Investor Lawyers Blog

Wealth Advisor Institute Calls for Reforms of the U-5 Termination Process For Brokers

Published on: September 2, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The Wealth Advisor Institute wants the way U-5 termination forms are filed to be reformed. The forms are used for reporting information about why a broker has left a firm. A copy of the form then has to be given by the broker to a new employer.

The WAI called on NASD (Now part of FINRA) to make the reforms after the New York State Court of Appeals gave total legal immunity to the information that firms choose to include on U-5 forms. This means that under New York law, brokers cannot obtain monetary damages in rulings involving U-5 defamation cases. An appeals court in California issued a similar ruling regarding U-5 forms two years go.

The WAI says it was appalled by the New York Court’s decision and expressed worries “advisers can end up getting sold out” by their firms.

Business Optimism over SEC ‘Reforms’ – That is, to Dismantle Securities Regulations!

Published on: August 5, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Washington lawyer Peggy Blake, who recently joined Winston & Strawn as a corporate partner, reports her foreign financial services clients are “very optimistic” about the movement afoot at the Securities and Exchange Commission to adopt a mutual recognition regime.

Yet, during recent trips to London and Geneva, she found a number of her foreign bank clients have some reservations about “how the whole thing will play out.” Blake advises clietns on application of U.S. securities laws to non-U.S. financial service providers. As part of her practice, she works with clients to design their compliance programs.

Her goal, along with those on Wall Street, in the White Houst and at the SEC, is to dismantle U.S. securities regulations governing corporations, their executives, securities firms, accounting firms and others.

New York Court Sides with Ameritrade – Redefines “Best Execution”

Published on: August 5, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Justice for investors is simply denied in New York courts and a trend of no justice for investors threatens to spread nationwide as more and more “activist” business-friendly judges are appointed to the federal bench.

The U.S. District Court for the Southern District of New York, known to be friendly to Wall Street, has struck again, this time ruling Ameritrade was not required to route orders to multiple markets to fulfill its duty of “best execution” of trades. This is one of many case filed by investors which was dismissed, with prejudice, in a decision which could affect investors nationwide. (Gurfein v. Ameritrade Inc., S.D.N.Y., No. 04 Civ. 9526 (LLS), 7/17/07

Although language on Ameritrade, Inc.’s Website advertised that it had the capability of distributing customer orders to multiple markets and could thereby seek best execution, the judge decided this did not oblige Ameritrade to route orders to different markets for execution. The judge also found Ameritrade had no duty to the plaintiff to execute the limit order at the “best price” or fulfill the “best execution” regulatory requirement.

Hedge Funds Plead Guilty in Scam Costing Victims $194 Million

Published on: August 4, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Three hedge fund companies pleaded guilty to criminal conspiracy charges in a Florida Federal Court in a scheme that cost victims nearly $195 million. The defendants included KL Group LLC, Shoreland Trading LLC, and KL Triangulum Management LLC, U.S. Attorney R. Alexander Acosta said in a written statement.

These companies each admitted their role in running a hedge fund “scam” based out of West Palm Beach and Irvine, California, Acosta’s statement said. “The corporations admitted their complicity, through the attorney for their court-appointed receiver, in overseeing approximately $195 million in fraudulently obtained proceeds.” The companies will be sentenced in November.

Claims were also filed against three principles of the funds describing a scheme in which approximately 250 clients invested between 2000 and 2005. Although much of the money was apparently lost, a large amount of the funds allegedly went to the individuals’ personal use. Case documents say the defendants established opulent ocean-view offices in West Palm Beach with high-end furnishings and equipment. Prospective investors were given tours to view day trading purportedly using a proprietary system.

SEC Bows to Pressure – Pulls List of Those Linked to Terrorists

Published on: August 4, 2007 | by Shepherd Smith Edwards & Kantas, LLP

A month ago the SEC rolled out a list of companies officially linked to countries designated by the U.S. Secretary of State as state sponsors of terrorism. The SEC’s published list, which included Halliburton and other large companies, received more than 150,000 Internet hits. It also stirred a firestorm from business groups and lobbyists.

Under such pressure, the SEC has suspended publication of the controversial list indefinitely. In a release, SEC Chairman Christopher Cox said that, while the agency “received many positive comments” over its listing, it also received negative comments regarding the lack of updated information.

Cox justified removal of the list by citing the agency’s commitment to “complete, accurate, and timely disclosure,” rather than simply admitting it succumbed to political pressure. Cox also questioned the need for a SEC list, stating that the issuers’ disclosures regarding their business contacts in the five named countries–Cuba, Iran, North Korea, Sudan, and Syria–“will continue to be available through the SEC’s EDGAR database.”

Hartford to Pay $115 Million for Late Trading – and More!

Published on: August 3, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Hartford Financial Services Group will pay $115 million to settle market-timing and broker-compensation charges brought by the Attorney General offices of Connecticut, New York and Illinois.

The three state regulators charged that the Hartford insurance unit failed to properly oversee hedge funds that were engaging in market-timing sales of its variable annuities. New York Attorney General Andrew Cuomo said his investigation also found that Hartford invested into a hedge fund that was market-timing Hartford’s variable annuities, reaping nearly $16 million in profits from the hedge fund, while hiding its role and profit to customers.

The Connecticut Attorney General said his investigation revealed that Hartford also provided fictitious quotes to insurance brokers including the Marsh & McLennan Companies. He stated that Hartford provided Marsh with the intentionally high and noncompetitive bids, knowing it could “deceptively create the mirage of a competitive market–with the understanding that it could win other desirable future business from Marsh,” adding, “Hartford colluded with brokers and agents to pay concealed contingent commissions to get steered business.”

Morgan Stanley Fined Again – This Time for Overcharges

Published on: August 3, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The New Financial Industry Regulatory Authority (FINRA) has fine Morgan Stanley $1.5 million and ordered restitution of $4.6 million for overcharging clients on bonds.

FINRA is the former NASD, plus the NYSE regulatory unit, and is the primary regulator of the securities industry. FINRA discovered that Morgan Stanley’s retail unit had overcharged clients on 2,800 purchases totaling $59 million. The securities in question are notes issued by Kemper Lumbermen’s Mutual Casualty Co.

The value of bonds is often difficult to determine and unwary clients can often easily become victims of overcharges. A rule of thumb is that securities should not be marked up more than 5%, except in extraordinary situations. However, markups on debt instruments, including bonds and notes, should be even lower because such markups greatly alter the investor’s return.

Weekly Update Aug. 1, 2007 Wall Street Notes

Published on: July 31, 2007 | by Shepherd Smith Edwards & Kantas, LLP

MERRILL LYNCH: The firm’s retail brokerage revenues increased 13% to $3.3 billion, and new profits were up 23.7 %. Its broker count rose to 16,200 and it claims “net positive recruiting against all our major competitors, along with its lowest turnover of top producers in years. The firm also reported a rise in fee-based business, as it and other Wall Street firms operate on a short reprieve from the SEC to either register its representatives under the Investment Advisor’s Act, reassign the accounts to those already registered or restructure those accounts.

BEAR STEARNS: The firm continues to suffer the slings and arrows of critics over its CMO hedge fund debacle. Meanwhile, head manager of those funds was previously reported to have maintained his golf scores at the climax of the funds. Or did he? It has been reported that a three-member committee at the Hollywood Country Club in Deal, N.J., is investigating his victory at a July 4 golf tournament, to determine whether he changed his scores. Apparently, allegations of such cheating by executives at the club are frequent.

“We’re FINRA – the Financial Industry Regulatory Authority”, announced the old NASD, plus the NYSE’s regulatory functions. As we reported weeks ago, it was the third try at names for the NASD. First it offended 1.4 billion Islamic persons, then embarrassed itself with an acronym that sounded like a disease. Finally, it chose FINRA, which brought criticism from those in the financial industry that it doesn’t regulate. As we predicted, the NASD was much too arrogant to make yet another change. As well, it was intent on replacing “association” with “authority,” so it would not appear to be a fox in charge of a henhouse, despite its structure being similar to a country club (see above).

What Worries Your Broker? This Should Scare You!

Published on: July 31, 2007 | by Shepherd Smith Edwards & Kantas, LLP

“There are two things I worry about: Clients dying and the government putting me out of business,” said a Merrill Lynch rep who says he gets about 80% of his revenue from B-shares shares and fee-based business. Apparently, the safety of his clients’ assets must be down the list.

Meanwhile, regulators are currently engaged in a crackdown on brokers who shove clients into B-shares when the breakpoints of A-shares are much more appropriate, and those who use wrap accounts then ignore their clients. Hundreds of millions of mutual fund load refunds have been ordered. It has been discoverd that some clients have paid $5,000 to $20,000 per transaction while ignored in fee-based accounts at major firms.

Loss of the fees “would make me wonder whether I should stay in business,” said Curtis Mohr, a Pasco, Wash., broker affiliated with Royal Alliance Associates Inc. Good riddance!

Merrill Manager at Center of Harassment Claim Now at Southwest Securities – But Claims and Counterclaims Continue

Published on: July 31, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Former Merrill Lynch employee Hydie Sumner sued that firm saying she was sexually harassed. She was represented by lawyer Linda Freidman. In 2004, a panel of three NASD arbitrators decided Hydie was right and awarded her $2.2 million. They also forced Merrill to reinstate her.

Meanwhile, an email was allegedly sent to Merill Lynch by Ms. Sumner’s attorney Linda Freidman, reportedly at Sumner’s direction, questioning Merrill’s ethics for employing “a man like [Blas] Catalani,” Sumner’s Merrill Lynch manager. According to Catalini, this defamed him and caused him to be fired, his clients were then distributed to other brokers at Merrill and he found it “extremely difficult” to become re-employed in the securities industry.

Catalini, therefore, filed a lawsuit against Sumner and her lawyer, claiming defamation. Not to be outdone, Hydie Sumner then filed a counterclaim against Catalini claiming that he damaged her reputation by reporting that she was the reason he was terminated by Merrill Lynch.