The Law Planet Blog

Some of you will recall the ill-conceived and ill-fated transaction where Merrill Lynch acquired the assets, including the human assets of Advest from Axa Financial.. It was a disaster for Merrill and unpleasant for the Advest brokers, a vast majority of whom left the firm.

We represented a few of those brokers, and talked with others, who did not feel that Merrill was a good fit and chose to move on. The problem was that these brokers all had transition contracts in place. In one case we handled, the NASD arbitration panel amortized the bonus money and ordered our client to pay back a lower amount than Merrill was seeking. In a more recent case, Brian Buckstein of our office represented a client whose contract contained language that voided the agreement in the event that Advest closed his office and did not open one within 50 miles.

Brian tried the case against Merrill for two days and Merrill tried to argue that a Merrill office would qualify as an Advest office for the purpose of the agreement. The arbitration panel apparently disagreed with Merrill's position and awarded Merrill nothing.

The lesson to be learned from this is to read any agreement carefully and, if you don't want to end up working for an entity you didn't choose, put language in the agreement that gives some protection.

That's the view from The Law Planet, Jupiter, Florida.

Posted by Marc S. Dobin | Permalink | Email This Post

Posted In: Labor & Employment , Securities Industry , Stockbroker Issues

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Every day, a stockbroker is asked to sign an amendment to NASD Form U-4, the securities industry's Uniform Application for Securities Registration. A brokerage firm is required to amend the Form U-4 upon the occurrence of certain specified events as described in the form. In particular, customer complaints and arbitrations which allege damages over the dollar thresholds must be disclosed.

Unfortunately for the brokers, truthful allegations are given the same weight as untruthful ones. A customer can allege unauthorized trading, for example. The firm is required to repeat that allegation on the Form U-4. The firm is not permitted, however, to pass judgment on whether or not the allegations are truthful. For a broker with no particular experience with amendments to the form U-4, signing a form with such heinous allegations is especially distasteful. What's a broker to do in this situation?

Box 28 is the answer. A little-publicized fact is that the broker has the right to provide his/her rebuttal to the disclosure in Box 28. The instructions say that this rebuttal should be written "in the space provided." In many instances, Box 28, when printed, has no space at all. But there is space available for the asking.

What should go in Box 28? A broker should write a brief, truthful, factual rebuttal to the allegations that the firm has disclosed. For instance, in the case of unauthorized trading, if the broker is 100% certain that all trades were discussed with the client prior to entry, a broker could write this fact. In the case of a client who makes allegations of losses in a portfolio, a broker could write that the client's account was profitable for the period the broker handled the account. Again, the Box 28 text must be truthful and, I suggest, should not be opinion, only fact.

In the case of a manager named for "Failure to Supervise," the manager could write in Box 28, if truthful, that the manager was not the manager during the time of the allegations.

Why fill in Box 28? When a customer or prospective employer requests a full CRD printout, Box 28 language will print out along with the customer's allegations. CRD reports are sometimes introduced into evidence at arbitration hearings. Having Box 28 completed with factual, objective, rebuttal language will take some, but not all, of the sting out of disclosing the complaint in the first place.

A lawyer is not required to complete the language for box 28. However, an experienced securities attorney can assist the broker in crafting the rebuttal in a light most favorable to the broker. This entire process, barring any unforeseen glitches, shouldn't take very long and will give the broker some peace of mind and feeling of involvement in the process.

That's the view from The Law Planet, Jupiter, Florida.

Posted by Marc S. Dobin | Permalink | Email This Post

Posted In: Labor & Employment , Securities Industry , Stockbroker Issues

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The NASD has levied fines against four brokerage firms for mutual fund violations related to B shares. See the NASD press release here. There is a certain amount of hypocrisy involved in these fines.

I remember when B shares were first released. They were marketed as a means to eliminate the broker's self-interest in the mutual fund transaction. This was done with the full knowledge of the SEC and NASD. A broker is supposed to "know the customer." A broker violates that rule when a recommendation is made because a broker would receive a higher or lower commission depending upon the selection of mutual fund family.

B shares, which charge a declining redemption fee based upon years held, charged no upfront fee. A customer was encouraged to buy B shares because "all your money goes to work immediately." That was the sales pitch. In exchange, the brokerage firm received a commission which was financed by the mutual fund sponsor and amortized over the redemption period. This was viewed as a good thing.

But then, one day, someone woke up and said "we're paying these higher fees over the life of the investment, not just during the redemption period." This resulted in a change where B share purchases became A shares, which were eligible for lower ongoing expenses and whose purchasers paid a sales charge upon initial investment. In my experience, the crossover period, where it is a better investment to be an A share purchaser instead of a B share purchaser, is about 7 years.

The regulators have been examining this situation for a number of years. One thing they are looking for is large purchases in a fund family (a group of mutual funds administered by the same company) that would be eligible for a breakpoint (a commission discount). Some funds have breakpoints as low as $100,000. Most funds allow an investment without commission at $1,000,000.

If you are an investor in mutual funds, ask your broker for the most cost-effective way to buy the funds, including using purchases among your household accounts. If you are a broker, it is your job to get the client the best deal.

That's the view from The Law Planet, Jupiter, Florida.

Posted by Marc S. Dobin | Permalink | Email This Post

Posted In: Investments , Securities Industry

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Dobin & Jenks, LLP, the sponsor of The Law Planet Blog, represented Nicholas C. Hodges, CPA, CFP in an NASD Securities Arbitration in Jackson, MS. The dispute involved issues of defamation, copyright ownership, breach of fiduciary duty, diversion of corporate opportunities. After almost 8 days of arbtration hearings, Mr. Hodges was awarded $75,000 in damages, ownership of the copyright to his book, The Lazy CPA’s Guide for Adding Financial Services to Your Tax Practice, and attorneys' fees of more than $86,000.

The arbitration award can be found here.

Perhaps the best part of this case was our two clients, Nick Hodges and Toni Nurnberger. They were two of the nicest people we have ever represented and the award represented the culmination of nearly two years of litigation and hard work. Nick, "The Lazy CPA" is anything but lazy. Toni, his associate for several years, keeps everything from boiling over. When my kids ask me what I do for a living, I tell them that I help people and think of people like Nick and Toni.

Nick has made a movie. Thankfully, he doesn't sing or dance and he keeps his clothes on.

A big thanks to Nick and Toni and to all our clients who have helped us keep the doors open since 1999.

That's the view from The Law Planet, Jupiter, Florida.

Posted by Marc S. Dobin | Permalink | Email This Post

Posted In: Labor & Employment , Securities Arbitration , Securities Industry , Stockbroker Issues

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Recently, I wrote about Dan Solin's "study" of securities arbitration and the conclusion that mandatory arbitration is unfair. I suggested that the authors of the study incorrectly dismissed the commonly-held belief that the bad cases for the brokerage firms get settled while the defensible ones generally go to hearing. The "study" has received much press recently, including this article in The Washington Post by Michelle Singletary.

I read a recent arbitration award that made me think of this study, again. In a case involving Raymond James, the Claimants dismissed the claim after one day of hearing. The arbitration award specifically discussed the Claimants' dismissal of the claim with prejudice and a representation that the allegations against the individual broker were without basis and should be expunged. I know both lawyers who handled the case and they are well-known and experienced securities arbitration lawyers.

What this award says to me, between the lines, is that an overnight settlement was reached. This was possibly due to the evidence that was brought out during the first day of hearing. My question vis a vis Mr. Solin's study is this - Does this count as an investor loss? My guess is that it does. This just goes to further prove the flawed nature of this study.

It disappoints me that a number of media outlets and politicians are hanging their hats on this study, which is intellectually flawed. If these special interests (and I admit that I would probably be termed a special interest as well) get their way, just wait another 15 to 20 years. They'll be begging to go back to arbitration after a series of successful motions to dismiss and incomprehensible jury verdicts.

That's the view from The Law Planet, Jupiter, Florida.

Posted by Marc S. Dobin | Permalink | Email This Post

Posted In: Securities Arbitration

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