? About as high a rate as one might expect of those people who read the iTunes license agreement. (Google “south park” and “Why won’t it read?”)

It was quite obvious to me that Merrill Lynch had overplayed its sizable power. It was also clear that Merrill was trying desperately to avoid going to the very forum that it has used for years, arbitration. Merrill is likely sick and tired of arbitrators actually applying the “real world” to its employment situations instead of the world according to Merrill’s employment lawyers at their high-priced law firms. (I have friends at those firms, but it doesn’t mean I agree with them.)

FINRA got wind of what Merrill/Bank of America was up to. And it has cost Merrill $1,000,000 in fines to atone for its sin of trying to avoid arbitration. Reuters reports that Merrill gave out $2.8 billion in retention bonuses and used this ruse to avoid arbitration. One wonders what other things Merrill Lynch did and is still doing to brokers who went through the retention process. Those may come to light as well.

In the meantime, FINRA did its job and stopped Merrill from continuing to pull this stunt. Like I said at the beginning, it didn’t smell right. It seems that FINRA picked up the same odor and traced it to its source.

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Auction Rate Securities Expungements Discussed in Registered Representative

It’s interesting how the securities business goes in cycles. Over 20 years ago, my former employer Prudential Securities (now Wells Fargo Advisors) had problems with limited partnerships. At the time, the Prudential Securities name became synonymous with limited partnership sales, even though other firms sold LPs in greater volumes.

Other products have come and gone. More recently, Auction Rate Securities (ARS) are in the news. While the credit market lock-up is old news, the effects of these products is just being felt by registered representatives. As this article in Registered Representative magazine describes, stockbrokers are facing a lifetime tattooed with customer complaints which were none of their doing. Wachovia/Wells Fargo, along with other brokerage firms, settled with securities regulators and agreed to buy back ARS from their retail customers. However, because of a strict reading of U-4 reporting requirements, financial advisors at many firms have seen otherwise unblemished records tarnished through no fault of their own. The real question I have is why didn’t the firms negotiate the non-reportability of these settlements.

But there are steps to fix this. They require time and money. An expungement arbitration can be started to get relief from the reported settlements. While there is no guarantee that an arbitrator or arbitrators will grant the expungement request, the language placed by most firms forced to settle ARS complaints will go a long way towards convincing an arbitrator that an expungement is proper.

The next step is court confirmation, if the expungement award is entered. Generally, this is handled in the same manner as confirming an arbitration award. If and when the court confirms the award, then the order is sent to the CRD processing center and the negative information is removed. The happy day is when the broker looks at his or her CRD and does not see the complaints that previously tainted the report.

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

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US Supreme Court rules on Palm Beach County arbitration motion.

Palm Beach County is famous for many things.  Burt Reynolds, Tiger Woods, Michael Jordan, Spring Training for the World Series-winning St. Louis Cardinals are among them.  Sometimes Palm Beach County gets in the news because the United States Supreme Court finds something worthy emanating from our court system.

In this case, the Supreme Court took issue with a ruling from the Fourth District Court of Appeals, which agreed with a ruling by Hon. David French, denying a motion to compel arbitration by KPMG, a national accounting firm.  This dispute is more fallout from Bernard Madoff and his admitted fraud.

It appears that the plaintiffs lost money investing through one or more of the feeder funds, Termont Partners and others.  They claim, according to the court, that they relied on audits performed by KPMG.  They further claimed that the audits were not done properly.  And, of course, they claim that they lost money.

When they sued, KPMG moved to compel arbitration because there was an arbitration clause in the audit engagement agreement.  According to the court, there were professional malpractice claims along with some Florida state law claims.  The court differentiated the claims, under a Delaware choice-of-law provision, as direct or derivative.  The trial court and the Fourth DCA both held that arbitration was unavailable because the direct claims did not have to be arbitrated.

The US Supreme Court disagreed.  The Court held that, even though it may appear judicially inefficient, the arbitrable claims, referred to as “derivative”, must be arbitrated.  The Court also held that the “direct” claims need to be examined to see if they are arbitrable as well.  This could very well leave the litigation split between two arenas, likely increasing costs and complexity.

Not sure how I feel about this decision.  The US Supreme Court continues its support of arbitration “above all.”   But in a situation where the cases will be split, it seems that the costs of litigation will increase dramatically and no real benefit will be served by forcing the parties to arbitration.

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FINRA doctored documents given to SEC; punished with a wristslap.

It’s all over the news, at least that section of the web that I frequent, that FINRA employees changed documents before handing them over to the SEC.  The Reuters story by Suzanne Barlyn and Sara Lynch can be found here.

My firm and I have done document productions to FINRA in the past.  They frequently require “certified” copies of documents from my clients.  Sometimes they require “certified” copies of documents that we obtain from another branch of FINRA.  Apparently, my clients and my firm can’t be trusted to not alter documents.

But FINRA production to the SEC?  Apparently that’s exempt from notions of honesty and fair play.  But even more ironic is the penalty.  FINRA has to hire a consultant and take steps to improve its practices.  If one of my clients altered documents before sending them to FINRA, the discovery would likely result in my client’s permanent suspension from the securities industry.  I have seen draconian responses to much less.

Is it any wonder that the public does not trust our current regulatory system.  Bernie Madoff made the SEC look bad.  FINRA is altering documents that should have been innocuous.  And nothing significant happened other than more lawyers gained employment.

On the other hand, I had a client who changed some customers’ phone numbers in the firm’s database.  That client was suspended from the industry and will have a permanent CRD mark.  Does that seem fair?

 

 

 

 

 

 

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Citigroup Pays $285 Million Fine But Doesn’t Admit Wrongdoing?

This concept has always fascinated me. A company such as Citigroup pays a huge fine but says “we didn’t do anything wrong.”

In this case, Citigroup agreed to pay the fine for allegedly piecing together a sweetheart transaction where it made money no matter which way the market went.  Here’s how it goes — Citigroup took a bunch of really crappy mortgages and put them together in a shiny box called “Class V Funding III”.  This shiny box was “diversified” among lots of crappy mortgages.  I guess the theory was if you put enough crap in one investment it magically smells less like a pile of crap.

So, of course, on the front end Citigroup makes money foisting this shiny box of crap on institutional investors (who should have known better, by the way).  Citigroup made $34,000,000 dollars polishing crap and making it look and smell pretty.  (Mythbusters did an episode where they polished crap and made it shiny.  Maybe that was inspiration.)  But Citigroup wasn’t alone, they had help from Credit Suisse in picking which crap to go into the shiny box.

What Citigroup didn’t tell the 14 institutional investors (who should have known better) was that their institutional trading desk was taking a short position against the very pieces of crap in the shiny box.  Within months of taking possession of the shiny box, it started to lose its sheen and shimmer and started to smell like its contents.  But Citigroup didn’t need to worry, because it made money on structuring the deal and took investment positions to profit when the deal fell apart.

According to the SEC, Citigroup made $160,000,000 on the transaction, first creating the shiny box then betting against it.  The fine paid includes the $160,000,000 plus interest plus penalties.  I wonder if the traders who made bonuses when this deal paid off handsomely got to keep them.

I love this business.  That’s the amused view of one Lawyer from Jupiter, Florida.

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Representing a Cantor in a Restrictive Covenant Lawsuit

In case you don’t scour the Internet looking for my name everyday (I don’t think my mother does either, so don’t feel bad), you probably noticed that the blog was quiet this summer. I took a long vacation. In fact, this summer was the first time in forever that I took two weeks away from the office. It was strange.

I came back to work invigorated and looking forward to the second half of the year. In late August, my friend and tennis partner, Cantor Bruce Benson (founder of the Institute for Jewish Living), was sued by my former synagogue (and his former employer) for an alleged violation of the restrictive covenant in his contract. While the contract attached to the complaint had a section entitled “Non-Compete” it was really a restriction on employment.

Anyway…the temple sought an injunction to prevent Cantor Bruce from, among several things, holding High Holiday services. There was a hearing on the injunction two days before Rosh Hashanah started. The court did not stop Rosh Hashanah services and ordered the parties immediately to mediation. A confidential settlement was reached at mediation, so I can’t discuss the terms.

But if you want to read about two of the most interesting days of my professional life, you can look here, here, and here.

Jane Musgrave at The Palm Beach Post did a great job covering the story. I don’t know if I’m going to add a practice area
of representing clergy members, but it sure was interesting.

That’s the New Year’s view of one lawyer from Jupiter, Palm Beach County, Florida.

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Florida’s rule disqualifies stockbrokers with old offenses.

In May of last year, the State of Florida amended its registration rules regarding the criminal histories of stockbroker applicants. The amendment assigns year values for specified crimes. Those year values then disqualify an applicant according to its terms.

For instance, if an applicant has committed a specified felony, the disqualification period is for 15 years from the date of the plea or finding. If other crimes are committed at different times, then additional 5 year periods can be tacked on. It appears that the entire disqualification period can only be reduced by a maximum of 3 years.

So what this means is that the felony drug possession as a senior in college could delay a new broker’s application for 15 years and could possibly be used to deny registration anyway. Further, it appears that a new U-4 filing will give the State of Florida a new shot at currently registered representatives. So brokers changing firms with otherwise ancient and forgotten criminal histories could end up with big problems.

The interesting thing is that a broker who is already registered and has a specified crime in his/her past would not lose his/her license. It is only on the submission of a new U-4 that this new part of the registration rule would apply. This could make for some very uncomfortable situations.

So the most important thing for currently registered brokers to keep in mind is that, if there is a felony in their past, they need to keep this rule in mind if they are thinking about changing firms. And if there is a question about any potential disqualification, they need to get help in interpreting the rule very carefully.

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

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Latest FINRA Securities Arbitration Statistics Released

Statistics and percentages can be fun. (Cue groans here) Sometimes it can be interesting to dig deeper into the statistics and see what else they might mean. Each month, FINRA releases arbitration statistics for the month ending one month prior. So this month’s statistics analyze arbitrations through the end of July.

The report has the usual stuff — number of new arbitration cases filed, number of cases closed, etc. But dig a little deeper and there are some interesting figures. For instance, New arbitration case filings through July are down 12% over 2010. But they’re down 35% over 2009. This is likely a function of the reaction to the 2008 meltdown and the wave of cases that followed.

Here’s something else. If you total the new cases through July for 2009, 2010 and 2011, that equals 10,724. The number of cases closed during that same time period is 9,795, leaving an overhang of about 1,000 cases.

Another interesting statistic is the “How Arbitration Cases Close” analysis. An average of less than 20% of cases have gone to final hearing in the last 5 years. An average of 50% of the cases settle through direct communication between the parties (but the report does not specify how much the cases settled for). And, at most, 10% of cases settle through mediation. It is not clear if the “Direct Settlement” category includes cases settled through non-FINRA mediation but I suspect that the mediation category includes FINRA and non-FINRA mediation.

So what can we take away from this? First, if the numbers hold, a litigant is just more likely to settle a case than have it go to hearing, by a large margin. There is a less than one in five chance of going to hearing. And more than three-fourths of all cases never see a hearing.

What would be interesting is to pair these figures up with the “win” figures that are also tracked. The only problem with that, of course, is that the claimed damages may not be based in any sort of supportable logic.

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

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SunTrust television commercial makes me laugh.

OK, so I’m easily entertained. I still laugh when David Letterman has the sneezing monkey.

But this commercial caught my eye. In the wake of mergers of banks, both voluntary and shotgun, SunTrust‘s message rings true. They just better hope that they don’t merge and end up with the same problem Chase Investment Services has had in litigation.

Still keeping my old family, I’m Marc Dobin.

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Chase Investment Services loses another non-solicitation arbitration

Loyal readers (who may be wondering if I had lost interest in the blog) will recall that Chase Investment Services lost an arbitration to Morgan Keegan and Todd Rozzo in March of this year. Chase tried to enforce a contract against a former WaMu broker, Rozzo, and his new employer, Morgan Keegan. My firm represented Morgan Keegan.

It turns out that there was a very similar case in Seattle, Washington. Chase, again, went for an injunction. Chase, again, acted as if the world was going to end if the brokers were allowed to talk to their clients. Chase, again, initiated an arbitration against the former brokers. And Chase, again, lost the arbitration.

Maybe Chase will get the message that I have detected. Absent some horrific set of circumstances, such as bad acts by the departing brokers or raiding, arbitration panels do not get excited about the run-of-the-mill changing of jobs. For Chase to behave like a child complaining about not getting his/her way is just bad business. Brokers change firms. Chase needs to get over it.

This does not mean that, in the right set of circumstances, an arbitration panel won’t award damages. It simply means that it has to be something more egregious than simply changing jobs. Having the manager and several brokers leave at the same time could be sufficient. Deleting data on a computer system could be sufficient. There are any number of bad acts that could lead to liability. But if a broker leaves “clean”, the likelihood of a firm prevailing in an arbitration is pretty slim.

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

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