The Law Planet Blog

The top Accounting Officer at Beazer Homes USA, Michael Rand, has been charged with fraud and misleading company auditors by the Securities and Exchange Commission.

An SEC complaint filed in federal court, alleges that Michael T. Rand, Accounting Officer for Beazer Homes, deceived investors by fraudulently recorded improper accounting reserves during 2000 and 2005. This little creative accounting decreased Beazer's reported net income considerably.

According to Robert Khuzami, Director of the SEC's Division of Enforcement:

"Michael Rand orchestrated an old-fashioned 'cookie jar' earnings management scheme where he hid from view over $60 million in so-called reserves. Then when Beazer's business declined, he fraudulently reversed those secret reserves and appeased financial analysts, enticed new investors, and most importantly earned himself an undeserved lucrative bonus."

The SEC complaint against the Beazer Chief Accounting Officer, Michael Rand explicitly gives details on how he masterminded this Accounting scheme and profited personally. He personally sold stocks valued at $3 million and earned $1.7 million in bonuses. Was it worth it, to lose everything and risk going to jail? I guess only Mr. Rand can answer this question. I am certain that the Beazer investors are not happy about being duped by these false earnings statements. Time will tell if there were others involved in this scheme.

As part of FINRA’s ongoing effort to consolidate and reconcile the former NASD and NYSE manuals, changes are in the works. FINRA recently filed a proposed rule change that is going to make changes to FINRA suitability rules, as we have known them, noticeably different.

FINRA’s proposed rules governing Suitability and Know Your Customer Obligations will expand the obligations of registered representatives when recommending securities or investment strategies­ to customers. This is interesting because it looks like FINRA is moving towards codifying a fiduciary standard, or at least a modified fiduciary standard.

In the past, a fiduciary duty in a non-discretionary account related to only the execution of trades and custody of assets. Now, if an investment strategy encompasses assets away from the firm, that strategy falls within the proposed rule. For instance, the recommendation to retain stocks in an account at another brokerage firm may be considered recommending an investment strategy as may the recommendation to hold, and not sell, a particular stock.

This represents a significant change in the relationship a broker has with his/her client and will broaden the areas of responsibility when making suitability determinations.

It's a new dawn. It's a new day and investors in Florida should be feeling good. Florida Governor Charlie Crist signed House Bill 483 into law on Monday, which adds protections for Securities investors today, designed to protect securities investors from Bernie Madoff type ponzi schemes.

The Bill's sponsor, State Representative Tom Grady (R- Naples) is quoted as saying the following in a recent interview:

“Our economy will grow stronger if investors have confidence in our financial markets. By increasing the tools available to the state to prosecute violators of our securities laws, we protect investors and foster needed trust in the system."

House Bill 483 gives additional power to the Office of Financial Regulation for prosecution of violations of the Florida Securities and Investor Protection Act. Whistleblowers will also be compensated with rewards for orginal information regarding money laundering investigations.

Governor Crist issued the following statement on House Bill 483 :

“Investors play a critical role in the success of Florida’s economy, and this legislation helps ensure their hard-earned money is protected. I am committed to maintaining the integrity of our markets. Enhancing protection measures and oversight is the best way to crack down on fraudulent activity and increase consumer confidence.”

HB 483 - Investor Protections received overwhelming support from legislators. This Bill provides the following Investor Protections according to the House of Representatives site:

Expands jurisdiction of Office of Statewide Prosecution to investigate & prosecute specified additional offenses; revises various provisions of law relating to viatical settlements; exempts specified transactions in viatical settlement investments from specified registration requirements; revises registration requirements; excludes post judgment interest from payments from fund; expands class of persons related to or associated with applicant or registrant for which specified violations may result in adverse actions taken against registrations; requires Financial Services Commission to adopt rules relating to disciplinary guidelines & temporary disqualification; authorizes OFR to apply to court for specified orders; specifies additional investigation & enforcement authority of AG; authorizes AG to recover costs & attorney fees; authorizes OFR use of such information in prosecution actions; increases amount of specified administrative fines; authorizes OFR to bar specified persons from submitting applications or notifications for license or registration under specified circumstances; revises criteria for prohibited practices relating to commodities; authorizes FDLE to enter into agreements to pay rewards for specified information; expands subject matter jurisdiction of statewide grand jury to include specified additional offenses.

If you have original information regarding Investor fraud you may want to contact an attorney to discuss your rights. If you want to learn more on Securities litigation and your rights as a whistleblower, visit the following pages on Securities Litigation and Stockbroker fraud.

Today, I came across an interesting article from Bloomberg News on the Arbitration debate over financial investments. It was a Commentary written by Bloomberg News Columnist Susan Antilla entitled "Obama Fails to End Kangaroo Courts for Investors".

In the article, Susan highlights the following statement from President Obama:

The Securities and Exchange Commission “should study the use of mandatory arbitration clauses in investor contracts,” and then pursue legislation if appropriate,

At the end of the Commentary, she adds:

That argument is more bogus today than ever, because cases increasingly involve the mass-marketing of financial products by multiple brokerage firms.

“The concern is that the industry arbitrator could be on a panel telling others that ‘everybody does it,’” says Brian Smiley, the president of Piaba.

And in a closed justice system where nobody can come to court and watch, who would ever know?

The Arbitration Commentary gives food for thought and highlights the key issues, but it is hard to argue over, which side Susan is on in the Arbitration argument. She makes her point very clear on the issue.

It is safe to say that after losing a loved one, a widow has a lot on their plate, However, this loss does not mean that Financial Advisors can ignore them or mismanage their account. A recent study by Allianz Life found that

About 44% of widows are inclined to obtain financial advice in new ways, and that 70% of those using financial advisers considered firing their advisers in the first three years after their husbands' deaths.

This tragic loss does not give Financial Advisors the right to prey upon Widows with risky financial investments, mismanagement of funds or simply ignoring the widow alltogether.

Five simple steps that a widow can use for Financial Guidance and respect from Financial Advisors include:

Step one: Deal with your emotional needs first after the death of your spouse. Having a clear mind and perspective is key before making major decisions,

Step two: Organize your finances and make a budget. Looking at your entire financial picture allows you to see what you need financially to live on.

Step three: Calculate your net worth. Take a look at all of your assets, investments, stocks, home, bank accounts, bonds, and everything that is of value. Ask your Financial Advisor to give you a report of what your portfolio is worth, present value and a comparison of what it was worth when your husband was alive. Give them a specific timeframe of when you expect this data.

Step four: Identify a few key Financial Advisors and Interview them for your business. Compare the Financial Advisor that was working with your spouse to the new ones that are recommended by reliable sources. Make a checklist of things that are important to you in an advisor. Rate each Advisor with a score for each of your checklist items and come up with a ranking system for comparison. Try to be objective and compare each advisor on the same benchmarks.

Step five: Sit down with your Chosen Financial Advisor and develop a long-term financial plan for your investments. Share with the selected Financial Advisor that they were selected after a careful screening process. This will allow them to see that you are serious about service and expect excellent Customer Service. Set aside a specific timeframe for a review, that you are comfortable with, i.e., monthly, bi-monthly, quarterly, semi annually. Make sure that the Financial Advisor agrees to this timeframe to go over your portfolio and hold them to it. If they fail to service your account properly, go back to your list and replace them with someone that will treat you the way that you expect to be treated.

Read the book, On Your Own: A Widow's Passage to Emotional & Financial Well-being,by Alexandra Armstrong and Mary R. Donahue for more information on how a Widow can take charge of their life and finances without being taken advantage of by a Financial Advisor. The book retails for under $20 on Amazon and other online retailers.

If you are a Widow, please note that you are not alone, According to an article on the subject from Investment News, nearly 800,000 women become widows each year. There is much comfort in numbers. Join a support group for women that are recent widows. You may find that sharing your experiences present, past and future can help you cope with your loss.

To learn more on other ways for Widows to protect themselves against Investor fraud, view some of the following Financial Services pages on Stockbroker fraud, Securities Issues, or dispute resolutions.

Allen Stanford, Chairman of Stanford Group holdings, surrendered to authorities yesterday, will be officially charged by SEC today in Court. He is accused of stealing over $8 billion from investors.

According to Bloomberg News and The Washington Post,

The SEC lawsuit indicates in its compmplaint that Stanford International Bank misled investors by touting "improbable, if not impossible" returns for investments.

The SEC alleges that the Stanford Group Co. sold $8 billion of certificates of deposit in Stanford International Bank. The financial advisors of the company misled clients to believe that their money would be placed primarily in easily sold financial instruments monitored by over 20 analysts and closely audited by Antiguan regulators.

Instead Stanford and the company's chief financial officer managed most of the portfolio and invested a substantial amount of it in real estate and private equity.

The SEC announced today that it, along with Alabama Securities Commission has charged Aura Financial Services with “rampant” churning of customer accounts, “widespread” supervisory failures and other securities violations. This is stunning. It is rare that an entire firm is charged with churning. Usually it is an individual broker or office. For a firm to be charged must be pretty bad.

What do you do if you’re a client of Aura and can’t figure out what happened to your account? Contact a qualified securities arbitration attorney to look at your account statements and determine the best route to follow.

This gets back to the basics of investing. If you don’t understand what’s going on, don’t do it. If your Broker is doing things you don’t like, get another Broker. When you think you’ve been mistreated, ask a professional for a second opinion.

To learn more on this Aurora Financial Fraud case, read the SEC Press Release and Investment News article "SEC charges Birmingham B-D with churning"

The truth will always come out. This is a hard lesson that Fund Manager, Matthew D. Weitzman, just recently learned. He has been charged with investment adviser fraud, securities fraud, and wire fraud. If convicted he faces up to a maximum of 15 years imprisonment and over $5 million in fines.

Mr. Weitzman was co-founder of AFW, financial planning and investment management firm. AFW managed more than $190 million in assets at the end of 2008. According to reports in the North Country Gazette,, Mr. Weitzman converted investor money for his own use.

The Golden Goose is no more for Mr. Weitzman. His misdeeds caught up with him and now he must face the music for his crimes. Hopefully, the Investors in AFW will seek legal counsel to discuss how they can get their stolen funds back.

Countrywide executives must face the music for deception and fraud as the Securities and Exchange Commission (SEC) has brought charges against the former Chief Executive Officer (CEO) Angelo Mozilo and two executives for allegedly hiding financial difficulties which led to the company's collapse from the subprime mortgage crisis. In 2007, Countrywide Financial was the United States' largest mortgage lender. When it collapsed in 2008, the Bank of America acquired Countrywide for more than $4 billion. This case is important as the public attempts to assign blame for the subprime mortgage collapse.

Many corporate executives use a common defense against financial malfeasance, that their subordinate employees hid important information. The SEC has collected top Countrywide executive e-mails (sent while the housing market was starting to decline) that portray a rosy public picture, with negative private ruminations concerning an impending collapse. These executives described the mortgage loans as "toxic" in private conversations. Ex-CEO Mozilo used terms like "flying blind" to describe his inability to assess the viability of these subprime loans.

Actions, such as ex-CEO Mozilo's sale of $260 million worth of stock, have led to insider trading charges that these executives failed to disclose important information publicly. Evidence is growing that ex-CEO Mozilo was quite engaged in all of the intricate details of homeowner loans. The Bloomberg News Service has reported extensively on these SEC lawsuits.

Still, ex-CEO Mozilo and his co-defendants are adamant in defending themselves, denying the SEC's claims that they deceived investors. These defendants argue that "no one could have predicted the severity and force of the housing market downturn." The Countrywide executives claim that regulators "cherry-picked" quotes which have been taken out-of-context.

Continue reading "Countrywide Executives must face the music for deception and fraud " »

Attorney Marc Dobin, Partner and Director of the Financial Services Divsion, LaBovick & LaBovick, P.A., was quoted in the May 2009 issue of Financial Advisor Magazine in the article, FINRA Arbitration Claims. The Financial Industry Regulatory Authority (FINRA) is seeing a sharp rise in the number of arbitration claims filed by irate investors seeking compensation from the securities industry for steep losses during the market downturn.

Mr. Dobin comments on how it is the financial advisor's responsibility to match the investment with the investor. The advisor should make recommendations that are suitable to a client’s investment objectives and financial situation. The article also highlights the 90% increase in the number of arbitration claims in 2009 (1,065 claims) over the prior year, 2008, which had a 54% increase in the number of arbitration claims from the prior year 2007.

The highlight is taken from May 2009 Frontline News Financial Advisor article on the rise in FINRA Arbitration Claims.

As we speak to Clients and give Seminars we are constantly asked "How can an investor preotect themselves against Stock Fraud?" Here are a few points that anyone can remember. Please feel free to share them with loved ones that are consistent investors. Enjoy...

1. Read your mail. Account statements are confirmations are sent for a reason. If the value of your account dropped or grew more than expected, read the prior month’s statement and try to figure it out. Ask your broker for help. If the broker won’t help, get a new broker

2. Diversify your investments. No matter how much your broker says “This is great” don’t put all your money in one place. No competent money manager does this. A private investor shouldn’t either.

3. Be proactive in dealing with your investment professional. A broker is supposed to make recommendations that are appropriate for your situation. If you’re uncomfortable and want to stay with that firm, talk to the branch manager. If you want to leave the firm, do it.

4. Remember that an investment that sounds too good to be true, isn’t true. All of the Ponzi schemes that fell apart over the last year were all succeeding because people thought they were in on a “secret” program that was always doing better than the market. It turns out there was no valid investment program. Experienced investors thought they had found the magic bullet. They should have known better. They forgot this basic principle.

LaBovick & LaBovick is pleased to announce FREE Community Lunch and Learn Seminars from the Financial Services Division. The Seminars will be conducted by Attorney Marc S. Dobin in Palm Beach County on June 8th and June 15th.

The Lunch and Learn Seminars will kick off in North Palm Beach County and South Palm Beach County in June. The Seminars will be held at Toojay's in Boca Raton and Toojay's in Palm Beach Gardens. The purpose of the Seminars is to educate Investors who have lost money in the market due to mismanagement of funds by a Broker. The Seminars will also share tips for Financial Investors on how to prevent stockbroker fraud. Unfortunately, retired investors and professionals that have relied on the wisdom and skills of a Broker are the ones that typically fall prey to stockbroker fraud. They have allowed a Broker complete control over the management of their account.

According to Marc Dobin, “This investing climate is unlike anything I’ve witnessed. The investing public wants to know how to protect themselves from having this happen again.”

If you or someone that you know have been a victim of Stockbroker fraud for over $100,000 and want to learn more about your rights, call 561-625-8282 to RSVP. All registered participants must have a confirmation number to attend. Attendees will not be allowed to attend without a confirmation number. Space is limited; therefore, all Attendees are required to RSVP.

The Educational Stock fraud Lunch and Learn Seminars will be held on the following dates:
A. June 8th - TooJays - Downtown at the Gardens
B. June 15th - TooJays - Boca Raton - Glades Road

“The purpose of our Educational Lunch and Learn Seminars is to share tips and techniques that will help investors become a more involved and knowledgeable investor. And we will show investors what to do when things go wrong,” added Marc Dobin.

Investors that have lost over $100,000 in the stock market due to mismanagement of funds by a Stockbroker should attend one of the Stock fraud Lunch and Learn events. Call 561-625-8282 to RSVP and learn about your rights and how you can protect yourself from this happening again.

Continue reading "Free Community Lunch and Learn Seminars for Victims of Stockbroker fraud in Palm Beach County" »

Should brokers be able to keep profits from the alleged $8billion investment Ponzi scheme ran by Texan billionaire Sir Allen Stanford?

If the Court appointed Receiver, Ralph Janvey, has anything to do with it, this will not be the case. Janvey is seeking the return of the large commissions, bonuses, and other compensation paid by Sir Allen’s company for the sell of certificates of deposit, to 66 Financial advisers.

According to a lawsuit filed by Janvey, the unsuspecting customers that purchased CDs from the Brokers should be entitled to compensation. The Brokers involved, should not be entitled to compensation from the "elaborate and sophisticated” incentive program, since the services they were being compensated for, were not legitimate.

If Janvey prevails in this lawsuit, this will be a huge step in the right direction for investors involved in Stanford ponzi scheme and others around the country.

Read more on the Stanford Ponzi Scheme, by clicking on the following link to the article in the Financial Times, "Official seeks return of Stanford paid commissions" by Joanna Chung.

"Glaring Red Flags and Returns to good to be true", should have alerted Mr. J. Ezra Merkin to the Madoff Ponzi scheme according to New York Attorney General Andrew Cuomo. He is bringing the suit against Merkin because of his actions and reckless disregard regarding unsuspecting investors losing $2.4 billion. Although his clients lost money, Merkin personally gained $470 million for his careles actions. Merkin is the general partner of Ascot and Gabriel, domestic hedge funds and has been involved with running investment funds since 1989. One would think that with all his experience and credentials, he should have known better.

In a 54-page complaint filed earlier this week, New York Attorney General Cuomo accuses Merkin of duping his customers into believing he was investing their money. He touted himself as an "investing guru" when "in reality" he was only "a master marketeer."

On a positive note, Merkin is not accused of knowing about Madoff's fraud. However, because of his experience and track record, he should have known better. In the complaint, Cuomo is stating that Merkin is guilty of "deceit, recklessness, and breaches of fiduciary duty."

Click here to read more from the Law Journal Article on N.Y. Attorney General Sues Financier Over Madoff Losses

All eyes are on this New York case, because of the implications for other Brokers. Time will tell if Merkin and others will face consequences for client losses in the Madoff Ponzi scheme.

Let's hope that Justice Prevails and that Attorney General Andrew Cuomo has sucess with his suits against Merkin.

By now anyone who has any interest in investing knows about Bernie Madoff. Mr. Madoff has admitted his guilt in a Ponzi scheme of gargantuan proportions. But I think this is just the beginning.

Mr. Madoff has stated, through others, that no other person knew about his fraud. I find that impossible, not just difficult, to believe. I think he is pleading guilty to protect others.

What can a Madoff investor do? I have spoken with some of them and the stories are heartbreaking. People's lives have been ruined and will never be fixed. Securities arbitration and litigation is one recourse. But the Madoff entities are in receivership. So the feeder funds and moneyraisers are the next targets. But those cases will not be easy. A lawyer familiar with securities arbitration and litigation should have an opinion on this.

In my opinion, the investigation is not over. The SEC, which has been raked over the coals recently, will likely dig deeper. They will find out who else knew about the fraud, or ignored it, and when they found out. They will look at the feeder funds and the moneyraisers. And others will suffer consequences.

It's a shame that the public trust was violated in such a manner. This remains a black eye for the investment industry. It will take a long time to restore this confidence.

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

I have mentioned in the past that my distaste for Equity Indexed Annuities runs deep. I wondered aloud how a market-based product could be sold by someone with a securities registration. I would like to think that the SEC cares what I think, but I would be wrong. However, SEC Rule 151a went into effect in December and the Index Annuity folks are hopping mad.

They have a website, SEC151a.com, to plead their case. But what struck me most when reading their materials is the first page, which encourages its members to not get registered with either a Series 6 or Series 7. The authors of this site are discouraging people from the additional oversight that having a supervising broker/dealer would bring. Of course, that would likely mean another layer of overrides and reduction in income.

In my view, it would also lead to fewer inappropriate EIA sales. When I last blogged on this topic, I received an email from an annuity marketer taking me to task for blasting this "wonderful" product. It was all I could do to prevent myself from laughing (actually I did laugh). It's real simple in my mind. If you're selling something that relies on the stock market's performance to determine the performance of the underlying investment, you should be registered to sell securities.

Start sharpening your pencils, folks, and please bubble inside the circle only.

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So Citigroup is the latest institution deemed "too big to fail." Here's the part I don't understand. The New York Times is reporting that Citigroup is going to get $306 billion in guarantees and an infusion of $20 billion.

Isn't this the same Citigroup that was whining that it should have been permitted to purchase ailing Wachovia? Isn't this the same Citigroup that has sued Wachovia and Wells Fargo becuase it ended up the loser in that deal? Did the Feds tell Citigroup to stop stupid litigation while they were at it?

There shouldn't be anything that is deemed "too big to fail." What happened to "Joe the plumber?" Has he now been forgotten? Have all the small and large businesses that are struggling to make a profit and pay taxes been forgotten? I'm disgusted by this.

When a financial giant like Citigroup makes bad decisions, the government bails them out. When small businesses make bad decisions, the government is nowhere to be found. Make up your minds, folks.

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

There has been a huge shift in the United States from defined benefit retirement plans, where an employee is guaranteed a fixed payment upon retirement, to defined contribution plans, where the employee makes the contribution and maybe the employer makes a matching payment. Defined contribution plans are considered cheaper for the employer.

The best known defined contribution plan is the 401(k). In a 401(k), the employee contributes to the plan and chooses the investment strategy. A plan administrator offers a variety of investment vehicles, usually associated with mutual fund-type investments, and the employer may offer to match a percentage of the employee's contribution. The employer is called the plan sponsor.

There was some discussion in legal circles as to whether or not an employee, the "plan participant," could bring an action against the plan administrator regarding administration of the plan. ERISA lawyers, who are apparently immune to boredom, batted this around at some length for a while. The Supreme Court brought an end to this discussion and made a logical decision in my view.

In Larue v. DeWolff, the Supreme Court held that an administrator can be held liable to an individual participant, not just the plan, if the administrator screws up. Now how hard was that? Logic would tell you that if it's the participant's money, and the administrator is responsible for dealing directly with the participant, then the administrator has a problem if they/he/she don't listen to the participant's instructions, which was the case in LaRue.

This is what's wrong with the law. Logic gets suspended while egghead lawyers sit around and argue about the placement of a comma in a sentence or the meaning or a single word in a paragraph. Why couldn't someone just say "duh" (not "doh!")? I, for one, am glad to see that our Supreme Court got it right this time. Now, if we could only get Congress to worry about something other than flawed arbitration studies....

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

It has been 20 years since the stock market crash of 1987. Many were predicting that this was the end of the world as we know it (Insert REM music here). Others saw the crash as a buying opportunity. It turns out that the buyers were probably right.

If we look at a chart of the major market indices such as the Dow Jones Industrial Average, the Standard and Poors 500 and the Russell 1000 have done quite nicely over the last 20 years. In fact, the "crash" shows barely a blip on a historical chart.

The 1987 crash brought an onslaught of arbitration claims. It wiped out billions of dollars of net worth and pointed out weaknesses in various systems. Daily trading volume on the NYSE was over 600 million shares during the crash period -- and the system was strained. Now, daily trading volume regularly tops 1 billion shares without a hitch.

This year marks the 215th anniversary of the execution of the Buttonwood Agreement, which marked the formation of the NYSE. Much has changed, including the fact that the exchange is now publicly held instead of owned just by its members. But the basics remain the same. Buy good stocks and remember the reason they were purchased during market downturns.

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

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.

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.

OK, I try to limit the posts to once a week, so I can actually do some billable work, but I read an article about this video on YouTube and I couldn't resist.

Enjoy.

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

Bear Stearns announced bankruptcy petitions for two of its hedge funds. The term "hedge fund" has been used to describe a variety of investment vehicles. Generally, these funds are designed for high net worth investors with significant investable assets. The investors in these funds have virtually no say in how the funds are invested and, generally, they pay significant management fees to the fund manager. They are usually organized as partnerships.

According to this article in Forbes magazine, these funds invested heavily in subprime mortgage instruments. This is the domestic equivalent of Third World debt. These are instruments backed by loans made to borrowers with low quality credit.

To make matters worse, at least one of these funds appears to have been using leverage to purchase these instruments. Leverage is a buzzword for borrowing money. So the leveraged fund is borrowing money to buy investments that loaned money to people with bad credit. When it is explained this way, instead of buried in some dense disclosure document, would anyone place any significant amount of money in this investment?

Subprime lending survived because of the real estate boom in most parts of the country. Now that the gloss is off of the real estate market, the subprime market has come crashing down, taking those that were profiting from the higher interest rates of subprime loans with it. Bear Stearns, as manager of the funds, had no monetary risk unless it had some of its own money in the funds, which I doubt.

The hedge fund "industry" is an area that desperately needs regulation. I'm guessing that some of the "high net worth" investors in these funds are going to be people who had no business being in the investment. Only time will tell -- and the sob stories on 60 Minutes

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

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.

Wachovia Securities, which recently announced its merger with one of our clients, A.G. Edwards & Sons, agreed to pay a $3 million fine for allowing buy-and-hold customers to sit in wrap fee accounts. A wrap fee account is one where the client pays a flat fee for either no commissions or reduced commissions. Some brokers throw in extra services in exchange for the wrap fee.

Wrap fees have been around for a long time. In the "old days" (i.e. when I first started defending brokerage firms), a broker accused of churning would throw up his/her hands and say "That's it, I'm going to managed money" meaning a wrap fee account. The broker saw this as a way of not being accused of churning the client's account. Of course, a wrap fee is not a cure for all ills.

Wachovia, like other firms before it like Raymond James and UBS, was accused of letting its wrap fee clients just sit there racking up fees but getting nothing for the fee. Further, it appears that "A" share mutual funds, for which a client already paid a sales load (commission), were also being used in a wrap fee account, a definite no-no.

This tension between commission business and wrap fee business creates the issue of "which is cheaper." Sometimes a broker won't know how much activity the client is going to do, so a wrap fee would be inappropriate. Other instances may call for a wrap fee, such as a client investing significant new money, but the long term costs can be high if the strategy is to buy and hold.

Ultimately, the decision comes down to the basic premise of what is best for the customer. That is and has always been the mantra of securities business. Sometimes, for a myriad of reasons both honest and not-so-honest, the securities industry loses sight of the goal - the best interest of the client. In this case, the wrap fee was seen as placing the client and the broker on the same side of the table, with no transaction-based incentive. Most brokers that I know feel this way. Unfortunately, the decision to recommend a wrap as opposed to a transaction-based account is not a simple one. And the regulators don't provide any real guidance on the front end but are more than willing to extract a fine or two when the plan doesn't work out.

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

The National Association of Securities Dealers ("NASD") has issued warnings to investors regarding the sales of Equity Index Annuities. NASD Investor Information This is interesting because an Equity Index Annuity is treated as a fixed insurance product in Florida and not subject to securities regulation. This allows the unscrupulous insurance salesperson plenty of room for abuse.

Here's the problem with one of the most popular brands of Equity Index Annuities - the annuity values on the account statements are misleading. The only way to get the statement value out of the annuity is to annuitize it over ten years. I have a client who thinks that when she dies, her beneficiaries are going to get the "value" listed on her account statement. In fact, they will only get the value if they take 10 equal payments over 10 years. Hence, the Roach Motel analogy. Your money checks in but doesn't check out.

An Equity Index Annuity is a securities-based product that only requires an insurance license to sell. The performance of the annuity is tied to a market index or blend of market indices. Usually, the annuity's link to the index is capped and/or participates in only a percentage of the index's performance. Further, if the market declines, there usually is no limit on the decline. But there will be a limit if the performance rebounds.

I can barely understand this and I do this for a living. I can only imagine what the inexperienced investor must think. Actually, I know because we have spoken with people who have purchased these hybrid products. They didn't understand them when they purchased the annuity and they could not explain them to me when I asked for a description.

The unfortunate part is that the senior citizens who purchase these products can least afford having their money tied up in this manner. Worse yet, from my view, is that the aggrieved purchaser may have to go to court rather than go to arbitration. And since they are not securities, the attorneys' fee provision of the Florida Blue Sky Law would not apply.

Our advice - if you don't understand it, don't buy it. If you think you've been wronged, do something about it. Don't suffer in silence.

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