Investor Lawyers Blog

Wells Fargo Settles for $148M Municipal Bond Bid-Rigging Charges Against Wachovia Bank

Published on: December 8, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Wells Fargo & Co. has agreed to settle for $148 million the civil claims and criminal charges accusing Wachovia Bank of taking part in a bid-rigging scam with other financial firms and overcharging local and state governments on their investments. The settlement resolves allegations that for eight years, Wachovia rigged at least 58 transactions involving proceeds from over $9 billion of municipal bonds. By agreeing to settle, Wells Fargo, which acquired Wachovia three years ago, is not denying or admitting to these allegations.

In its allegations against Wachovia, the SEC said the financial firm earned ill-gotten gains in the millions of dollars by using tips provided about rival bids, turning in bogus bids to give competitors an advantage, and working with some of them to rig auctions so it would benefit. The Justice Department said Wachovia’s illegal behavior corrupted the bidding system for investment contracts while preventing municipalities from getting to avail of a competitive process. However, because the financial firm admitted to the illegal conduct, cooperated with the investigation, took action to deal with anti-competitive behavior, the federal government decided not to prosecute.

Involved in investigating Wachovia were the SEC, attorneys general in more than two dozen states, and the US Justice Department. The federal agencies have been looking at how a number of Wall Street firms and local-government advisers worked together to rig competitive auctions in order to charge excessive fees to public agencies that bought the investments.

More than dozen banks have been named as alleged co-conspirators. Other financial firms that have settled similar claims over muni bond bid-rigging are Bank of America, Corp., UBS AG, and JPMorgan Chase & Co. With this latest settlement, the banks will have paid $673 million to settle the municipal bond-related allegations.

The charges against the financial firms involve investment contracts purchased by cities and state with proceeds from the municipal-bond market. At competitive auctions organized by financial advisers, these contracts should have gone to banks offering the highest return.

According to investigators, what instead ended up happening is that some of these advisers would direct business to a certain bidder in exchange for kickbacks. Meantime, other banks would purposely make bids they knew wouldn’t win to cover up the alleged conspiracy. Because governments usually have to invest bond proceeds in the short term until it is time to spend the cash on public projects, the bogus bidding practices adversely impacted what municipalities ended up paying for reinvestment products. The bid-rigging cost the US Treasury and other governments money.

Wells Fargo Pays $148 Million to Settle Wachovia Muni Bid-Rigging Charges, Bloomberg, December 8, 2011

Wells Settles Wachovia Bid-Rig Case, Wall Street Journal, December 9, 2011

More Blog Posts:
Bank of America’s Merrill Lynch Settles for $315 million Class Action Lawsuit Over Mortgage-Backed Securities, Institutional Investor Securities Blog, December 6, 2011

Former US Treasury Secretary Henry Paulson Told Hedge Funds About Fannie Mae and Freddie Mac Bailouts in Advance, Institutional Investor Securities Blog, November 30, 2011

$75K FINRA Arbitration Award Against Wells Fargo Advisors LLC For Defaming an Ex-Employee in Form U-5 is Confirmed by District Court, Stockbroker Fraud Blog, November 30, 2011

Bank of America’s Merrill Lynch Settles for $315 million Class Action Lawsuit Over Mortgage-Backed Securities

Published on: December 6, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Bank of America, Corp. has agreed to pay investors $315 million to settle their class action claim accusing Merrill Lynch of misleading them about the risks involved in investing in mortgage-backed securities. If approved, the proposed settlement would be one of the largest reached over MBS that caused investors major losses when the housing market collapsed. The lead plaintiff in this securities case is the Public Employees’ Retirement System of Mississippi pension fund.

The class action lawsuit accused Merrill of misleading investors about $16.5 billion of MBS in 18 offerings that were made between 2006 and 2007. They are claiming possible losses in the billions of dollars. (The offerings occurred before Bank of America bought Merrill.)

The plaintiffs contend that Merrill’s offering documents were misleading. They also believe that the original investment-grade ratings for the securities, which had been backed by loans from Countrywide, IndyMac Bancorp Inc., First Franklin Financial unit, and New Century Financial Corp. were unmerited. Most of these investments were later downgraded to “junk” status.

By agreeing to settle, Bank of America is not admitting to or denying wrongdoing.

This settlement must be approved by US District Judge Jed Rakoff, who just last week rejected the proposed $285M securities settlement between Citigroup Global Markets Inc. and the Securities and Exchange Commission. He ordered that the case be resolved through trial. Rakoff was also the one who refused to approve another proposed Bank of America securities settlement—the one in 2009 with the SEC—for $33 million over misstatements that were allegedly made regarding the purchase of Merrill. Rakoff would later go on to approve the revised settlement of $150 million.

Rakoff has criticized a system that allows financial firms to settle securities fraud allegations against them without having to admit or deny wrongdoing. He also has expressed frustration at the “low” settlements some investment banks have been ordered to pay considering the amount of financial losses suffered by investors.

Our securities fraud lawyers represent individual and institutional clients that sustained losses related to non-traded REITs, private placements, principal protected notes, auction-rate securities, collateralized debt obligations, mortgage-backed securities, reverse convertible bonds, high yield-notes and other financial instruments that were mishandled by broker-dealers, investment advisers, or their representatives. We also work with victims of Ponzi scams, affinity scams, elder financial fraud and other financial schemes.

BofA Merrill unit in $315 mln mortgage settlement, Reuters, December 6, 2011

Public Employees’ Retirement System of Mississippi

More Blog Posts:
Citigroup’s $285M Settlement With the SEC Is Turned Down by Judge Rakoff, Stockbroker Fraud Blog, November 28, 2011

Citigroup’s $285M Mortgage-Related CDO Settlement with Raises Concerns About SEC’s Enforcement Practices for Judge Rakoff, Institutional Investor Securities Blog, November 9, 2011

Ex-Lehman Brothers Holdings Chief Executive Defends Request that Insurance Fund Pay Legal Bills, Stockbroker Fraud Blog, October 19, 2011

Texas Securities Fraud: Unregistered Adviser Confesses to Selling Almost $400K in Promissory Notes and Investments Despite Cease and Desist Order

Published on: December 5, 2011 | by Shepherd Smith Edwards & Kantas, LLP

William Erik Byrne, who is unregistered securities advisor, admits that he sold $389,000 in investment and promissory notes to investors even after he received a cease and desist order from the Texas State Securities Board in 2005. He also is accused of giving out investment advice to clients even though he was not authorized.

State regulators also filed a Texas securities complaint against Byrne for selling unregistered variable annuities from Hampton Insurance Co. Ltd. Not only were none of the VAs were filed with the Texas Department of Insurance, but also, Hampton Insurance was not under that department’s supervision.

Byrn says that between 2006 and 2009 he sold investments to clients without telling them that Texas regulators had ordered him to stop or why. State officials also say that Byrne failed to tell investors that previous clients hadn’t been paid according to the terms of their contracts.

Working with a Registered Adviser
State and federal laws require that investment advisers and broker-dealers and their representatives be registered. Registration is usually with a state securities agency or the Securities and Exchange Commission. Unfortunately, there are those that don’t follow this requirement and try to get away with this.

As an investor, you want to make sure that the representative and/or financial firm you want to work with is registered. Otherwise, if there is a problem later on, such as a broker-dealer or investment adviser going out of business, there may not be a way for you to recoup your losses even if a court or arbitrator rules in your favor.

You should also do your own research. You can find out whether an investment adviser is correctly registered by reading its Form ADV registration form. This form also should let you know whether the investment adviser has had any previous run-ins with regulators or past problems with other clients.

Unregistered and Registered Securities
Although it is typically illegal to sell unregistered securities, there are exemptions. You can get Form ADV from the investment adviser, the regulatory body the adviser is registered with, or by going to the Investment Adviser Public Disclosure Web site.

Read the Enforcement Actions Against Byrne

Rule 144: Selling Restricted and Control Securities, SEC
Texas State Securities Board

Investment Adviser Public Disclosure Web

More Blog Posts:
Texas Securities Fraud: Raymond James Financial Services Pays Elderly Senior Investor About $1.8M Following Loss of Appeal, Stockbroker Fraud Blog, December 2, 2011
Former Texan and First Capital Savings and Loan To Pay $4.5M for Alleged Foreign Currency Ponzi Scheme, Stockbroker Fraud Blog, November 11, 2011
Texas Securities Fraud: SEC Moves to Freeze Assets of Stewardship Fund LP, Stockbroker Fraud Blog, November 5, 2011 Continue Reading ›

Texas Securities Fraud: Raymond James Financial Services Pays Elderly Senior Investor About $1.8M Following Loss of Appeal

Published on: December 2, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Raymond James Financial Services has paid the $1.79M Dallas securities arbitration award plus interest it owes to Hurshel Tyler and the estate of his wife Mildred. They filed their claim with the Financial Industry Regulatory Authority. Both were in their 80’s.

They contend that they were advised by an ex-Raymond James representative to take their $3.5M in bond funds and place them in variable life insurance and variable annuities. Unfortunately, the life insurance policy was tied to $2M in improper loans, interest obligations, and ongoing tax that made it difficult to return the financial product to the brokerage firm. Tyler and Mildred’s estate claim that the stockbroker, Daul Davis, made a recommendation to them that was unsuitable.

Davis not only advised the Tylers to liquidate their municipal bond portfolio and make the new investments, but also, unknown to the couple, he moved them from one variable annuity to another, which cost them a significant surrender fee and commission. The Tylers’ Texas stockbroker lawyer says that by making the couple’s son the new annuity’s annuitant, the financial firm and Davis earned over twice the commission than if Hurshel Tyler had been the annuitant. (Usually, the annuitant and annuity owner are the same person. However, the insurance company that was involved only offered a 3.25% commission for annuitants over 80 years of age, while the commission for someone younger than that was 7.5%)

A FINRA arbitration panel sided with Tylers. The couple had sought to recoup their money, but instead panel members instead awarded them with compensatory damages.

Raymond James went on to appeal that decision. The broker-dealer argued that the couple should have given the annuities back. They also contended that they shouldn’t have to pay the couple’s $250K in legal fees because Florida, which is where the financial firm is based, doesn’t allow for this type of award.

Although Raymond James has gone ahead and paid the arbitration award, the broker-dealer maintains that the payment is unjust. The financial firms claims that not only did the couple make over $800,000 while the accounts were under its watch, but also, any losses they sustained occurred after they moved the accounts to a different broker-dealer. Raymond James says that despite disagreeing with the FINRA panel’s ruling, it has gone ahead and paid what it considers an “erroneous award” because in the long run doing so now would be less costly than continuing to contest it.

This Texas securities arbitration award is the largest one that Raymond James has ever had to pay.

Raymond James Pays Highest Arbitration Award in History, LifeHealthPro, November 30, 2011
After appeal fails, RJ forks over $1.8M to 87-year-old client, Investment News, November 30, 2011

More Blog Posts:
Former Texan and First Capital Savings and Loan To Pay $4.5M for Alleged Foreign Currency Ponzi Scheme, Stockbroker Fraud Blog, November 11, 2011
Texas Securities Fraud: SEC Moves to Freeze Assets of Stewardship Fund LP, Stockbroker Fraud Blog, November 5, 2011
Houston Judge Overturns $9.2M Securities Fraud Ruling Against Morgan Keegan, Stockbroker Fraud Blog, October 11, 2011 Continue Reading ›

Securities Claims Accusing Merrill Lynch of Concealing Its Auction-Rate Securities Practices Are Dismissed by Appeals Court

Published on: November 30, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Court of Appeals for the Second Circuit has affirmed a district court’s decision to dismiss securities fraud claims accusing Merrill Lynch & Co. of hiding its ARS practices to manipulate the market. The case had been filed by plaintiff Colin Wilson on behalf of all buyers between March 2003 and Feb. 13, 2008 that purchased ARS for which Merrill was the dealer.

Wilson contended that although until July 2007 Merrill Lynch did not allow its ARS auctions to fail, in the couple of months that followed the broker-dealer did not put in support bids during at least 34 auction-rate securities issuances. As a result, those auctions did fail. Wilson also claimed that because Merrill Lynch did not appropriately disclose the full scope of its ARS practices, the financial firm was sending out a false signal that the market was sustainable despite there being not enough of an investor demand for the instruments.

The district court threw out the Wilson’s ARS case after finding that Merrill’s disclosure did not mislead investors. Now, the appeals court is affirming. It found that if, as Wilson says, Merrill intended to put in support bids for every auction unless it decided to let certain ones fail or get out of the market in general, then the court believes that the broker-dealer gave fair disclosure of all this. The appeals court also didn’t agree with Wilson’s allegation that Merrill Lynch knew without a doubt that if it didn’t intervene an ARS auction was sure to fail.

This is the first appellate ruling involving securities class litigation over the demise of the ARS market. Upon the market’s decline beginning 2007, Merrill Lynch and other large broker-dealers started letting auction-rate securities auctions fail. When they completely stopped their support, the market became illiquid. A number of investors have since filed ARS lawsuits seeking to recover their money.

Although Merrill appears to have won this case, Shepherd Smith Edwards and Kantas founder and stockbroker fraud attorney William Shepherd notes, “This is not the huge victory Merrill claims. The court did NOT find that Merrill did not engage in wrongdoing in the sale of auction rate securities (ARS) to its clients, most of whom were led to falsely believe that these ARS investments were similar to commercial paper or short-term treasury bills. This case is instead concerned with “market manipulation,” a type of securities fraud claim that is rarely brought and almost never successful. In order to win this case, among other hurdles the plaintiffs would have to demonstrate that Merrill’s practices were intentional and were intended to change the market value of the securities. Also, this decision is by the federal appeals court in New York, which mysteriously decides many cases in favor of Wall Street.”

2d Cir. Affirms Merrill Off the Hook In Investor Suit Over ARS Disclosures, BNA, November 16, 2011
Read the full opinion (PDF)

More Blog Posts:
SEC and SIFMA Divided Over Whether Merrill Lynch Can Be Held Liable for Alleged ARS Market Manipulation, Institutional Investor Securities Blog, July 29, 2011 Raymond James Settles Auction-Rate Securities Case with Indiana Securities Division for $31M, Stockbroker Fraud Blog, August 27, 2011
District Court in Texas Decides that Credit Suisse Securities Doesn’t Have to pay Additional $186,000 Arbitration Award to Luby’s Restaurant Over ARS, Stockbroker Fraud Blog, June 2, 2011 Continue Reading ›

Former US Treasury Secretary Henry Paulson Told Hedge Funds About Fannie Mae and Freddie Mac Bailouts in Advance

Published on: November 30, 2011 | by Shepherd Smith Edwards & Kantas, LLP

According to Bloomberg.com, former US Treasury Secretary Henry Paulson told a number of Wall Street executives in advance that the government was planning on Taking Control of Freddie Mac and Fannie Mae. This information, reportedly delivered to them at the Eton Park Capital Management LP offices on July 21, 2008 when Paulson was still in office, came just one day after he told the New York Times that the Office of the Comptroller of the Currency and the Federal Reserve were inspecting both mortgage giants’ books and that he expected that this would give the markets a sign of confidence.

There were about a dozen people present at the Eton Park gathering, including the hedge fund’s founder Eric Mindich, at least five former Goldman Sachs Group Inc. alumni, Lone Pine Capital LLC founder Stephen Mandel, Och-Ziff Capital Management Group LLC’s Daniel Och, TPG-Axon Capital Management LP’s Dinakar Singh, Kynikos Associates Ltd.’s James Chanos, GSO Capital Partners LP co-founder Bennett Goodman, Evercore Partners Inc.’s Roger Altman, and Quadrangle Group LLC co-founder Steven Rattner.

Paulson reportedly spoke about placing Freddie Mac and Fannie Mae into “conservatorship,” which would then allow the firms to stay in business. He said that the two government-sponsored enterprises’ stock, as well as numerous classes of preferred stock, would be eliminated. One fund manager who was there that day said he was surprised at Paulson’s wiliness to reveal such details.

Paulson did not do anything illegal when he gave out this insider information. However, any of the executives who were there today could have traded on this inside information. Whether anyone did is a mystery, seeing as firm-specific short stock sales cannot be tracked with public documents.

The US government seized Frannie and Freddie a couple of weeks after the Eton Park gathering and control of the firms was handed over to the Federal Housing Finance Agency.

At the time, Paulson said that the failure of Freddie and Fannie was not an option—considering that over $5 trillion in mortgage-backed securities and debt that the two of them had issued belonged to central banks and other investors throughout the world.

Last year, the Los Angeles Times reported that taxpayer loss from the government takeover could go as high as almost $400 billion. The FHFA said it was looking to offset some of this by getting billions of dollars back from banks that sold Fannie and Freddie bad loans. By September of 2010—two years after the seizure—the cost of the bailouts had already hit $148.2 million and concerns arose when the Obama Administration announced that it was raising the $400 billion cap on the government’s commitment to the two mortgage giants through 2012.

Our securities fraud lawyers represent clients though sustained severe losses when the housing market collapsed. Unfortunately, broker misconduct contributed to a number of these losses.

How Paulson Gave Hedge Funds Advance Word of Fannie Mae Rescue, Bloomberg.com, November 29, 2011

Losses from Fannie Mae, Freddie Mac seizures may near $400 billion, Los Angeles Times, September 16, 2011

U.S. Seizes Mortgage Giants, Wall Street Journal, September 8, 2008

Related Web Resources:
MF Global Shortfall May Be More than $1.2B, Says Trustee, Stockbroker Fraud Blog, November 26, 2011

Bonds Defeat Stocks For the First Time Since Prior to the Civil War, Institutional Investor Securities Blog, November 26, 2011

Wells Investment Securities Agrees to $300,000 Fine by FINRA for Alleged Use of Misleading Marketing Materials for REIT Offerings, Institutional Investor Securities Blog, November 23, 2011

LPL Financial Ordered to Pay $100K for Lack of Adequate Oversight that Resulted in Unsuitable Investments for Clients

Published on: November 29, 2011 | by Shepherd Smith Edwards & Kantas, LLP

LPL Financial must pay $100K for its improper supervision of a broker. The Oregon Division of Financial and Corporate Securities, which fined the financial firm, reports that LPL Financial has put in place better oversight procedures since the violation was discovered. LPL Financial is a LPL Investment Holdings Inc. division.

According to the state’s securities division, Jack Kleck, an LPL Financial branch manager, sold risky gas and oil partnership-related investments to almost 36 residents. A lot of these clients were elderly seniors for whom these investments were unsuitable (considering their investment goals and age). Some even lacked the mental capacity to make such investment choices.

LPL Financial is accused of committing securities law violations, including not making sure that company procedures and policy were enforced and inadequately supervising Kleck, whose securities license was taken away in 2007. He was ordered to pay a $30,000 fine.

Sale of Interest in Private Placement Offerings by Medical Capital Holdings, Provident Royalties DBSI Leads to FINRA Order that Investors Get $3.2M in Restitution

Published on: November 29, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority has ordered another 10 individuals and 8 financial firms to pay $3.2M in restitution to clients who were sold interest in risky private placements that were issued by DBSI, Inc., Medical Capital Holdings, Inc., and Provident Royalties, LLC. The parties that were sanctioned allegedly sold the interests without having reasonable grounds to recommend the securities to customers. The SRO believes there were inadequate supervisory systems in place.

FINRA fined the following parties for allegedly failing to reasonably investigate the private placement offerings to ensure that the firms making the sales were fulfilling their obligation to customers.

• NEXT Financial Group, Inc.: $2 million in restitution and a $50,000 fine. VP Steven Lynn Nelson was fined $10,000 related Provident Royalties private placements sales.

• Investors Capital Corporation: About $400,000 in restitution over Provident Royalties private placement sales and a CIP Leveraged Fund Advisors-offering.

• Garden State Securities, Inc.: $300,000 related to a Medical Capital private placement. Kevin John DeRosa was fined $25,000. Vincent Michael Bruno, who is chief compliance officer, will pay a $10,000 fine.

• Capital Financial Services: Clients will get $200,000. Ex-principal Brian W. Boppre is fined $10,000. Private placements from both Medical Capital and Provident Royalties were involved.

• National Securities Corporation: $175,000 in restitution related to the sale of Provident Royalties and Medical Capital private placements. Director Matthew G. Portes was suspended and fined $10,000.

• Equity Services, Inc.: Nearly $164,000 in restitution and a $50,000 fine. Sr. VP Stephen Anthony Englese was fined $10,000 while representative Anthony Paul Campagna must pay $25,000.

• Securities America, Inc.: Fined $250,000.

• Newbridge Securities Corporation: A $25,000 fine related to private placements sold by DBSI and Medical Capital. Ex-Chief Compliance Officer Robin Fran Bush was fined $15,000.

• Former Meadowbrook Securities CEO and President of LLC Leroy H. Paris II must pay a $10,000 fine related to the sale of Medical Capital and Provident Royalties private placements.

• Michael D. Shaw was barred from the securities industry. He was previously associated with VSR Financial Services, Inc.

Between ’01-’09, Medical Capital Holdings was able to raise about $2.2 billion through the private placement offerings of promissory notes. Over 20,000 investors participated. Meantime, from September ’06 to January ’09, Provident Asset Management, LLC sold and marketed limited partnerships and stock in 23 private placements issued by Provident Royalties. More than $485 million was raised from over 7,700 investors who made their purchases through over 50 retail broker-dealers. Last year, however, a number of the private placement deals soured, causing a number of broker-dealers that sold them to shut down, while the investors sustained financial losses.

FINRA Sanctions Eight Firms and 10 Individuals for Selling Interests in Troubled Private Placements, Including Medical Capital, Provident Royalties and DBSI, Without Conducting a Reasonable Investigation, FINRA, November 29, 2011

FINRA fines eight firms for private placement sale, Reuters, November 29, 2011

More Blog Posts:
FINRA Wants Brokers Selling Regulation D Private Placements to Take Part in Tougher Due Diligence Process, Stockbroker Fraud Blog, June 7, 2011

Boogie Investment Group Inc. Fails Because of Fraudulent Private Placements by Provident Royalties LLC and Medical Capital Holdings Inc., Stockbroker Fraud Blog, October 27, 2011

Citigroup’s $285M Settlement With the SEC Is Turned Down by Judge Rakoff

Published on: November 28, 2011 | by Shepherd Smith Edwards & Kantas, LLP

U.S. District Judge Jed S. Rakoff has turned down the proposed $285M settlement between the SEC and Citigroup Global Markets Inc. However, unlike with the SEC’s tentative $33M settlement with Bank of America that he rejected, eventually approving a $150 million settlement between both parties-this time, Rakoff is ordering the SEC and Citigroup to trial.

The SEC claimed Citigroup sold Class V Funding III right as the housing market fell apart in 2007 and then bet against the $1 billion mortgage-linked collateralized debt obligation. Meantime, the financial firm allegedly failed to tell clients about this conflict of interest. Investors would go on to lose nearly $700 million over the CDO, while Citigroup ended up making about $160 million.

To many observers, Rakoff’s decision doesn’t come as a surprise. He has expressed concern with the SEC’s handling of securities cases for some time. In his ruling today, Rakoff was very clear in stating that he didn’t believe the tentative agreement was “fair… reasonable… adequate, nor in the public interest.” He also called for the “underlying facts” and made it clear that the SEC’s typical boilerplate settlement, which usually involves the other party agreeing to the terms but not admitting to or denying wrongdoing, was not going to suffice.

Until now, the SEC’s settlement policy has allowed the Commission to declare a victory while letting defendants get away with not acknowledging any wrongdoing so that private plaintiffs cannot use such an outcome in litigation against them. Now, however, Rakoff wants the court and the public to actually learn whether or not Citigroup acted improperly.

Also in his opinion, Rakoff spoke about how the current settlement doesn’t do anything for the investors that Citigroup allegedly defrauded of hundreds of millions of dollars. Not only that but the SEC isn’t promising to compensate the alleged securities fraud victims.

For now, the trial between Citigroup and the SEC is scheduled for July 2012. However, the Commission could decide to appeal Rakoff’s ruling and ask an appellate court to either make him accept the $285 million settlement or appoint a new judge to the case. According to the New York Times, however, this could prove challenging because a writ of mandamus would be required.

Our securities fraud law firm has had it with financial firms defrauding investors and then getting away with this type of misconduct. It is our job to help our clients recoup their losses whether via arbitration or in court.

Behind Rakoff’s Rejection of Citigroup Settlement, NY Times, November 28, 2011
Judge to SEC: Stop settling, start really suing, OC Register, November 28, 2011
Read Judge Rakoff’s Opinion

More Blog Posts:
Citigroup’s $285M Mortgage-Related CDO Settlement with Raises Concerns About SEC’s Enforcement Practices for Judge Rakoff, Institutional Investor Securities Blog, November 9, 2011
Bank of America To Settle SEC Charges Regarding Merrill Lynch Acquisition Proxy-Related Disclosures for $150 Million, Stockbroker Fraud Blog, February 15, 2010
Ex-Goldman Sachs Director Rajat Gupta Pleads Not Guilty to Insider Trading Charges, Stockbroker Fraud Blog, October 26, 2011 Continue Reading ›

FINRA May Put Forward Another Proposal About Possible SEC Rule Regarding Fiduciary Duty

Published on: November 28, 2011 | by Shepherd Smith Edwards & Kantas, LLP

According to FINRA CEO and Chairman Richard G. Ketchum, the SRO may put out a second concept proposal about its stance regarding disclosure obligations related to a possible Securities and Exchange Commission rulemaking about formalizing a uniform fiduciary duty standard between broker-dealers and investment advisers. Currently, the 1940 Investment Advisers Act defines the investment advisers’ fiduciary obligation to their clients, while broker-dealers are upheld to suitability rules that will be superseded next August by two FINRA rules regarding broker-dealer suitability standards.

The Dodd-Frank Wall Street Reform and Consumer Protection Act’s Section 913, however, said that it is SEC’s responsibility to determine whether these current regulatory and legal standards s are still effective and if any regulatory shortcomings that exist need to be filled. In July 2010, the SEC asked stakeholders for feedback about this mandates. After receiving over 3,000 public comments, it issued a study recommending that there be a uniform fiduciary standard for both types of representatives when giving advice to retail clients. The SEC could put out its proposed rule by the end of this year.

FINRA is working with the Commission on this and plans to stay involved in the process. It was just last year that the SRO put out a concept proposal seeking public comment about the idea that broker-dealers should have to provide retail investors with certain disclosures at the start of a business relationship. These clients would be required to give a written statement detailing the kids of services and accounts they provide, any conflicts of interests, and limits on duties that they are entitled to expect. FINRA said that regardless of what a unified fiduciary standard would look like, retail investors would benefit from getting this disclosure document at the start and that such a mandate is an “outright necessity.