The Law Planet Blog

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.

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

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Since just about the beginning of time, FINRA (formerly NASD) fines were viewed as a mere nuisance by out-of-business firms and former registered persons. FINRA has been criticized in the past for not collecting regulatory fines or fees from arbitration proceedings. At least in one case, this seems to have changed.

FINRA filed, and won, an enforcement action against John Fiero and Fiero Brothers, the broker-dealer he controlled, obtaining an award for over $1,000,000 in fines and costs. In the past, this would have been a pyrrhic victory for FINRA as it was well-known that they would not pursue collection if the firm was out of business. Well, it looks like this is no longer the case. FINRA filed a lawsuit in New York state court to collect the award.

FINRA was successful in the lower court and the appellate level. There were various defenses raised by Fiero and his company -- all of which were nice attempts but hard to fathom. Their success, perhaps temporary, came at the Court of Appeals, New York's highest court. For the first time in this matter, it appears, a court addressed the issue of jurisdiction over the action. The Court of Appeals found that Section 27 of the Exchange Act of 1934 specifically provides for "exclusive jurisdiction" in Federal Court. Boom, like that, FINRA was foiled.

Probably not for long. And this will be a lesson for those of us who practice in this area. We can no longer advise clients that, out of the business means that FINRA won't come after you. Maybe it's based on dollar level, but we'll see.

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

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Posted In: Legal Issues , Securities Industry , Stockbroker Issues

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Since time immemorial, brokers who left their prior firms have taken copies of customer information. In the "old days", brokers copied their holding pages, new account forms and last monthly statements of their customers. With the advances made in the industry, a broker only needs a customer name, address, account number and phone number to accomplish the transfer. Sure, there's plenty of other data, but it's not needed to effect the transfer. This has been going on since I started as a paralegal in the Prudential-Bache Securities law department in 1983.

The SEC sounds like it wants to change all that. Last month, an administrative law judge held a hearing in a case brought by the SEC against NEXT Financial, a brokerage firm from Texas using the independent contractor model. In that case, the SEC's lawyers maintained that all information is confidential and cannot be transferred without the customer's permission. It is unclear whether this includes names and addresses.

In 2007, we successfully defended two cases brought by major wirehouses against their smaller competitors. In both cases, the firms complained about the transfer of "confidential" information. In both cases, we pointed out the hypocrisy of the argument as those same firms use the same "confidential" information when they recruit from other firms. As I said, this has been going on since time immemorial. The arbitrators in both cases, recognizing that this is the custom and practice in the industry, awarded nominal damages to the wirehouses, not the hundreds of thousands or millions that were sought.

The brokerage industry has been able to deal with this issue, on its own, for years and years. The problem, of course, is that NEXT's alleged conduct was wrong and the firm did not own up to its failings. As we sometimes say in the practice "Bad cases make bad law." From what the SEC alleged, this was a "bad case" and the industry may find itself suffering from its impact.

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

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Every stockbroker is required to register with the state in which he or she does business and with, at a minimum, FINRA (formerly known as NASD). A broker's background, as maintained by FINRA, can be found here. Every customer of a broker should look at the broker's background before trusting their life savings to a stranger.

And every broker is a stranger. No matter how much you know about your broker, you will certainly not hear of arbitration awards or regulatory sanctions. The new BrokerCheck generates a very user-friendly report in pdf format which can be saved for future reference. It contains the broker's employment history, registration history, any outside business affiliations and, if applicable, and regulatory/litigation history.

Most brokers have clean records or records with minor dings on them. Other brokers have plenty of dings but they may be due to a product failure, such as Limited Partnerships or firm research stocks. But a consistent history of such magic terms as "unauthorized trading" or "unsuitability" should give you reason to look elsewhere. It may mean that the broker you're speaking with has a difficult time complying with the rules. With over 50,000 registered brokers, you should be able to find one that suits your needs.

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

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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.

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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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The arbitration award can be found here.

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

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

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

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

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