Articles Posted in Arbitration

FINRA Provides Guidance As It Opens Up Arbitration Process to Investment Advisers

Published on: November 9, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority is now making its arbitration process available to all registered investment advisers. The SRO’s arbitration forum has in the past been for member broker-dealers, but not IA’s, to resolve disagreements. (That said, IAs that are dually registered with FINRA have had to arbitrate via the SRO’s arbitration process if the disagreement pertained to the adviser’s activities as a member of FINRA or as an associated person.) Now, however, FINRA is ready to take arbitration cases against investment advisers as long as the parties involved are both amenable to this.

Some people have expressed concern that opening up FINRA’s arbitration process to these advisers could create problems. For example, seeing as broker-dealers and investment advisers are upheld to different standards under federal law, there has been the worry that FINRA arbitrators might get confused as to which standard applied to a case.

FINRA arbitration lawyer William Shepherd, however, disagrees: “It is true that financial advisors are held to a fiduciary standard by statute, but securities brokers are often held to a ‘common law’ fiduciary standard. For example, brokers are held to a fiduciary standard when they use discretion to invest their clients’ money (either with or without written permission). As well, for decades the FINRA Arbitration Code has allowed cases to be filed for ‘any dispute, claim or controversy.’ Current FINRA arbitrators are savvy enough to make any distinction in the responsibilities of different investment professionals and are likely the most capable persons in existence to decide cases concerning financial advisors.”

FINRA’s decision to open its arbitration process comes during the ongoing discussion about possible self-regulatory oversight for advisers. Bill H.R. 4624 proposes bringing advisers under the supervision of at least one SRO, with FINRA as the potential watchdog. There has, however, been strong opposition to the legislation, and House Financial Services Committee Chairman Spencer Bachus (R-Ala.), who ushered H.R. 4624, has decided not to keep pushing it forward until a committee consensus is reached.

Meantime, FINRA has put out guidance on how investment advisers who are not members of the SRO can use its mediation and arbitration forum to resolve disagreements with employees and members. Per the guidance on disputes between IAs that are firms not regulated by FINRA and investors/investment adviser employees, the SRO will accept disputes by parties seeking this forum as long as the investor and IA turn in a post-dispute agreement to arbitrate, the IA or other parties consent to pay arbitration surcharge fees, and the investor submits a written submission agreement to send the dispute to FINRA Dispute Resolution (the agreement has to be signed by all parties involved in the arbitration and the signatures need to have been written after the events that led to the dispute happened). FINRA mediation services will be offered for investment adviser disagreements on a voluntary basis.

Guidance on Disputes between Investors and Investment Advisers who are not FINRA-regulated firms, FINRA

FINRA Opening Arbitration Process To Investment Advisers, Spokeswoman Says, Bloomberg/BNA, October 29, 2012

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Court Upholds Ex-NBA Star Horace Grant $1.46M FINRA Arbitration Award from Morgan Keegan & Co. Over Mortgage-Backed Bond Losses, Stockbroker Fraud Blog, October 30, 2012

Plaintiff Must Arbitrate Faulty Investment Advice Claim With TD Ameritrade But Can Proceed With Litigation Against Oakwood Capital Management, Stockbroker Fraud Blog, October 29, 2012

Citigroup Ordered by FINRA to Pay $1.2M Over Bond Markups and Markdowns, Institutional Investor Securities Blog, March 27, 2012 Continue Reading ›

Court Upholds Ex-NBA Star Horace Grant’s $1.46M FINRA Arbitration Award from Morgan Keegan & Co. Over Mortgage-Backed Bond Losses

Published on: October 30, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Three years after the Financial Industry Regulatory Authority awarded former Chicago Bulls forward Horace Grant a $1.46 million arbitration award in his securities claim against Morgan Keegan & Co., the U.S. Court of Appeals for the Ninth Circuit has upheld that ruling. Grant, who had suffered mortgage-backed bond losses, accused the brokerage firm of not disclosing to him that his investments were not suitable for him, withholding information about the actual risks involved, and failing to supervise the fund manager. Morgan Keegan is now part of Raymond James Financial Inc. (RJF).

Grant bought the majority of the funds through his account with Morgan Keegan in 2004 when the brokerage firm owned the sports agency that represented him. The mortgage-backed bond funds were among a group of investment products that took huge losses in value in 2007 and 2008 when the subprime market failed.

Hundreds of investors proceeded to file similar mortgage-backed bond losses claims against Morgan Keegan, which finally agreed to settle with regulators for $200 million the allegations that it had inflated the value of the high-risk subprime securities that the funds held. James Kelsoe, a fund manager who is accused of purposely inflating the subprime securities’ value, would later to agree to an industry bar by the SEC and consent to pay a $500,000 penalty.

Plaintiff Must Arbitrate Faulty Investment Advice Claim With TD Ameritrade But Can Proceed With Litigation Against Oakwood Capital Management

Published on: October 29, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The California Court of Appeals says that while investor Irene Mastick can proceed with her securities litigation against Oakwood Capital Management LLC, she has to arbitrate her securities claim against TD Ameritrade Inc. Mastick had sued representatives of the two financial firms, along with M.E. Safris & Co. and her accountant Michael Safris alleging that she had been provided with poor investment counsel.

Mastick claims that after meeting the defendants in 2008, she was advised to take the proceeds from her life insurance policies and invest them. Contending that she was given bad advice regarding this strategy’s tax consequences, she filed her fraud lawsuit.

Safris, who is a New Jersey resident, had the securities case removed to federal court and Mastick amended her complaint to include the firm representatives. Oakwood and TD Ameritrade then sought to compel arbitration but the federal court then denied their petitions and remanded the lawsuit due to lack of diversity. TD Ameritrade and again sought to compel arbitration.

Merrill Lynch Agrees to Pay $40M Proposed Deferred Compensation Class Action Settlement to Ex-Brokers

Published on: August 27, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Merrill Lynch (MER) has arrived at an “agreement in principle” to resolve the class action lawsuit filed by John Burnette and Scott Chambers over deferred compensation that they contend that the brokerage firm refused to pay them after it merged with Bank of America (BAC) in 2008 and they left its employ. About 1,400 brokers are part of this class. However, some 3,300 ex-Merrill brokers have submitted deferred compensation claims against the brokerage firm for the same reason.

Merrill had refused to give these employees their deferred compensation, which is what a broker usually gets paid for staying with a financial firm for a specific number of years, when they resigned after the merger. These brokers, however, cited “good reason” for their departure, which is another cause they can claim to receive this.

The class action settlement was presented to U.S. District Judge Alison Nathan at Manhattan federal court on Friday. She will decide whether to approve it, as well as certify the class according to the parties’ definition. However, it is not known at this time how many brokers will go for this settlement if it is approved.

It is not unusual for many to opt not to be part of a class action settlement and instead seek to obtain more money via an individual arbitration claim. Having an arbitration lawyer personally representing your case generally leads to bigger results. Already, over a thousand ex-Merrill brokers have filed their FINRA claims. Also, for an ex-Merrill broker whose deferred compensation was above six figures, they are likely to get much less by going the class action route. Meantime, ex-Merrill brokers with revenues that exceeded $500,000 during a certain timeframe before they left the financial firm cannot participate in a class action settlement. Neither can those that accepted bonuses and waived certain rights related to deferred compensation claims from Merrill after the deal with Bank of America.

That said, even the ex-Merrill brokers that decide to opt out of the class are likely to benefit from this settlement because it establishes a floor for payouts while serving as Merrill’s public acknowledgement that it had a financial duty to pay the former brokers upon their departure.

Under the class action settlement, the majority of advisers would get 40-60% of the value of their account. According to OnWallStreet.com, for a broker to receive 60%, advisors must have already made a request for reimbursement, whether via lawsuit, arbitration, or some other way and left the financial firm prior to January 30, 2010. To be eligible to receive 50%, these advisers too will have had to have made some type of legal action and resigned by June 30, 2010. If no action was taken, and the former broker still wants to opt in, they would turn in a form and seek 40% of compensation–dependent upon when they exited the firm. Other ex-advisors might also be able to receive 40 to 60% of payment depending on when they left Merrill, whether they had filed a deferred compensation claim, and in what compensation plans they were participants. Ex-dvisers that had an agreement with the Advisor Transition Program, however, would not be able to participate.)

Merrill to Make Good on Former Brokers’ Deferred Comp, On Wall Street, August 24, 2012
Merrill to pay $40 mln in deferred compensation suit, Reuters, August 25, 2012

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Merrill Lynch to Pay Brokers Over $10M for Alleged Fraud Over Deferred Compensation Plans, Institutional Investor Securities Blog, April 5, 2012

Advanced Equities Ordered by FINRA Arbitration Panel to Pay $4.5M to Ex-Broker, Stockbroker Fraud Blog, June 12, 2012

Claims Continue over MasterShare – Prudential Securities’ Deferred Compensation Plan, Stockbroker Fraud Blog, August 13, 2008 Continue Reading ›

FINRA Seeking to Create a Bigger, More Diverse Arbitrator Roster

Published on: August 23, 2012 | by Shepherd Smith Edwards & Kantas, LLP

According to the Financial Industry Regulatory Authority ‘s lead arbitrator recruiter, the self-regulatory organization is taking active steps to create a roster of arbitrators that is not only larger than its current one, but also more professionally and culturally diverse. Barbara Brady spoke at a Practicing Law Institute seminar this month.

Arbitrators are who that preside over FINRA arbitration cases on numerous matters, including financial fraud claims by investors and broker-brokerage firm disputes. Last year, arbitrators made more than 1,270 securities arbitration decisions that led to over $19 million in repayment to investors, over $63 million in fines, and 475 broker suspensions. Only a court can overturn an arbitrator’s securities ruling and this would have to be due to extenuating circumstances.

“Outcomes in arbitration vary greatly based on the quality of the arbitrators,” said William Shepherd, a Houston-based attorney, whose firm has represented investors in more than 1,000 arbitration claims over the past twenty years. “If securities arbitration is to have any integrity at all FINRA must make certain that the arbitrator decides cases fairly.”

Choosing who should be named an arbitrator can lead to disagreement over how much securities industry/brokerage firm experience or ties a candidate should have. For example, while an arbitrator who used to be a broker or a securities attorney may have certain technical expertise and experience that could prove helpful in deciding a case, he/she may also be biased.

“Having savvy arbitrators may streamline the process a bit with less reliance on expert testimony,” said Shepherd, “but it is difficult for such arbitrators to understand the lack of understanding of investments by the ordinary investor. I often point to my client’s own experiences to demonstrate this to arbitrators. For example, my client’s understanding of machinery at his workplace keeps him from getting hurt, but if you walked into that factory you might be killed the first day. It’s not that you’re stupid, just that you lack experience in that environment. The dangers of investing were foreign to my client. That is why he or she hired an expert. ”

Securities panels with three arbitrators usually handle arbitration disputes when over $100,000 is involved. Customers are allowed to opt for two of the three arbitrators or all three of them to not have a securities industry background. That said, just because someone is a non-industry arbitrator doesn’t mean he/she lacks biases.

While FINRA chooses not to reveal the demographics of its arbitrator pool, Brady claims that the SRO does try to select a diverse range of arbitrators from different backgrounds. She said FINRA is making an effort to make sure that women, minorities, and professors of economics, law, and real estate are represented.

Who makes a good arbitrator?, Reuters, August 20, 2012

Arbitrator Appointment Frequently Asked Questions, FINRA

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Goldman Sachs Execution and Clearing Must Pay $20.5M Arbitration Award in Bayou Ponzi Scam, Upholds 2nd Circuit

Published on: July 14, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Court of Appeals for the Second Circuit is allowing a $20.5M award issued by a Financial Industry Regulatory Authority arbitration panel against Goldman Sachs Execution & Clearing LP to stand. The court turned down Goldman’s claim that the award should be vacated because it was issued in “manifest disregard of the law” and said that the clearing arm must pay this amount to the unsecured creditors of the now failed Bayou hedge fund group known as the Bayou Funds, which proved to be a large scale Ponzi scam.

Goldman was the prime broker and only clearing broker for the funds. After the scheme collapsed in 2005, the Bayou Funds sought bankruptcy protection the following year. Regulators would go on to sue the fund’s funders over the Ponzi scam and the losses sustained by investors. Meantime, an Official Unsecured Creditors’ Committee of Bayou Group was appointed to represent the debtors’ unsecured debtors. Blaming Goldman for not noticing the red flags that a Ponzi fraud was in the works, the committee proceeded to bring its arbitration claims against the clearing firm through FINRA. In 2010, the FINRA arbitration panel awarded the committee $20.58M against Goldman.

In affirming the arbitration award, the 2nd Circuit said that in this case, Goldman did not satisfy the manifest disregard standard. As an example, the court pointed to the $6.7M that was moved into the Bayou Funds from outside accounts in June 2005 and June 2004. While the committee had contended during arbitration that these deposits were “fraudulent transfers” and could be recovered from Goldman because they were an “initial transferee” under 11 U.S.C. §550(a), Goldman did not counter that the deposits weren’t fraudulent or that it was on inquiry notice of fraud. Instead, it claimed the deposits were not an “initial transferee” under 11 U.S.C. §550 and the panel had ignored the law by finding that it was.

Morgan Stanley Smith Barney Ordered by FINRA Arbitration Panel to Pay $5M Over Allegedly False Promises Made To Brokers Recruited from UBS AG

Published on: June 22, 2012 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Regulatory Authority arbitration panel is ordering Morgan Stanley Smith Barney to pay $5 million to Todd G. Vitale and John P. Paladino, two of the brokers that the financial firm had wooed from UBS AG (UBS) in 2008. The two brokers are alleging fraudulent misrepresentations, breach of written and oral contract, promissory fraud, negligent misrepresentation, fraudulent omission and/or concealment, intentional interference with existing and prospective economic advantage, negligent omission and/or concealment, California Labor Code violations, breach of implied covenant of good faith and fair dealing, promissory estoppel, constructive fraud, negligent supervision, and failure to supervise. They both still work for Morgan Stanley Smith Barney.

Both brokers were recruited a few months before Morgan Stanley merged with Citigroup Inc.’s (C) Smith Barney. Per the terms of their recruiting agreement, Vitale was promised that within six months of joining the financial firm he would become a salaried manager. Paladino would then inherit Vitale’s book, which would come with significant revenue.

After the merger occurred, however, a number of key management changes happened, and four years after they were hired, Vitale still hasn’t been promoted to manager while Paladino has yet to get his book. Also, Paladino’s monthly income has been reduced.

Ruling on the case, the FINRA arbitration panel awarded $2 million to Paladino and $2.6 million to Vitale. $355,000 in legal fees was also awarded to the two men.

This arbitration proceeding is one of numerous cases of late involving investment advisers claiming that financial firms had wooed them with promises that were never fulfilled. Brokerage firms often make verbal commitments when recruiting and they protect themselves by not including these agreements in the actual employment contract.

“Successful financial advisors and brokers can manage tens of millions or even hundreds of millions of dollars of their clients’ assets and securities firms are willing to pay, or promise to pay, them millions of dollars to bring their clients’ accounts to a new firm,” said Shepherd Smith Edwards and Kantas, LTD, LLP Partners and FINRA Arbitration Attorney William Shepherd. “Just as firms are not always honest with investors, these firms do not always keep their promises to advisors and brokers. Because licensed representatives and their firms are required to sign agreements to arbitrate disputes, cases of this type must be decided in securities arbitration. Our law firm has represented both investors and investment professionals in securities arbitration proceedings in their disputes with financial firms.”

Meantime, Morgan Stanley Smith Barney has issued a statement saying that the financial firm’s disagree with the panel’s decision and the facts support the ruling. However, there are internal firm memos documenting the recruiting deal.

Former Morgan Stanley Smith Barney Brokers Win $5M Employment Dispute Arbitration Award, Forbes, June 20, 2012

Panel Says MSSB Must Pay Recruited Brokers $5 Million, Wall Street Journal, June 20, 2012

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Advanced Equities Ordered by FINRA Arbitration Panel to Pay $4.5M to Ex-Broker

Published on: June 12, 2012 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Regulatory Authority arbitration panel has ordered Advanced Equities, CEO Dwight Badger, and Chairman Keith Daubenspeck to pay one of their former brokers $4.5 million in compensatory damages. The ex-broker, John Galinsky, had accused all three of them of not paying certain commissions on his work to raise capital for clients, such as Alien Technology, Bloom Energy, Arbinet (ARBX), ForceIO Networks, Infinera, (INFN), Motricity (MOTR), and Peregrine Semiconductor (PSMI). He also made claims of unjust enrichment, breach of contract, retaliatory discharge, and fraudulent inducement. Daubenspeck and Badger cofounded Advanced Equities.

The FINRA arbitration panel awarded Galinksy $3.47 million in actual damages, $347,000 in interest, $211,314 in other costs related to trial, and $500,000 in punitive damages-the last due to the investment banking boutique showing a “reckless disregard” for the broker’s warrant rights while breaching its fiduciary duties to him. Additionally, Advanced Equities must pay FINRA $61,650 in session fees. (There were 51 pre-hearing and hearing sessions took place between June 2010 and April 2012, which is after Galinsky went to arbitrators.)

Advanced Equities is a Chicago-based investment firm. It makes late-stage venture capital investments in tech companies. Just last January, the Securities and Exchange Commission sent Wells notices to Badger and Daubenspeck letting them know they could face federal enforcement action over a 2009 private offering.

Galinsky worked for Advanced Equities’ retail broker unit for 10 years. He now works with National Securities Corporation.

Brokers With Arbitration Claims Against Financial Firms
“In 1972, financial firms instituted mandatory arbitration to resolve disputes between financial firms and disputes between those firms and their representatives. During the 1980’s mandatory arbitration agreements with clients of securities firms were enforced by the courts,” said FINRA Arbitration Attorney William Shepherd. “Today, while the vast majority of securities arbitration actions are between investors and firms, each year hundreds of disputes between securities firms, and between those firms and their brokers, are also resolved in arbitration.”

Among such cases, was the claim brought by Patrick M. Mendenhall against UBS Financial Securities. Last year, a FINRA arbitration panel ordered the financial firm to pay its former broker $350,000 in compensatory damages and 6% interest until the amount was paid. Mendenhall, a former UBS broker, had sought resolution over allegedly unpaid deferred compensation and unused vacation time

Ex-Advanced Equities Broker Gets $4.5 Million IOU, Wealth Management, June 3, 2012

FINRA panel orders Advanced Equities to pay $4.5 mln, Reuters, May 21, 2012
Former UBS Broker Sues Firm For $3.8 Million in Deferred Comp and Unused Vacation Time, Forbes, November 28, 2011

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Charles Schwab Corp.’s Lawsuit Against FINRA to Stop Enforcement Case is Dismissed by Federal Judge

Published on: May 16, 2012 | by Shepherd Smith Edwards & Kantas, LLP

A federal judge has thrown out a lawsuit filed by Charles Schwab Corp. (SCHW) against the Financial Industry Regulatory Authority Inc. The financial firm had sought to stop the SRO’s enforcement case against it over an allegedly illegal arbitration agreement.

Schwab had added a new provision to over 6.8 million customer account agreement that would prevent clients from beginning or joining a class action lawsuit against the broker-dealer. Customers would also have to agree that industry arbitrators wouldn’t be able to consolidate securities claims from different investors. (Both kinds of cases typically involve investors with smaller claims that are usually less than $10,000. Lawyers who oppose Schwab’s arbitration provision have said that it leaves many of these investors without a legal process to be able to recover any financial losses.) By February, more than 50,000 clients had opened accounts with Schwab since it had implemented its new arbitration provision.

However, FINRA does not let class actions go through its arbitration system and it prevents broker-dealers from limiting the ways in which customers can file claims in court that are not allowed in arbitration. In its enforcement case against Schwab, the SRO accused the brokerage firm of violating its rules by making clients waive their right to file a class action complaint against it. Schwab immediately responded with a lawsuit against FINRA.

Stockbroker Fraud News Roundup: UBS Puerto Rico Settles SEC Action for $26M, Morgan Keegan’s Bid to Get $40K Award Over Marketing of RMK Advantage Income Fund Vacated is Denied, and SEC Settles with Attorney Involved in $1B Viaticals Scam

Published on: May 11, 2012 | by Shepherd Smith Edwards & Kantas, LLP

UBS Financial Services Inc. of Puerto Rico (UBS) has agreed to pay $26.6 million to settle the Securities and Exchange Commission administrative action accusing the financial firm of misleading investors about its control and liquidity over the secondary market for nearly two dozen proprietary closed-end mutual funds. By settling, UBS Puerto Rico is not denying or admitting to the allegations.

Per the SEC, not only did UBS Puerto Rico fail to disclose to clients that it was in control of the secondary market, but also when investor demand became less in 2008, the financial firm bought millions of dollars of the fund shares from shareholders that were exiting to make it appear as if the funds’ market was stable and liquid. The Commission also contends that when UBS Puerto Rico’s parent firm told it to lower the risks by reducing its closed-end fund inventory, the Latin America-based financial firm carried through with a strategy to liquidate its inventory at prices that undercut a number of customer sell orders that were pending. As a result, closed-end fund clients were allegedly denied the liquidity information and price that they are entitled to under the law. UBS Puerto Rico must now pay a $14 million penalty, $11.5 million in disgorgement, and $1.1 million in prejudgment interest.

The SEC has also filed an administrative action against Miguel A. Ferrer, the company’s ex-CEO and vice chairman, and Carlos Ortiz, the firm’s capital markets head. Ferrer allegedly made misrepresentations, did not disclose certain facts about the closed-end funds, and falsely represented the funds’ market price and trading premiums. The Commission is accusing Ortiz of falsely representing the basis of the fund share prices.

In other stockbroker fraud news, the U.S. District Court for the District of Colorado has denied Morgan Keegan & Co. Inc.’s bid to vacate the over $40,000 arbitration award it has been ordered to pay over the way it marketed its RMK Advantage Income Fund (RMA). Judge Richard Matsch instead granted the investors’ motion to have the award confirmed, noting that there were “many factual allegations” in the statement of claim supporting the contention that the firm was liable.

Per the court, Morgan Keegan had argued that the arbitration panel wasn’t authorized to issue a ruling on the claimants’ bid for damages related to the marketing of the fund, which they had invested in through Fidelity Investment. Morgan Keegan contended that seeing as it had no business relationship with the claimants, it couldn’t be held liable for their losses, and therefore, the FINRA arbitration panel had disregarded applicable law and went outside its authority. The district court, however, disagreed with the financial firm.

In other stockbroker fraud news, the SEC has reached a settlement with a Florida attorney accused of being involved in a financial scam run by a viaticals company that defrauded investors of over $1 billion. The securities action, which restrains Michael McNerney from future securities violations, is SEC v. McNerney. He is the ex-outside counsel for now defunct Mutual Benefits Corp.

The MBC sales agent and the company’s marketing materials allegedly falsely claimed that viatical settlements were “secure” and “safe” investments as part of the strategy to get clients to invest. The viaticals company also is accused of improperly obtaining polices that couldn’t be sold or bought, improperly managing escrow premium funds in a Ponzi scam, and pressuring doctors to approve bogus false life expectancy figures.

McNerney, who was sentenced to time in prison for conspiracy to commit securities fraud, must pay $826 million in restitution (jointly and severally with other defendants convicted over the MBC offering fraud).

UBS Puerto Rico unit to pay $26.6 mln in SEC pact, Reuters, May 1, 2012

Morgan Keegan & Co. Inc. v. Pessel (PDF)

SEC Files Charges Against Former Attorney for Mutual Benefits, SEC, April 30, 2012

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