The Law Planet Blog

Last week, the Massachusetts Securities Division’s Enforcement Section filed a complaint against Securities America, Inc. (Securities America) claiming that the company omitted information and mislead investors. In the complaint, Massachusetts claims that Securities America violated a state securities act in connection with the sale of millions of dollars worth of Medical Notes to investors.

According to the state of Massachusetts, Securities America sold investors roughly $697 million worth of Medical Capital notes issued by Medical Capital Holdings, Inc. (Medical Capital). Securities America offered the notes to investors in a number of private placements, meaning the securities were considered too risky to be solicited or sold to the general public. The complaint alleges that Securities America did not properly disclose the material risks associated with the notes prior to selling them to investors.

In a statement concerning the issue, Massachusetts Secretary of the Commonwealth, William Galvin, said:

“Our investigation showed that Securities America ignored their own due diligence analysts and sold these notes to unsophisticated investors without telling them the risks involved. People invested their life savings, while this dealer hid from them the truth of what they were getting into.”

In addition to allegedly misleading investors by Securities America, since August of 2008, Medical Capital has been in permanent receivership and has defaulted on every one of its outstanding note obligations. This means that approximately $1.079 billion of notes are in default, leaving millions of investors’ dollars – including the life savings of many – frozen. The civil complaint also seeks restitution for investors whose dollars are now illiquid.

From approximately 2003 to 2009, Medical Capital issued over $1.7 billion in Medical Capital notes. Acting as a placement agent between the notes and investors, Securities America handled the sale of roughly 37 percent of the total notes issued, or $697 million.
In connection with the sale of the notes in Massachusetts alone, Securities America received nearly $30 million in compensation. This does not include the untold millions of dollars worth of compensation received from countless more allegedly mislead investors in other states.

Although Massachusetts filed this complaint on behalf of investors within its state lines, this case of financial fraud affects investors throughout the United States. If you invested in Medical Capital notes using Securities America, please contact an attorney experienced in securities fraud immediately to discuss protecting your rights under the law.

Click on the following link to read the official complaint filed by the Commonwealth of Massachusetts

Click on the following link to read the Boston Herald’s article, State seeks restitution for securities of America investors.

LaBovick & LaBovick, PA filed a FINRA arbitration against Ameriprise Financial Services, (NYSE: AMP), formerly known as American Express Financial Advisors (AEFA) for stockbroker misconduct and negligence. The claim alleges that Deborah Amilowski, Financial Advisor for Ameriprise Financial Services, failed to properly advise a Senior investor on risks associated with unsuitable products for a person of that age, at the time of the initial investment and negligence in properly identifying the beneficiary resulting in additional loss to the trust.

The FINRA Statement of Claim, filed on August 13, 2009, stated that Ms. Amilowski, recommended a RiverSource variable annuity as an initial investment to a 77 year old investor at the time of purchase, thus ineligible for a guaranteed death benefit. This investment was too risky for someone of this age.

"Ameriprise Financial had the perfect opportunity to fix the problem, but compounded the error through their negligence and failure to act in the best interest of the client. Brokerage firms and their advisors must act with their client's best interest first. It is not acceptable for a firm to take advantage of Senior investors for profit," stated Marc S. Dobin, Esq., Director of Financial Services, LaBovick & LaBovick, PA.

Click on the following link to learn more on the FINRA Arbitration claim against Ameriprise Financial.

The Public Investors Arbitration Bar Association has proposed a rule directly to the SEC that would effectively eliminate the “industry” arbitrator from the arbitration panel. The paranoia exhibited by this organization, without any true empirical basis, knows no bounds.

As a lawyer who represents both industry and investor clients, I have a unique position to assess this proposal (although I am not alone in representing both types of parties.) PIABA remains critical of the presence of a person experienced in the industry on an arbitration panel. Personally, having experienced arbitrations where the industry panelist was marginally affiliated and the public arbitrators knew next to nothing about securities, I suggest that we should all be afraid of PIABA’s proposal.

PIABA continually refers to the industry panelist as an advocate for the industry. There is no basis for this. The organization cites flawed research that states that claimants in arbitration win less than they “should.” But how does PIABA know that these cases would have fared better either in court or with an all-public arbitration panel? It doesn’t. I have stated before and I will say it again, that cases that go to hearing tend to be self-selecting. Those cases which can’t settle because the Claimant wants too much or the Respondent won’t pay enough are the ones that go to hearing. Therefore, these are the more difficult, or bad, cases depending on one’s point of view.

I have been involved in a number of cases where it was obvious that the industry panelist did not agree with the Respondent’s position. There is no evidence that the industry panelist serves as a patsy for the brokerage firms. Just because a flawed analysis finds that the “win rate” is down, does not mean that the system is bad. In arbitration, each case stands on its own. Two cases cannot be compared as every person’s situation is different.

PIABA has come up with some good ideas in the past. This is not one of them.

Rule Change Petition presented to the SEC from the Public Investors Arbitration Bar Association

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.

A Florida Judge orderered former Pinnacle Business Management, Inc Chairman, Jeffrey G. Turrino to pay $9.95 Million and permanently banned him from Penny Stock Offerings.

The Securities and Exchange Commission announced that, Judge Elizabeth A. Kovachevich, United States District Judge for the Middle District of Florida, entered an order of civil contempt against defendant Jeffrey G. Turino.

In her ruling, Judge Kovachevich found that Turino acted in flagrant and repeated contempt of the penny stock bar back from December 2003. This was in connection with a previous Commission enforcement action stemming back from May 2002. In that action, the Commission alleged that Turino, one of his associates, and the penny stock company they operated, Pinnacle Business Management, Inc., had committed securities fraud by making materially false and misleading statements about Pinnacle’s business operations. This action was settled by Turino with a civil penalty of $60,000, consent to a permanent fraud injunction, and a penny stock bar for five years.

Financial Services Director, Attorney Marc Dobin made the following comments regarding this case:

This demonstrates two things: Some leopards don't change their spots (or pay attention to what the judges say) and that no matter how many times you tell the investing public to be careful with their money, they will still listen to a good story from a con man and give them their hard-earned money.

To learn more on the case, click on the following link from the SEC website regarding: Securities and Exchange Commission v. Pinnacle Business Management.

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.

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.

The Eleventh Circuit Court of Appeals, which covers Florida, is a "manifest disregard" circuit. In Montes v. Shearson Lehman Hutton, the court found that a closing argument in an NASD arbitration that acknowledged the law, but encouraged the arbitrators to ignore it, was evidence of manifest disregard of the law. The arbitrators agreed and Shearson won the case.

On a motion to vacate, ultimately decided by the 11th Circuit, Shearson lost. The court found that the test is that the arbitrators were aware of the law and chose to ignore it. Montes may be the only case decided on this basis for the movant. In other words, in establishing "manifest disregard" as a basis for vacating an arbitration award, Shearson lost.

Over time, and mergers, Shearson became part of Citigroup Global Markets. That entity, Citigroup, recently lost a FINRA securities arbitration award to a woman from Texas. Citigroup thought it had a good argument, that the arbitrators manifestly disregarded the law. The trial court agreed. The Fifth Circuit did not.

In Citigroup v. Bacon the Fifth Circuit said that "manifest disregard of the law" is no longer available as grounds to vacate an award. The court based its decision on a recent US Supreme Court decision in Hall Street Associates v. Mattel. The US Supreme Court in Hall Street found that "manifest disregard" is not part of the statute allowing vacatur of arbitration awards. The Court pronounced for the entire nation that "manifest disregard" does not exist any longer. (Other circuits, by the way, have found their way around this ruling.)

Florida currently is a "manifest disregard" state, but the 11th Circuit said that Montes is the only case it has found worthy of that moniker. In fact, in Harbert v. Hercules Steel,, the 11th Circuit warned that sanctions may be appropriate for weak motions to vacate arbitration awards based on "manifest disregard."

There you have it. Citigroup has managed to establish that "minfest disregard" is and is not a basis for vacating an arbitration award. For those of you non-lawyers who read this, I can't explain it other than to say, that's the way the law is sometimes.

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

I have been handling securities arbitrations for over 20 years. Every once in a while, the arbitrators saw the other side's case for what I believed it was -- nonsense. This has happened a few times over the years.

I heard about a case that was being tried before FINRA in Boca Raton. The premise of the claim seemed flimsy to begin with. Money had been stolen by a broker and returned by the brokerage firm, Merrill Lynch to the customer. The claim appears to be for, in part, lost investment opportunity. The broker did not appear during the arbitration hearings. At a point in time, she said she was not appearing because she was "awaiting sentencing." Those are usually not helpful words.

But it appears that Merrill did the right thing and paid back the customer the money that was stolen. But in something that I cannot recall ever seeing before, there is a nearly two page recitation of the procedural issues in the case. There are issues dealing with amendment of pleadings, appearance of witnesses and the possiblity of depositions. This case was war.

The arbitrators sided with Merrill Lynch and against both the Claimant and her broker. The panel awarded both the Claimant and Merrill Lynch their attorneys' fees against the broker. But that's not the unusual part.

The unusual part is the assessment of the arbitration costs jointly and severally against the Claimant and her lawyers. That is very rare. In case anyone reading the award thought that the panel was happy about this case, the assessment of costs against the lawyers pretty much puts that notion to rest.

Some days, the dog bites you and some days you bite the dog. I don't know who plays which role, but somebody got bit.

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

The folks at FINRA are SOOO predictable. Some arbitration haters come out with a "study" about arbitration and conclude it's not fair. The securities industry releases its own study and says that arbitration is fair. So what does FINRA do? A "pilot" program. See the press release here.

What is the hubbub all about? The eggheads and some members of the plaintiffs' bar believe that the presence of an industry panelist creates a bias against the public claimant. Apparently, these people haven't sat in hearings where I've been. Typically, in cases that I've handled, the industry panelist is the one who is toughest on the securities industry. In a case where my firm represented a public customer, it was the industry arbitrator who was toughest on the opposition's expert.

So does this mean that panels will be free of bias? No. In fact, there is nothing in this program that prevents lawyers who typically represent customers from being on a panel. They are generally qualified as "public" arbitrators. But the program leaves someone like me, who represents brokerage firms and investors, from being on a panel. So now a panel can be dominated by a died-in-the-wool plaintiffs' lawyer with no counterpoint.

This, in my humble opinion, is a mistake. This is another example of addressing a "problem" that does not exist. The bigger problem is arbitrator competence. I once had a case where the chair was an interior designer! She had no business being the chair, but there were no lawyers on the panel, so she got the job. It was ridiculous. The new rules, which require a "qualified" chair, do much to address this situation. But a panel with no industry member? Talk about a stacked deck.

Remember, the industry member is only one of three. If the other two arbitrators are too weak to make up their minds, and the industry member is believed to drive the panel, then that is a problem with the arbitrator pool, not the process. I have always said give me three smart arbitrators and I will get a fair result 99% of the time. On the other hand, if you start tinkering with the process, and remove the industry panelist, I think that this will demonstrate only that FINRA has succumbed to undue political pressure.

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

I recently wrote about FINRA's policy on expungements. Of course, FINRA has no control over what any individual state securities commissioner might do. In what appears to be a case of first impression, a state securities regulator has stepped in to try and stop a bargained-for expungement.

Melanie Lubin, the securities commissioner for Maryland, intervened in what is usually a milk-run expungement matter. In an attempt to keep the complaint on broker's record, Ms. Lubin objected to the expungement. At the trial court level she was denied the opportunity to intervene. The DC Appeals court ruled that she could intervene and sent the case back to the trial court.

Get ready boys and girls. Not only will this change the whole expungement atmosphere, it will change the wording of releases. If an expungement is a material part of the settlement, then what will happen if the state regulator intervenes and shouts "STOP!" More litigation, that's what. And for those of us that do litigation, that's good news. For those of you who pay the bills for litigation, this is not a good day.

This is going to become an even more sensitive issue as "product failures", such as Auction Rate Securities, are disclosed on a broker's CRD. Many brokers are already stating that they were just a conduit for the information (or misinformation) given to them by their firms. Does a state securities commissioner really want to stick his or her nose in that one? What a mess.

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

I have recently received several inquiries regarding expungements of U-4 and U-5 information. I have said this more than once, but "in the old days" an expungement was a piece of cake. The parties agreed to it, whether it was a customer or industry dispute, and it was done.

Of course FINRA got wise to this and started slowly tightening the noose around expungements. I have done research on this issue before but wanted to share this one link I found which you, my 3 loyal readers, may find helpful. This page contains the be-all and end-all from FINRA regarding expungements.

There are two classes of expungements - customer and non-customer. Expungements of customer complaints require specific findings. If a U-4 or U-5 disclosure is not customer-related, then a different set of rules applies and the only finding that an arbitration panel needs to make is that the disclosure was defamatory.

There is also a procedural difference once the successful litigant has obtained an expungement Order. If it is customer-related, a court needs to sign off on the change to the U-4/U-5 and FINRA needs to be made a party to the action. If the expunged information is not customer-related, a simple finding of defamation is sufficient for FINRA to remove the information from the CRD system.

Now you're informed. That's the view from The Law Planet - Jupiter, Florida.

We've all seen them - the books and magazines that look like they feature a financial salesperson. In fact, NBC's Dateline program did an expose on annity sales practices. Several of the agents the show targeted had phony ghostwritten articles.

In FINRA Notice to Members 08-27, the regulators stated that using ghostwritten materials could violate a number of rules, including NASD Rules 2110, 2120 and 2210 and Incorporated NYSE Rule 472. Frankly, the use of the word "could" is fairly silly. How about "does" unless, in a conspicuous place, the financial representative discloses that the only connection he had to the article was possession of a credit card and a digital picture?

This is one of those common sense kind of moments. Others call it the "Wall Street Journal" test. Do you want your behavior displayed on the front page of the "Wall Street Journal"? Generally, no.

FINRA's Notice to Members addresses a recent theme, aggressive sales tactics used in connection with seniors. FINRA has issued pronouncements regarding "free" lunch seminars, the use of certifications that are nothing more than mail order multiple question tests and, now, the use of phony news articles. All of these are good steps to protect those who can least afford to make financial mistakes.

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

In another installment of the incompetent/malevolent broker/dealer guidebook, Barclays Capital partially prevailed on a Motion to Vacate Arbitration Award filed against one of its former employees. In Barclays Capital Inc. vs. Elizabeth Bing Shen, 2008 N.Y. Misc. LEXIS 2327, a NY Supreme Court judge (the lowest level trial court, interestingly enough) found that the ruling in Rosenberg v. MetLife barred recovery of punitive damages.

Rosenberg, as those who have been following this issue will recall, held that incorrect statements on a U-5 Termination Notice were absolutely privileged. In my opinion, regardless of whether you represent a firm or the broker, this is a wrong-headed decision that was decided by judges who ignored the impact on a broker's life a U-5 can have. There has been some discussion by commentators that there are ways "around" Rosenberg. Certainly, one of them is to avoid New York law in contracts. There are others as well, but if I shared them I'd have to shoot you.

Back to Ms. Shen. She was apparently owed a bonus and her U-5 was found to be erroneous by the arbitrators. By the description in the court's opinion, she does not qualify for "Employee of the Year" status by any means, but the arbitrators clearly felt that she didn't deserve the disclosure she received. They awarded her punitive damages.

The court found that the punitive damages could only have been for the U-5 defamation claim and, therefore, vacated that part of the award. We are currently representing brokers whose U-5s, we believe, are defamatory. We are not concerned about the New York choice of law provision because we feel that there are valid arguments against it when the the broker is in Florida. Nevertheless, this creates more stress and anxiety and creates a "free defamation zone" for broker-dealers, honorable and not.

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

In an email from FINRA, formerly NASD, dated April 14, 2008, the agency announced that the arbitrators' procedures on damages and closing the hearing will be changing. This is, ostensibly, to unify the scripts between NASD and NYSE arbitration codes.

The first change has to do with damages. In an effort to have the percentage "win" rate more accurately reflect what was sought at hearing, the arbitrators will be asking for a summary of the "final request" for damages. It is off of this amount that the statisticians calculate customer "win" rates and percentages. Since the statisticians use the amount sought as described in the award, this amount will now be based upon what the party asks for at hearing.

Frankly, I don't see how this will make a difference. If it makes FINRA feel better, so be it.

The next change is more interesting. The NASD script always ended with the chairperson asking the parties if they had a "full and fair opportunity to be heard." Every once in a while a party would say "no." Interestingly, there's nothing that I recall from the chair's script that tells the arbitrators what to do in the case of "no." Basically, it causes a fire drill. Or the chair says that the objection is not relevant or necessary. I once used the threat of a "no" in a case where I felt the arbitrator was being unfair in the allocation of time to present my case. The arbitrator, an otherwise fair-minded individual, changed course and I was given the opportunity to present my client's case in full (successfully, as well).

The new script will ask the following "Do the parties have any other issues or objections that you would like to raise that you have not previously raised?" This was, I think, the intent of the prior question anyway. But there is a big perceived difference between "full and fair" and "any other issues or objections."

FINRA states that "full and fair" is nowhere to be found in its arbitration codes. Given some of the results I've received, "fair" certainly isn't in there.

These are hardly earth-shattering changes. But ever since I attended my first arbitration (when dinosaurs roamed the earth) I have heard the "full and fair" language. I'll miss it.

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

FINRA, the securities regulatory agency governing all stockbrokers, has announced its approval of a new expungement rule in a press release dated December 14, 2007. This is further evidence of regulatory scrutiny of a long-standing practice of obtaining expungements in the settlement of customer claims.

Many moons ago, when my hair was more plentiful and darker, the warring parties in a securities arbitration could simply agree to have the customer complaint removed from the broker's record, get the arbitrators to sign off on it and the deal was done. NASD got wise to this practice and enacted a series of ever-tightening rules regarding expungements. First time around, the arbitrators had to grant the expungement and the award was required to be confirmed by a court, unless the defamatory U-5 filing was the subject of the arbitration, in which case no court confirmation was necessary.

The NASD then enacted standards that must be met regarding the expungement of customer complaint information. Arbitrators were to apply certain standards in granting expungements. Additionally, NASD was to be notified when a broker sought a court confirmation of an expungement order. It appears that these standards and practices were not enough. Much settlement money changed hands and arbitrators were still granting expungements.

This new rule, as proposed, tightens the noose further. An evidentiary hearing is required and the terms of the settlement with the customer must be disclosed. This raises an interesting question. If the brokerage firm pays the money and the customer gives a separate release to the broker, which release is relevant to the arbitrators' inquiry?

FINRA's concern about expungements is understandable. As the custodian for CRD, which is relied upon customers and regulators as the broker's record, expungements can skew a broker's history. At the same time, a broker should have a right to have frivolous items removed.

That's the view from The Law Planet - Jupiter, Florida. Happy holidays to one and all.

The Securities Industry and Financial Markets Association (SIFMA), the securities industry's trade group, has been remarkably silent in the arbitration abolition wars. First, the distorted report from Daniel Solin and Edward O'Neal came out which said arbitration was unfair, simply based upon won/loss rates. Then the Feingold-Johnson bill is proposed - to ban all "consumer" arbitrations. Even PIABA, the trade group for securities claimants' lawyers, came out against arbitration and, separately, proposed removing the industry panelist from all arbitration panels.

In a recent article from The Investment News, SIFMA is described as fighting back. Of course, the naysayers will portray SIFMA's study as self-interested, but noone seemed to accuse Mr. Solin or PIABA of the same self-interest. But I digress.

A review of the SIFMA study shows that a lot of thought went into debunking the horse-droppings that were left behind by the Solin study. SIFMA correctly points out the number of garbage cases that were filed by people who were incapable of accepting that the market simply went down. This is not to say that every case was garbage, but my own experience was that there were a lot of people who wanted to take the risk and that ultimately led to their financial distress.

Read the report. It provides the other side of a coin that was not previously turned over. Now, I'm sure, the battle heads for Congress. Long live arbitration!

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

The newly-minted securities regulator, FINRA just fined Morgan Stanley $12.5 million for failing to produce emails in its possession. To make this even more heinous, Morgan Stanley hid behind the 9/11 tragedy as the reason for its failure to produce. As it turns out, this representation was just wrong and Morgan Stanley knew it.

This problem came to light in a very public way when Morgan Stanley tripped over itself, numerous times, in Palm Beach County Circuit Court litigation with Ron Perelman. Mr. Perelman's lawyers pressed and pressed the firm for emails. And, magically, emails started popping up all over. Eventually, the judge decided that Morgan Stanley couldn't be trusted and shifted the burden of proof to Morgan Stanley to prove that it wasn't liable to Perelman.

We have litigated against Morgan Stanley. In all cases but one, the company fought production of obvious items, produced incomplete documents and stated that documents didn't exist, and then produced the documents when forced. In one case, we were told no documents existed and a witness showed up at a hearing to testify with a big stack of paper that was in a file outside his office.

Litigation is a battle. But there are rules and expectations of lawyers and clients to abide by those rules. Morgan Stanley was fined for more than an oversight and it was deserved. Perhaps this will serve as a warning to other firms who play games in discovery.

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

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

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.

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.

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.

Under Florida law, the courts have upheld a qualified privilige on disclosures made on NASD form U-5, the Uniform Termination Notice for Securities Registration. Eaton Vance Distributors, Inc. et al. v. Ulrich, 692 So. 2d 915 (Fla. App. 2nd DCA 1997). However, there are a number of brokerage firms that use a New York "choice of law" provision in their employment contracts. A recent decision was initially thought to be the death knell for defamation actions.

In Rosenberg v. Metropolitan Life Insurance Company et al., 2007 NY Slip Op 2627, the New York Court of Appeal, the state's highest court, ruled that statements made on a Form U-5 are protected by an absolute privilege. The ruling, at first blush, appeared unequivocally devastating to registered representatives wishing to assert U-5 defamation claims employed in New York and/or governed by enforceable New York choice-of-law provisions. Fortunately, however, the Second Circuit Court of Appeals, after it received the Rosenberg case back from the New York Court, identified a very legitimate and glaring hole in the Court of Appeals’ analysis. Op. issued June 14, 2007 at n. 1.

The Court of Appeals recognized that statements in a Form U-5 that are not “material and pertinent to the issues to be resolved” are probably not protected. Specifically, the court recognized that not all statements placed on a broker’s Form U-5 may be absolutely protected:

Consequently, we need not decide if there are circumstances in which statements on a Form U-5 are not absolutely privileged under Rosenberg II. We note, however, that in the context of judicial or quasi-judicial proceedings, statements made by parties, attorneys, and witnesses are absolutely privileged only ‘so long as they are material and pertinent to the issue to be resolved in the proceeding.'

While initially devastating to broker U-5 defamation claims under New York law, the Second Circuit’s latest per curiam decision holds out hope that brokers are not completely without recourse when false language is contained within a Form U-5. Moreover, because U-5 defamation analysis is governed by state law, states such as Florida that reject an absolute privilege in U-5 defamation cases remain unaffected by Rosenberg.

Here at The Law Planet, we continue to receive inquiries from recently-terminated stockbrokers about getting help with the language on a form U-5. Most brokerage firms are savvy enough to realize that getting the broker's input on the language is a major step towards avoiding defamation litigation. Our role as counsel is to make sure that the brokerage firm discharges its regulatory obligation while minimizing the impact on our client's career.

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

There was a study published recently by Dan Solin, a lawyer in New York City, and his co-author Eddie O'Neal, a professor, which conclued that mandatory securities arbitration is unfair. Now, I will admit that I (and others) make a pretty good living in securities arbitration venues of the NASD and NYSE. But I don't understand what all the hand-wringing is about and I certainly don't understand the conclusions that these two gentlemen reached.

Most importantly, I think, they completely discounted the notion that the broker-dealers settle the tough cases and try the cases that they can't settle or think they can win. I don't know Mr. Solin but I don't think he does any defense work (he is a member of PIABA, the Public Investor Arbitration Bar Association), I find it hard to believe that he can simply dismiss this notion as "anecdotal." In my firm's practice, where we represent customers, brokers and broker-dealers, we have seen the vast majority of our cases settle before they go to hearing. It's not just anecdotal, it's a fact.

There are some distinct advantages in arbitration. The strict evidentiary rules don't apply. This allows hearsay, double hearsay, newspaper articles and the like into evidence. An old saw in arbitration is that arbitrators "let everything in" and they will "take it for what it's worth." You won't see a judge do that.

Expert witnesses are another area where arbitration is more lenient. When I first came to Florida, I examined a proposed expert and he admitted that he was not an expert on securities laws, even though he was going to testify in a securities fraud case. His testimony was allowed. In court, he would most likely have been shown the door.

There really isn't a way to study the purported fairness or unfairness of securities arbitration by just looking at numbers. But look at PIABA's name. Notice the word "Arbitration." Trust me, no one is holding a telethon for impoverished securities lawyers.

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