Month: March 2010

The not-so-new u-4 and U-5 filing requirement.

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.

Jesup & Lamont tries to teach FINRA who’s boss – good luck

Dan Jamieson at Investment News reports that Jesup & Lamont is tangling with FINRA over what it considers to be unfair treatment of the firm. The general counsel of Jesup is a former litigator from Greenberg Traurig and someone that I have known for a long time. In fact, now that I think about it, we’ve known each other since before either one of us graduated from law school.

Anyway…Jesup keeps poking FINRA in the eye. According to the article, Jesup called the police to report that FINRA auditors from the Boca Raton office were trespassing. Let’s just say that this wouldn’t have been my first move. On the other hand, ff you’re trying to move your firm to the top of FINRA’s hit list, this would be the preferred method. I am certain that FINRA auditors enjoy being regarded as trespassers.

The late Jim Croce wrote a song called “You don’t mess around with Jim.” The refrain is “You don’t tug on Superman’s cape,You don’t spit into the wind. You don’t pull the mask off the old Lone Ranger
And you don’t mess around with Jim.” While FINRA would not regard itself as coming from the planet Krypton or a masked crusader for justice, a surefire way to get FINRA to torture a firm is to make FINRA think that you don’t respect the organization. And given FINRA’s newfound interest in catching bad acts, it would not surprise me if Jesup ends up on the receiving end of one or more FINRA disciplinary actions. I’ve seen it before.

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

A reasoned award results in vacatur.

I’m not a big fan of reasoned arbitration awards. I think that they provide fodder for a motion to vacate (what others might call an appeal). What they really do is answer the age-old question “What were the arbitrators thinking?” Having served as an arbitrator, trust me, you don’t want to know.

But the arbitrators in a breach of contract case involving Raymond James Financial Services and three former brokers felt a need to share their opinions. In doing that, not only did they get it wrong (and sully the name of a very good in-house lawyer at Raymond James), but they bought and paid for a motion to vacate. The tortured reasoning of this arbitration panel deserved to be put under a microscope. They didn’t seem to have a clue.

It was clear that the arbitrators wanted to award money to the brokers. They could have done so without explaining themselves. Had they not provided an explanation, which they were entitled to do, the brokers would have gotten their money. But noooooo, the arbitrators wanted to “share”. And in doing so, the case found its way through the District Court, where the award was vacated, and the Fourth Circuit Court of Appeals, where the opinion is lengthy but comes down to this simple analysis – the arbitrators blew it. And how does the court know? Because the arbitrators demonstrated it in their award.

For those of you that want reasoned awards, here’s the poster child for why they have no business in arbitration.

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

Madoff Trustee victorious in calculating “profits”

The New York Times reports that Irving Picard, the SIPC trustee in the Bernard Madoff Securities liquidation, was successful in justifying his method of validating claims. His method, which uses the traditional “cash-in, cash-out” methodology, is one that has been used time and time again.

On the other hand, there were people who felt that, even though they had gotten some, or all, of their money back from Madoff, they were entitled to the values contained on their account statements, no matter how false. I was surprised to hear this theory has been used since it doesn’t make any sense to me. In fact, it would encourage people to believe whatever is told to them, rather than be diligent in their choice of advisors and investments. One could conceive a scenario where a fraudster conspired with “victims” to inflate values and let SIPC pay out. That doesn’t make any sense.

I said it when I was writing The Law Planet Blog, and I’ll say it again, there’s no free lunches, people. Bernie Madoff got away with this for so long because no one asked the simple question of “how does he do it when nobody else can?” No one, except for Harry Markopoulos, was willing to say that the Emperor was wearing no clothes. And that fell on deaf ears.

Mr. Picard’s lawyer says he expects the other side to appeal. It’s unlikely that the appeal will be successful, in my opinion.

But that’s the opinion of one lawyer from Jupiter, Palm Beach County, Florida. I’m Marc Dobin and what do I know?