The Law Planet Blog

The Securities and Exchange Commission has issued an Order Instituting Administrative Proceedings against Next Financial regarding Next's transition practices. The SEC has alleged a violation of Regulation S-P regarding customer privacy. It is strange to see the SEC get involved in recruiting matters, but there's a twist here that should have been obvious, but apparently wasn't.

According to the SEC, Next has a "transition team" whose responsibility it was to help new brokers join the firm. No problem there. Next's team had a spreadsheet which the incoming brokers were supposed to fill out. The spreadsheet asked for more information than is necessary to facilitate a transfer, but still no big deal.

So why is the SEC involved? According to the filing, Next employees would access the "losing" firm's computer system and access their customer records. How did they accomplish this? Using the usernames and passwords of the incoming brokers, that's how. Did anyone at Next think this was appropriate? Of course it wasn't. A monkey living in a tree would know that this was inappropriate.

There are areas in the recruiting venue where the SEC has been the equivalent of the piano player in a bordello "You mean this is a house of ill-repute?" Customer information has moved between firms for years and years. This is the way business has been done. Next, as far as getting this information from its recruits in anticipation of their arrival, was doing nothing out of the ordinary.

Accessing another firm's computer system is a whole different story. There are legal implications that are far greater than just a Regulation S-P violation, such as legislation, Federal and State, protecting firms against unauthorized use of their computers by outsiders or hackers. In law school we were taught that bad cases make bad law. This could be a bad case and the fallout could affect the entire securities industry.

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

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

Posted In: Securities Industry , Stockbroker Issues

Bookmark:

Electonic Data Discovery, and other areas relating to electronic data storage, are hot topics in litigation and arbitration, whether in the securities field or other commercial disputes. There have been many articles written about the new sections of Rule 26 of the Federal Rules of Civil Procedure. What is not often discussed is the practical advantages of reducing the amount of paper being carried around and the amount of stress (when the computers are working) that is removed through proper usage of electronic media.

Here is a recent example of how some planning and Adobe Acrobat can make your life easy. My partner and I were defending a securities client in an arbitration brought by a group of unhappy non-clients of our client. We had litigated the same underlying issue with the same law firm two years ago. We had agreed with that law firm that the documents from the prior case could be used in this case, so that we did not have to produce the same universe of documents twice. Among the documents from the prior case was a list of clients of the broker, who went to jail for what he did.

We advised the arbitrators that this list was produced in the prior case and that counsel should have a copy among the (disorganized) papers he had in his possession. He wanted proof that we had produced the document in the prior case. Before we left the office, Debra and I both used the Microsoft Windows Offline Files function to synchronize all of the documents, pleadings and discovery, to our laptops. When the issue came up, I was able to locate the subject document in seconds. But we had a problem -- we wanted to maintain confidentiality of the contents and wanted to denote on the document that it was produced in the current case, not just the prior one.

While sitting at the counsel table, I opened the document, a PDF, in Acrobat and added a footer with all of the case identifying information and the confidentiality warning. Then, using the HP portable printer that is almost always with me at hearing, I printed out the document and gave a copy to opposing counsel, all the while listening to his examination of my witness. The witness was ordered to review the document over lunch, which he did, and his testimony was over within a few minutes of returning to lunch.

Think about this story the next time you are loading up boxes and boxes of paper discovery documents into your car or onto the messenger's truck. And think about the fact that the prior case had an equally large number of documents. Yet we did not bring a single box of production documents, from either case, to the hearing, only our exhibit notebooks.

The electronic document management train is leaving the station. If you're going to compete, you need to get on, but there's no room for storage boxes of documents in the overheads!

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

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

Posted In: Law Practice Management , Legal Technology , Securities Arbitration

Bookmark:

Senator Russell Feingold (D-Wis.) has sponsored a bill in the Senate to eliminate consumer arbitration, including securities arbitration. This knee-jerk reaction to some "Chicken Littles" claiming that big chunks of sky have landed on their heads is misguided. Consumer arbitration, including securities arbitration, has deep roots in American commerce. I am disappointed that, once again, our government is sticking its nose where it need not do so.

Here is why arbitration is good. It is fast. It is less expensive (not cheap, by any means). And a resolution is generally final. The persons hearing the case want to be there and are generally somewhat familiar with the issues presented. They may not be geniuses, but they have some knowledge, at a minimum. In securities arbitration, there is at least one member of a three member panel who is classified as being a "non-public" arbitrator because of securities industry ties. I am classified as a "non-public" arbitrator because my firm represents brokerage firms like A.G. Edwards & Sons, Stifel, Nicolaus & Co. and Legend Equities Corporation for more than 20% of its revenues.

Here is why arbitration is bad. The panel's knowledge and prejudices are the luck of the draw. Sometimes you get a well-educated panel with no biases. Other times, you get a panel that "hates" whichever side you happen to be representing that day. And it's very difficult to overcome the biases. Further, the rights of appeal are very limited. This is usually a good thing, but sometimes an arbitration panel just blows it. They focus on the wrong points, misinterpret some facts, and come up with the wrong result. It happens. And when it does, the appeal rights are virtually non-existent.

In court there are depositions. These cost, just for the court reporter, over $1,000 per day. In court, the days tend to be shorter so less is done. There is motion practice, which means more attorneys running to court to cool their heels to argue some esoteric point of law that is part of the judicial procedural jousting. There is jury selection. And then there are the appeals. They cost money, delay the result and possibly change the result. And the expenses attendant to keeping the matter open, through appeal, would be astonishing.

Here's an example of a case we have in our office. Our client has sued a Registered Investment Advisor. The lawsuit was filed in February of this year -- almost 6 months ago. We have now been through two motions to dismiss and have served our second amended complaint. We haven't even seen an Answer from the defendant yet.

In arbitration, we would already have a hearing date and discovery would be underway. Our client is elderly and we tried to get her trial expedited. The court denied the motion. Is this the result that Senator Feingold wants? Doubtful. Be careful what you wish for, folks.

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

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

Posted In: Investments , Securities Arbitration , Securities Industry

Bookmark:

A recent article in the Sarasota Herald-Tribune described a FINRA (formerly NASD) arbitration award to a retiree in Venice, Florida. I'm not particularly upset about the award, I don't know enough of the facts based upon the article.

From what I can tell, there were at least two registered representatives and one unregistered person who were somehow involved in the sale of an unapproved product to the retiree. This is a violation of FINRA rules and I am certain that it violated Sterne Agee's internal procedures. Frankly, if this occurred as described, the brokers should have known better.

What troubled me most was the mention of the "hedge fund" promoter at the end of the article. Guy Della Penna is a former stockbroker who was found by an arbitration panel to have violated State and Federal Securities laws in 2002. He fought the award and, ultimately, the Fifth District Court of Appeals confirmed it. I have not kept up on the case, but last I heard the award was still outstanding. With this information, who in their right mind would give this guy parking meter change let alone over $100,000?

This information was, and is, publicly available and should have been disclosed by either the selling brokers, registered or not, and Della Penna himself. I don't know if this was done. This is the problem with the world of unregistered investment vehicles. The disclosures are weak, if any. The oversight is lax and the only time an investor finds out something is wrong is when the investment vehicle itself is pushing up daisies. It wouldn't have been easy, but the successful arbitration litigant in this case should have been able to find out about Mr. Della Penna and taken his money elsewhere.

Remember, your mother was right. If it sounds too good to be true, it is. And there is no such thing as a secure investment that pays higher than CD returns but is as safe as a CD. IT DOES NOT EXIST! If it did, would I be writing this blog?

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

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

Posted In: Investments , Securities Industry

Bookmark: