Little Things Make Me Crazy

My firm is adverse to the same brokerage firm in two arbitrations. They are not particularly big cases, but after more than 10 years of litigating against the same firm, I realized that it appears to be a mindset.

One thing the firm does that is particularly annoying is overuse overnight delivery. This is particularly ironic since I am sure that the firm’s billing policy sent to its outside counsel says that overnight delivery should only be used when necessary. Nearly every corporate client I have promulgates a billing policy that specifically discusses expenses. And they nearly all say that routine correspondence should not be sent by overnight delivery. But it appears that when this firm’s own lawyers, or their staff, make the mailing decisions, they are not required to abide by that policy.
We have received overnight packages from this firm enclosing some of the most unimportant documents in a case. We have received overnight packages (marked for early a.m. delivery by the way) of items that could easily have been sent by email, US mail or fax. Instead, the company wastes its money in a demonstration of self-importance that I have not seen from other litigants.
There are other things going on, too, but I don’t want to spend the time examining a lengthy confidentiality agreement to determine if discussing the firm’s lack of familiarity with relatively easy technologies violates the agreement.
Arbitration was originally designed to be fast, efficient and cost-effective. Some firms have turned it into the same scorched-earth battle that arbitration was designed to avoid. Those same firms, if they would examine their internal processes, would see that efficiencies could be gained through intelligent expenditures and informed use of new technologies. But it’s been at least ten years, and this one firm clearly has not demonstrated an ability to learn much.
That’s the snail mail view of one lawyer from Jupiter, Palm Beach County, Florida. I’m Marc Dobin.
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Bad Language Leads to Arrest of Asset Management CEO

Remember when I blogged about Vincent McCrudden, an investment manager from New York? If you forgot, you can see it here. Back then, I analyzed his situation, tongue-in-cheek, and decided that he needed to have his mouth washed out with soap. Apparently, the Federal government took a different view.
According to this article in Investment News, Asset manager charged with threatening Finra and SEC officials: Report – Investment News, Mr. McCrudden created an “execution list” of people in the government for whom he wanted the home addresses and other contact information. As they say in the airports, “all statements made will be taken seriously.” As a result, Mr. McCrudden was arrested at Newark airport when he returned from Singapore (a nation whose government, by the way, is not known for its tolerance or sense of humor.)
According to the article, Mr. McCrudden offered a reward on his website for the information about the government officials. He also made the statement that “there were too many” for him alone, whatever that might mean. The government saw it as a threat and he was arrested. For those of you following along at home, this would be disclosable on his U-4 if he is registered. On the other hand, simply being charged with a felony, unless it is somehow related to investments, does not require disclosure on his ADV, if he has one.
Although this arrest occurred before the recent horrific events in Tucson, it appears that the government acted properly to make sure that its officials are not in danger. I don’t know if Mr. McCrudden is roaming the streets as of this writing, but he would be wise to keep a low profile.
I’m thinking, however, that updating his filings is pretty far back on his mind right now.
That’s the view of one lawyer from Jupiter, Palm Beach County, Florida. I’m Marc Dobin.
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A must read – “The Big Short”

I just returned from vacation. It is one of the few times during the year that I turn off the cellphone, email and fax. Instead, I spend time “enjoying” my family (they seem to act like it’s a burden) and we all perform an ancient ritual called “reading.”

In my case, I read fictional war thrillers and an occasional book related to my profession. While at the library, I came across “The Big Short”, written by Michael Lewis. For those of you that remember when music came in a form other than CD, he also wrote “Liar’s Poker.” I was fascinated by the simple analysis that ultimate resulted in some people making a ton of money due to the greed and/or stupidity of others.

Basically, Mr. Lewis described several investors, none of whom were big firm Wall Street types, who figured out those teaser rates, and loans that didn’t require any payments, that suckered in countless homebuyers would ultimately crash and burn. Their analysis told them that it would happen in mid to late 2007 or early 2008. And they were right.

These people did not “bet” against the homeowners. They bought Credit Default Swaps and other pieces of garbage that Wall Street devised as a means to make more money. Wall Street did not expect the CDSes and other derivative instruments to blow up in their collective faces. All that these investors did was buy the insurance, for about a 2% premium, on pools of mortgages that had the worst of the worst in them, negative amortization mortgages, teaser low-interest ARMS and teaser rate interest-only ARMs among them.

And these investors just waited for things to blow up. Which they did. Mr. Lewis also describes how the garbage loans were packaged together and, amazingly, the ratings services would give them Triple-A ratings. Somehow, the ratings services believed that if you assembled enough garbage into one can, it smelled like a rose. Hmmmm.

Reading this book reminded me of a situation shortly before the tech market crash in 2000. I was talking to a brokerage executive and we discussed how a fireman in New York had quit his job to write a mutual fund newsletter. We agreed that this was the first indication that the world would collapse. And it did collapse within about 18 months of this discussion.

Lewis serves as a good historian in “The Big Short.” And remember what they say – If you don’t learn about history, you are doomed to repeat it.” Unfortunately, most people don’t remember the saying. Read the book. I can’t say enough good things about it.

That’s the mortgaged, but not underwater, view of one lawyer from Jupiter, Palm Beach County, Florida. I’m Marc Dobin.

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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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