Investor Lawyers Blog

SEC Investor Advisory Committee Members Warn the Commission Not to Neglect Its Rulemaking Duties Even While Working to Implement the JOBS Act

Published on: June 21, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Members of the Securities and Exchange Commission’s Investor Advisory Committee are cautioning that it is imperative that the SEC not ignore its rulemaking obligations that it was tasked under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act even as it seeks to implement the new capital formation statute. The Jumpstart Our Business Startups Act was enacted in April.

The investor advisory committee, which is a new group at the SEC that was created under Dodd-Frank to provide the Commission advise about regulatory priorities, disclosure requirements, and investor protections, held their inaugural meeting on June 12. The committee takes the place of a prior one that was disbanded in 2010.

The JOBS Act
The JOBS Act is focused on helping smaller businesses gain access to capital. Per the statute’s Title II, the SEC has to allow general advertising and solicitation for private placement sales and offers under 1933 Securities Act Rule 144A and Regulation D Rule 506 as long as the buyers are accredited investors. The SEC’s Division of Corporation Finance associate director and chief counsel Thomas Kim has said that staff members are in the process of trying to determine how to practically implement the requirements so that investor protection isn’t compromised even as issuers are given some flexibility. Also, seeing as status or assets have resulted in a number of “prongs” for determining which entities or individuals are “accredited investors,” Kim noted that it was “reasonable” that issuers would take different steps to confirm accreditation depending on the accredited investor’s category.

Kim also spoke about how the crowdfunding rulewriting deadline of 270 days, which the SEC was given (under Title III of the JOBS Act) to come up with a registration exemption for crowdfunding, which involves “crowds” of investors sourcing small fund amounts, would be challenging to meet. A regulatory framework currently exists for the Title II modification to Rules 144A and Rules 506. However, the SEC would have to essentially make up from “whole cloth” a regulatory structure that incorporates disclosure requirements, funding portals, and other aspects from a completely new category of exempt offerings.

“An intense battle is being fought in Congress over Dodd-Frank efforts to ‘re-regulate’ the securities industry after the debacle caused by the ‘deregulation’ of that industry over the previous decade,” said Shepherd Smith Edwards and Kantas Founder and Stockbroker Fraud Attorney William Shepherd. Many believe such changes, if any, are months if not years away. Meanwhile, legislation to lower the bar in the issuance of new securities is sailing through at breakneck speed – proof positive as to who our representatives represent.”

JOBS Act (PDF)

More Blog Posts:

Advisory Performance Fee Rule Limit Adjusted by the SEC, Stockbroker Fraud Blog, July 30, 2011

Dire Predictions For Wall Street Reforms: Not Complete Until 2013, Even Longer to Implement, Half May Not Survive, Stockbroker Fraud Blog, May 12, 2012

SEC’s Efforts to Reconsider a ’07 Proposal Over Broker-Dealer Financial Requirements Elicits Concerns From Some Market Participants

Published on: June 20, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission’s efforts to revive a 2007 proposal, which would amend the rules under the 1934 Securities Exchange Act related to customer protection, net capital, notification, and books and records for broker-dealers, has some market participants upset. The proposal, which seeks to deal with areas of concern related to broker-dealer financial requirements and update the financial responsibility rules of these firms, was recently opened up again for comment by the SEC for a 30-day period through June 8, 2012 in the wake of the regulatory developments and economic events that have developed since 2007 and due to the public’s continued interest.

However, as our securities fraud law firm just mentioned, not everyone is welcoming this move with open arms. Earlier this month, BOK Financial Corp. (BOKF) wrote a letter to the SEC arguing that the proposal doesn’t factor in certain significant changes that have taken place since 2007 and that “key justifications” for specific proposed modifications appear to be based more on that time period rather than “current conditions.” Also voicing its disapproval was the National Investment Banking Association, which noted that the proposal fails to include numerical values or statistics that represent the present atmosphere. NIBA also pointed to the “unprecedented changes” that have followed since the proposal was introduced five years ago.

J.P. Morgan Trading Services is also not pleased with the SEC’s decision to revise this 2007 proposal. It is calling on the Commission to use other prudential rules that it believes would do a better job. Meantime, the Securities Industry and Financial Markets Association is warning that certain of the proposed requirements might up the financial osts for industry participants.

The proposal mandates that broker-dealers with the proprietary accounts of other broker-dealers maintain reserve funds to deal with claims stemming from these accounts. It also would prevent broker-dealers from including as part of these funds cash that was placed at affiliated banks, as well as some of the cash that was deposited in banks that are not affiliated.

That said, there are those that support this proposal. In a letter to the SEC, the Public Investors Arbitration Bar Association said that it believes the proposed measures would “marginally increase” broker-dealers’ financial stability while decreasing the risk of public investors that succeed in FINRA arbitration proceedings not being able to collect the damages that they are awarded through these proceedings. PIABA even believes that the proposal should additionally require that all broker-dealers have errors and omissions insurance to cover client claims to make sure that these financial firms are able to pay these arbitration awards.

Some Voice Concern at SEC Bid to Revive 2007 B-D Financial Responsibility Proposal, BNA/Bloomberg, June 18, 2012

Comments on Amendments to Financial Responsibility Rules for Broker-Dealers, SEC

More Blog Posts:
AARP, Investment Adviser Association, Among Groups Asking the SEC to Make Brokers Abide by 1940 Investment Advisers Act’s Fiduciary Duty, Stockbroker Fraud Blog, April 14, 2012

Despite Reports of Customer Satisfaction, Consumer Reports Uncovers Questionable Sales Practices at Certain Financial Firms, Stockbroker Fraud Blog, January 7, 2012
FINRA May Put Forward Another Proposal About Possible SEC Rule Regarding Fiduciary Duty, Institutional Investor Securities Blog, November 28, 2011 Continue Reading ›

Texas Securities Case: Mark Cuban Asks District Court To Reconsider Compelling the SEC to Produce Documents Related to Insider Trading Allegations Over Mamma.com Stock Offering

Published on: June 19, 2012 | by Shepherd Smith Edwards & Kantas, LLP

For the third time, billionaire Mark Cuban is asking the U.S. District Court for the Northern District of Texas to reconsider a previous ruling denying his motion to make the Securities and Exchange Commission provide summaries and interview notes related to its probe into his alleged insider trading activities. Cuban also wants the court to make the SEC give over similar documents in its investigation of Mamma.com.

The SEC had filed insider trading charges against Cuban, who is the owner of the Dallas Mavericks and the founder of HDNet, in 2008. The Commission is contending after Cuban became involved in a confidentiality agreement while on the phone with Mamma.com’s CEO about that company’s decision to take part in a PIPE offering, within hours of being given this insider information, he contacted his broker and allegedly improperly sold his 600,000 shares prior to the PIPE announcement. As a result, he avoided more than $750,000 in losses. Cuban has denied the Texas securities fraud allegations.

The district court threw out the SEC’s charges against Cuban in 2009, but the following year the U.S. Court of Appeals for the Fifth Circuit revived and remanded the Texas securities lawsuit against him. Then, last August Cuban moved to have certain documents produced, and he followed that request in September with an amended second motion. The SEC submitted its own motion to compel Cuban to produce documents in November.

Earlier this year, the district court ruled that Cuban is entitled to the nonprivileged parts of the SEC’s investigative files related to the probes on him and Mamma.com, as well as to documents having to do with the connection between the two investigations. The court, however, also decided that the Commission isn’t required to produce documents pertaining to certain individuals’ involvement with Mamma.com or the interview summaries and factual sections from the SEC’s interviews with certain witnesses in its Cuban probe.

Now, in his latest motion to compel, Cuban has stated that he believes that the summaries and notes he wants produced will allow his witnesses to remember events that happened nearly a decade ago. Referring to the court’s previous decision to partially grant his motion, Cuban said that the interview notes that the SEC produced after the court’s last order not only “exonerate” him but also demonstrate the “undue hardship” he is facing in litigating this lawsuit if the SEC is allowed to keep “withholding” interview documents.

SEC v. Cuban is slated to go to trial.

SEC Accuses Mark Cuban of Insider Trading, New York Times, November 17, 2008
Cuban Asks Court, for Third Time, To Compel SEC to Produce Documents, Bloomberg/BNA, June 12, 2012

More Blog Posts:
Dallas Mavericks Owner Mark Cuban’s Allegations of Misconduct Against the SEC Enforcement Staff are Without Merit, Says Inspector General’s Report, Stockbroker Fraud Blog, October 18, 2011

After District Court Dismisses Texas Securities Fraud Against Billionaire Mark Cuban, SEC Appeal Can Now Move Forward, Stockbroker Fraud Blog, August 17, 2009
US Sentencing Commission is Open to Public Comment on Proposed Amendments that Could Impact Insider Trading Convictions, Institutional Investor Securities Blog, February 29, 2012 Continue Reading ›

Securities and Exchange Commission Seeks Comments Regarding Its ‘Security-Based Swap Rules’ Implementation Plan

Published on: June 19, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Now that the SEC has unveiled its plan via a “statement of general policy ” that lays out how it intends to phase in its new rules that govern security-based swap markets, it is seeking comments. Commenters have 60 days within when the statement is published in the Federal Register to make their thoughts known. While the statement gives the order in which market participants will have to comply with the new requirements, it doesn’t provide an estimate for when the rules would actually be implemented.

The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act’s Title VII mandates that SEC set up a security-based swaps regulatory framework. In its policy statement, the Commission grouped its rules for security-based swaps into five categories:

• Definitional rules (for regulating and registering swap data repositories) and cross-border rules (that regulate non-U.S. market participants and cross-border swap transactions)

Lawmakers Use Funding Bill for Financial Police as Forum to Express Views on Regulators and their Agencies

Published on: June 18, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The Senate Appropriations Committee is recommending that the Commodity Futures Trading Commission and the Securities and Exchange Commission be funded at the same levels that the White House has requested. The $22.9 billion spending bill would allot $308 million for the CFTC and $1.566 billion to the SEC for the next fiscal year. No amendments were offered. Fiscal year 2013 begins on October 1, 2012.

However, Senator Jerry Moran (R-Kan.), a ranking member of this committee’s Financial Services Subcommittee, did express his opposition to the portion of the bill having to do with CFTC funding by voting “no” on that part. He contends that CFTC chairman Gary Gensler has rebuffed efforts to modify the way the agency is run. He also claims that Gensler has neglected to make rulemaking a priority as it relates to implementing key aspects of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.

The proposed funding for the CFTC is 50% above its present funding level, which is about $205 million. (Meantime, the proposed spending amount for the SEC is $245 million-a 19% rise from its current spending level.)

“One could argue that taxpayers are not getting their money’s worth from this investment but millions are involved in the securities and commodities markets and trillions of dollars change hands annually,” said Securities lawyer William Shepherd. ” Furthermore, more is lost through financial fraud than all other forms of fraud combined.”

Financial Services Subcommittee Chairman Richard Durbin (D-Ill.) has noted that the CFTC’s job, which includes overseeing the $300 trillion swaps market, is “huge.” Gensler, who supports the funding bill, has said that the CFTC’s proposed funding amount would allow the agency to have enough “cops on the beat” to maintain swaps and futures markets that are fair. He and Durbin also have pointed out that the swaps market is eight times bigger than the futures market.

It is important to note, however, that these funding recommendations are counter to two bills currently making their way through the US House. Both bills would provide funding to the two agencies at financial levels below what President Obama has requested.

“Conservatives stress that private enterprise works better than government,” said Securities fraud attorney Shepherd. ” If investment fraud laws were even as strong as a decade ago, free enterprise could cut the cost of regulation in half. This is because private law suits would then deter most investment fraud at no cost to taxpayers.”

U.S. Senate panel OKs budget boosts for SEC, CFTC, Chicago Tribune/Reuters, June 14, 2012

Obama proposes large budget boosts for SEC, CFTC, Reuters, February 13, 2012

United States Committee on Appropriations

More Blog Posts:
ABA Presses for Self-Funding for SEC and CFTC, Institutional Investor Securities Blog, May 31, 2012
SEC and CFTC Say They Found Out About JPMorgan’s $2B Trading Loss Through Media, Stockbroker Fraud Blog, May 31, 2012

AARP, Investment Adviser Association, Among Groups Asking the SEC to Make Brokers Abide by 1940 Investment Advisers Act’s Fiduciary Duty, Stockbroker Fraud Blog, April 14, 2012

ABA Presses for Self-Funding for SEC and CFTC, Institutional Investor Securities Blog, May 31, 2012 Continue Reading ›

Ex-Morgan Stanley Smith Barney Broker Settles with FINRA for Allegedly Failing to Notify Firm of Previous Arrest

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

Broker Bruce Parish Hutson has turned in a Letter of Acceptance, Waver, and Consent to settle allegations of Financial Industry Regulatory Authority rule violations involving his alleged failure to advise Morgan Stanley Smith Barney (MS) of his arrest for retail theft at a store in Wisconsin. FINRA has accepted the AWC, which Hutson submitted without denying or admitting to the findings and without adjudicating any issue.

The Ex-Morgan Stanley Smith Barney broker (and before that he worked for predecessor company Citigroup Global Markets Inc. ((ASBXL)), had entered a “no contest” plea to the misdemeanor charge in February 2010. He received a jail sentence of nine months, which was reduced to 12 months probation. On August 16, 2010, Hutson, turned in a Form UT (Uniform Termination Notice for Securities Industry Registration) stating that he was voluntarily let go from Morgan Stanley Smith Barney because the financial firm accused him of not properly reporting the arrest.

Also, although Form U4 (Uniform Application for Securities Industry Registration or Transfer) doesn’t mandate the disclosure of a mere arrest but does contemplate a criminal charge (at least), many industry members obligate employees to disclose any arrests. Yet when it was time to update this form by March 18, 2010, FINRA says that Hutson did not report the misdemeanor theft plea. Then, when he filled out Morgan Stanley Smith Barney’s yearly compliance questionnaire on May 19, 2010, he again denied having been arrested or charged with a crime in the past year or that he was statutorily disqualified.

FINRA contends that Hutson willfully violated its Article V, Section 2 (C) by-laws by not disclosing the criminal charge. The SRO also says that his later “no contest” plea to the misdemeanor theft violated FINRA Rule 2010 (when he made the false statement that he hadn’t been charged with any crime in the 12 months leading up to his completion of the compliance questionnaire) and he again violated this same rule when it was time to fill out the questionnaire. Per the AWC terms, Hutson is suspended from associating with any FINRA member for five months and he must pay a $5,000 fine.

“A broker can have a dozen complaints by investors and lose a half-dozen claims of wrongdoing, in which arbitrators reimburse these investors only part of their millions in collective losses, yet the broker is neither fined nor suspended,” said Shepherd Smith Edwards and Kantas, LTD, LLP founder and Securities Attorney William Shepherd. “A shoplifting charge in one’s past – very bad. Repeated misrepresentations to investors – so what. Perhaps FINRA should get its priorities straight.”

Broker Bruce Parish Hutson, Forbes, June 27, 2012

More Blog Posts:
Investor Groups, Securities Lawyers, and Business Community Comment on the JOBS Act Reg D’s Investor Verification Process, Institutional Investor Securities Blog, June 24, 2012

SEC Wants Proposed Securities Settlements with Bear Stearns Executives to Get Court Approval, Stockbroker Fraud Blog, February 28, 2012

Accused Texas Ponzi Scammer May Have Defrauded Investors of $2M, Stockbroker Fraud, August 3, 2011

Investment Advisers and Brokers Should Be Able To Explain in One Page Why an Investment Would Benefit a Retail Client, Says FINRA CEO Richard Ketchum

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

At the Financial Industry Regulatory Authority’s yearly conference, the SRO’s CEO, Richard Ketchum, talked about how investment advisers and brokers that sell complex instruments to retail clients should be able to write on a “single page” the reasons why the product is in the best interest of that investor. Ketchum made his comments less than a month after FINRA fined Citigroup Inc. (C), Wells Fargo & Co. (WFC), UBS AG (UBS), and Morgan Stanley (MS) $9.1 million for their alleged failure to correctly train sales employees about the features of and risks involved with leveraged and inverse exchange-traded funds.

Shepherd Smith Edwards and Kantas, LTD, LLP Founder and FINRA Arbitration lawyer William Shepherd disagrees with this ‘single page’ approach. “Despite its name, one should know that FINRA is a self-regulatory association owned and operated by securities dealers,” he said. “A one page statement as to why an investor is being sold an investment is likely designed to become a disclaimer such as the one found on a toaster or other product. This one-pager could then be used to shift the burden of suitability from the broker to the investor. Retirees who lose their savings can then be told. ‘It is your fault, not ours.’ Beware of securities self-regulators bearing gifts.”

Ketchum also talked about how reps should talk to investors about how a product will likely do in different markets and that investment losses could result. He also suggested that broker-dealers provide more training to brokers about financial products so that they can also better explain any costs involved. Acknowledging that conflicts of interests do exist, Ketchum spoke about the need for brokerage firms to self-assess regarding which is higher priority to it: the best interests of investors or that of their own employees?

Meantime, Securities Industry and Financial Markets Association general counsel and senior managing director Ira Hammerman has spoken in favor of a uniform fiduciary standard” for both investment advisers and brokers. He said it was key that new disclosures articulate in simple English the material risks, conflicts of interest, and possible rewards.

“As for standardizing the breach of fiduciary standard in the securities industry: The goal is to water-down ‘settled law’ regarding fiduciary duty,” said Stockbroker fraud attorney William Shepherd. “Other professionals, including lawyers, have lived with this duty for centuries. Since 1945, investment advisors have existed with the current legal definition of ‘fiduciary duty.’ Wall Street brokers should simply be held to the same standard.”

FINRA Annual Conference 2012

Securities Industry and Financial Markets Association

More Blog Posts
FINRA Initiatives Addressing Market Volatility Approved by the SEC, Institutional Investor Securities Blog, June 5, 2012
FINRA Will Customize Oversight to Investment Adviser Industry if Chosen as Its SRO, Stockbroker Fraud Blog, April 8, 2011

Fiduciary Standard in Securities Industry Doesn’t Need New Definition, Stockbroker Fraud Blog, November 26, 2010 Continue Reading ›

CFTC Director Says Corporate Compliance Employees Should Have Comprehension of Dodd-Frank Whistleblower Requirements’Anti-Retaliation Provisions

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

Speaking at Compliance Week’s yearly conference, Commodity Futures Trading Commission’s Whistleblower Office Director Vincente Martinez said that personnel in corporate compliance should have an understanding of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act’s anti-retaliation provisions that are part of its whistleblower requirements. Martinez noted that while companies are not mandated to explain the way the whistleblower program works to employees, the “quality of information” that compliance personnel choose to offer in response to whistleblowers wondering whether to bring information to the CFTC could make a company liable if an anti-retaliation claim were to be later brought. “Prudence” must therefore be exercised by compliance staff when dealing with such inquiries.

Under Dodd-Frank, eligible whistleblowers may be entitled to 10-30% of money sanctions when agencies are awarded over $1 million in penalties. These informants are also provided with significant protections against employer retaliation for their decision to step forward. Unlike the 2002 Sarbanes-Oxley Act’s whistleblower anti-retaliation provisions, which requires that an anti-retaliation complaint is first submitted to the Department of Labor, under Dodd-Frank, not only can a whistleblower go straight to federal court, but also jury trials for CFTS and Securities and Exchange Commission whistleblower retaliation claims are allowed.

Also speaking at the conference was SEC Enforcement Division Whistleblower Office deputy chief Jane Norberg. She made clear that foreign whistleblowers have the same anti-retaliation protections under Dodd-Frank even if they are located overseas. Norberg did, however, note that for foreign whistleblowers anti-retaliation process could be impacted by both the courts in that jurisdiction and whether or not the whistleblower submitted the claim in US federal court.

Securities Law Roundup: Ex-Sentinel Management Group Execs Indicted Over Alleged $500M Fraud, Egan-Jones Rating Wants Court to Hear Bias Claim Against SEC, and Oppenheimer Funds Pays $35M Over Alleged Mutual Fund Misstatements

Published on: June 13, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Former Sentinel Management Group Inc. CEO Eric Bloom and head trader Charles Mosley have been indicted for allegedly defrauding investors of about $500 million prior to the firm’s filing for bankruptcy protection in 2007. The government is seeking forfeiture of approximately that amount.

The two men are accused of fraudulently getting and retaining “under management” this money by misleading clients about where their money was going, the investments’ value, and the associated risks involved. According to prosecutors, defendants allegedly used investors’ securities as collateral to get a loan from Bank of New York Mellon Corp. (BK), in part to buy risky, illiquid securities. Bloom is also accused of causing clients to believe that Sentinel’s financial problems were not a result of these risky purchases, the indebtedness to the BoNY credit line, and too much use of leverage.

In other securities law news, Egan-Jones Rating Co. wants the Securities and Exchange Commission’s attempts to pursue claims against it in an administrative forum instead of in federal court blocked. The credit rating agency, which has long believed that the SEC does not treat it fairly even as it “historically coddled and excused” the larger credit raters, contends that if it were forced to make its defense in an administrative hearing it would not be able to avail of its constitutional due process rights due to the SEC’s bias.The Commission’s administrative claims accuse Egan Jones and its president Sean Egan of allegedly making “material misrepresentations” in its 2008 registration application to become a nationally registered statistical rating agency for government and asset-backed and securities issuers.

Egan-Jones filed a complaint accusing the SEC of “institutional bias,” as well as of allegedly improper conduct when examining and investigating the small credit ratings agency (including having Office of Compliance Inspections and Examinations staff go “back and forth between divisions and duties” to engage in both examination and enforcement roles.)The credit rater is also accusing the Commission of improperly seeking civil penalties against it under the Dodd-Frank Wall Street Reform and Consumer Protection Act, even though the actions it allegedly committed happened way before Dodd-Frank was enacted.

One firm that has agreed to settle the SEC’s administrative action against it is OppenheimerFunds Inc. Without denying or admitting to the allegations, the investment management company will pay over $35 million over allegations that it and its sales and distribution arm, OppenheimerFunds Distributor Inc., made misleading statements about the Oppenheimer Champion Income Fund (OPCHX, OCHBX, OCHCX, OCHNX, OCHYX) and Oppenheimer Core Bond Fund (OPIGX) in 2008.

The SEC contends that Oppenheimer used “total return swaps” derivatives, which created significant exposure to commercial mortgage-backed securities in the two funds, but allegedly did not adequately disclose in its prospectus the year that the Champion fund took on significant leverage through these derivative instruments. OppenheimerFunds also is accused of putting out misleading statements about the financial losses and recovery prospects of the fund when the CMBS market started to collapse, allegedly resulting in significant cash liabilities on total return swap contracts involving both funds. The $35 million will go into a fund to payback investors.

Meantime, Nasdaq Stock Market and Nasdaq OMX Group are proposing a $40M “voluntary accommodation” fund that would be used to payback members that were hurt because of technical problems that occurred during Facebook Inc.’s (FB) IPO offering last month. Nasdaq would pay about $13.7 million in cash to these members, while the balance would be a credit to them for trading expenses.

A technical snafu had stalled the social networking company’s market entry by about 30 minutes, which then delayed order confirmations on May 18, which is the day that Facebook went public. Many investors contend that they lost money as a result of Nasdaq’s alleged mishandling of their purchases, sales, or cancellation orders for the Facebook stock. Some of them have already filed securities lawsuits.

Sentinel Management Chief, Head Trader Indicted in Illinois, Bloomberg/Businessweek, June 1, 2012
Investors sue Nasdaq, Facebook over IPO, Reuters, May 22, 2012

Credit Rater Egan-Jones, Alleging Bias, Sues To Force SEC Proceeding Into Federal Court, BNA Securities Law Daily, June 8, 2012

OppenheimerFunds to pay $35M to settle SEC charge, Boston.com, June 6, 2012 Continue Reading ›

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

More Blog Posts:
Senate Democrats Want Volcker Rule’s “JP Morgan Loophole” Allowing Portfolio Hedging Blocked, Institutional Investor Securities Fraud, May 22, 2012
Wall Street Complains Financial Reform Will Mean More Lawsuits. Is This Bad?, Institutional Investor Securities Blog, October 16, 2010
Hampton Porter Investment Bankers’s Stockbrokers, Convicted For Securities Fraud In Pump-And-Dump Scheme, To Be Sentenced This Year, Stockbroker Fraud Blog, January 9, 2007 Continue Reading ›