April 15, 2015

Labor Department Proposes New Rule Imposing Fiduciary Duty on Brokers

In what has become a hot issue this Spring, the Labor Department yesterday proposed a new set of standards for brokers who offer advice in connection with 401(k)’s and other retirement accounts. Currently, brokers are required only to recommend products that are “suitable” for investors, which permits the sale of products that earn the broker high fees. Reuters reports that the new standards will require brokers to put their clients’ best interests first ahead of any personal financial gain. The Labor Department proposal will require “best interest” contracts between brokers and investors.

Rich Intelisano and Katz LLP represents investors in FINRA arbitrations and other litigations against broker-dealers and other financial firms.

April 10, 2015

Concern Mounts Over the Lack of a Rule Imposing a Fiduciary Duty on Brokers

I noted in my March 20 post that the Chair of the SEC had just come out in favor of a rule requiring brokers to act in their clients best interests. While investors wait for the SEC to move forward on the issue, the New York City Comptroller, Scott Stringer, is proposing that New York State require brokers to disclose the present state of their relationship to clients – “I am not a fiduciary” and “I am not required to act in your best interests, and am allowed to recommend investments that may earn higher fees for me or my firm, even if those investments may not have the best combination of fees, risks and expected returns for you.” The Wall Street Journal posited that New York’s adoption of such a requirement could spur other states to impose similar regulations.

A recent report by the Public Investors Arbitration Bar Association (“PIABA”) shows why Stringer’s proposal is critical. U.S. News describes the PIABA report which contrasted brokers’ advertising campaigns with the legal positions taken by those brokers in litigation against their clients. For example:

• Ad: “It’s time for a financial strategy that puts your needs and priorities front and center.”

• Legal position: “Respondents did not stand in a fiduciary relationship with Claimants.”

The PIABA report makes clear that brokers lure investors with the suggestion that the broker will place the investor’s interests first. The average investor, however, may have no inkling that the broker believes that he has no legal duty to do so.

Rich Intelisano and Katz LLP represents investors in FINRA arbitrations and other litigations against broker-dealers and other financial firms.

April 10, 2015

Broker Dealers Try to Avoid FINRA Arbitration: Heads I Win, Tails You Lose

There has been a spate of litigation in recent years over whether broker dealers can contract out of FINRA arbitration and litigate in court instead. Goldman, Sachs & Co. v. Golden Empire Schools Financing Authority, 764 F.3d 210 (2d Cir. 2014) is a recent example in the Second Circuit. Since 1989 the courts have blessed industry mandated FINRA arbitration as contained in the industry’s standard form customer agreement. Thus, investors effectively have no choice but to resolve investment disputes through arbitration. The industry has benefited from less costly and efficient arbitration and the avoidance of jury verdicts, and until recently, the FINRA rule requiring an industry representative on every panel. The trade off to enforcement of mandatory arbitration in favor of the industry was supposedly a fair and more efficient dispute resolution process for the investor.

Now, however, as FINRA reforms over the years have made arbitration more fair for investors, and as the cases brought against broker dealers have become larger and more complex, the industry is shifting strategy and attempting to have large and complex cases litigated in court. The means of choice for the industry to accomplish this are court forum selection clauses in contracts brokers obtain from the investor in an effort to trump any FINRA arbitration requirement.

Why would the industry like to be able to escape FINRA arbitration in a large and complex case? The answer lies in the nature of the investment documents usually associated with these cases which investors are required to sign as part of complex investment purchases. These investments typically have standard form risk disclosures which investors must acknowledge before investing. Such disclosures can sometimes be fatal to a court claim where they often form the basis for a motion to dismiss the case before discovery or trial, based on the more stringent pleading requirements of court litigation. In FINRA arbitration, on the other hand, absent rare circumstances, the investor is guaranteed a hearing on her case and motions to dismiss are not allowed.

In addition, in court the broker dealer can not only move to dismiss before trial, if it loses a large case it can move to set it aside before the trial court or on appeal. In FINRA arbitration, any court challenge must meet a very high burden and such challenges are rarely successful.

Why should the industry be able to cherry pick the disputes under which arbitration is required? The court decisions, like the Goldman decision referred to above, turn on principles of contract interpretation, often with no reference or discussion of the basic fairness and public policy implications of giving the industry an escape clause from its own mandated regime, whereas the investor can’t escape. Nor do the court cases adequately, or sometimes not at all, consider the role FINRA arbitration plays to help keep the industry playing by its own rules while avoiding the onerous legal hurtles and costs many investors would face in court.

March 20, 2015

SEC Chair Hints that the Commission Is Considering Rule on Fiduciary Duty for Brokers

Reuters reported that Mary Jo White, Chair of the U.S. Securities and Exchange Commission, came out in favor of creating of new rules to harmonize standards of care between investment advisers and brokers. Currently, investment advisers must act in a client’s best interest, while brokers may continue to sell products that primarily benefit their or their firm’s financial interests – so long as such products are “suitable” for the clients.

Wall Street has opposed efforts by the Department of Labor to craft rules governing such broker conduct and requiring them to put client’s interest first. White’s comments this week suggest that the SEC may be preparing to weigh in on the issue.

Rich Intelisano and Katz LLP represents investors in FINRA arbitrations and other proceedings against both investment advisers and brokers.

March 6, 2015

Major Banks Pass Stress Test: Was it Stressful?

The New York Times announced today that the nation’s biggest banks, according to certain “stress” tests, appear to be able to survive a serous downturn in the economy, where housing and securities markets severely decline and unemployment rises to 10%. Whether passing the stress test equates to a clean bill of heath for surviving the next serious recession depends on the metrics used to measure the banks’ health under various scenarios. Does that mean we are relying on the “quants” for the proper metrics, the math wizards who were lured away from math and scientific pursuits to help Wall Street create exotic and complicated investment products in the last 15 years? Yes. Remember that quants and their metrics gave Wall Street the cover it needed to classify risky housing securities products as investment grade, resulting in billions in losses for investors in the housing bust. It turned out the models the quants used were flawed: for one thing they sometimes didn’t go back far enough in financial history in building assumptions for the models. The banks’ passing the stress test is only as meaningful as how the stress test models are built, and we are once again in the hands of the financial quants in making that determination.

March 5, 2015

Morgan Stanley Likely Will Face Lawsuit by New York Attorney General Related to its Mortgage Bonds; Reaches Agreement to Settle Federal Mortgage Claims

Reuters reports that Morgan Stanley’s annual 10-K, filed March 2, 2015, indicates that the New York Attorney General intends to file a lawsuit related to 30 subprime securitizations sponsored by the company. This follows lawsuits and similar allegations by attorneys general in California, Virginia and Illinois. The New York Attorney General indicated that the lawsuit would allege that Morgan Stanley misrepresented or omitted material information related to the due diligence, underwriting and valuation of loans and properties. In the 10-K, Morgan Stanley stated that it does not agree with the allegations.

Morgan Stanley also reached a $2.6 billion agreement in principle last month with the U.S. Department of Justice and the U.S. Attorney’s Office for the Northern District of California to resolve claims related to what it called “residential mortgage matters.”

It remains to be seen whether investors will reap any of the benefits of these government actions seeking to mend the damage done by the subprime mortgage crisis and the proliferation of mortgage-backed securities (MBS), residential mortgage backed securities (RMBS), and collateralized debt obligations (CDOs).

Rich Intelisano & Katz LLP represents investors with claims related to the purchase of mortgage bonds, MBS, RMBS, and CDOs.

March 4, 2015

Former Barclays Brokers get Employee Forgivable Loans Knocked Out in FINRA Arbitration

A Miami-based FINRA arbitration panel has ruled that two former financial advisers of Barclays do not have to repay a total of over $3.8 million allegedly owed by them pursuant to promissory notes executed in connection with signing bonuses, despite the fact that they left the firm.

According to a recent report in the Wall Street Journal http://www.wsj.com/articles/two-ex-barclays-advisers-can-keep-big-bonuses-1424700638, the brokers, Ileana Delahoz Platt and Rafael Enrique Urquidi, joined Barclays in 2012 and received signing bonuses in the form of “forgivable loans”, which is a customary practice in the industry. These loans, evidenced by promissory notes, are typically forgiven over time provided the employee remains employed with the firm. However, shortly after Ms. Platt and Mr. Urquidi went to work at Barclays, the bank eliminated its business in the market where their clients were located, and, according to their attorney, the advisers could no longer service many of their clients, obliging them to leave the firm to seek out other employment.

In the FINRA arbitration proceeding, Ms. Platt and Mr. Urquidi sought compensatory and other damages, as well as a declaratory judgment that any amounts due under their loan agreements would be offset and that they would owe nothing under the promissory notes. Barclays, in a counterclaim, requested compensatory damages against the two advisers in the amounts it claimed were due and owing on the promissory notes at the time they left the firm.

The FINRA panel, in its award, denied Barclays’ counterclaim and held that Ms. Platt and Mr. Urquidi did not have to repay the loans. As is typical with FINRA awards, the panel did not provide a reasoned decision for its ruling. The award is noteworthy because it is often difficult for brokers to knock out 100% of a forgivable loan once they’ve left the firm.

Rich, Intelisano & Katz, LLP represents employees in the financial services industry in employment disputes, including compensation and bonus claims, wrongful termination claims and constructive discharge matters.

March 3, 2015

Master Limited Partnerships: Unsuitable for Some Investors?

Are master limited partners unsuitable for some investors? The term master limited partnership sounds like a complicated legal transaction. In fact, master limited partnerships or MLPs are complex investments that have become hugely popular in the last few years in this low interest rate environment. MLPs are tax exempt publicly traded companies that often own infrastructure in the energy field (pipelines, tanks, etc.). Individual and small institutional investors having be loading up on MLPs because they pay a large percentage of their income out to shareholders as distributions. According to Morningstar, investors added almost $12 billion in 2014 into mutual and exchange-traded funds which invest in MLPs. That's a huge amount of hard earned money looking for higher yields. The question is, do investors understand the real risks? We doubt it.

Brokers commonly market MLPs as low risk, higher yield securities. But that's not the case. An MLP is a publicly traded limited partnership with two types of partners: the general partner (or GP) who is responsible for managing the MLP and is compensated for performance; and the limited partner (or LP) who is the investor who provides the capital to the MLP and receives periodic income distributions. Unlike most partnerships, shares of MLPs can be bought or sold on a stock exchange. Just like any partnership, the problem with being a limited partner is that an LP has no role in the management of MLP. That's risk number one.

Risk number two is that most MLPs invest in the natural resources infrastructure. This is normally a risky space, especially with the swings on energy and commodity prices.

Risk number three is that the structure of an MLP mandates that most of the income be distributed to investors. This often forces MLPs to borrow funds to be able to pay dividends. The added risk is thus the leverage created by the MLP borrowing funds, especially in downturns in the economy.

Investors who do not want to take significant risks should learn as much as possible about MLPs. If you invested and lost money based upon misrepresentations regarding MLPs, feel free to contact our firm to learn more about MLPs and your options.

Here is an article from Bloomberg explaining some of the risks.

http://www.bloomberg.com/bw/articles/2014-03-20/master-limited-partnerships-investors-may-not-see-the-risks

February 25, 2015

Brokers May Soon Be Subject to Fiduciary Duty to Their IRA Investors

A leaked White House memo supports imposing fiduciary duties on brokers in their dealings with IRA investors, as reported by the New York Times.

Current rules provide a weaker standard for brokers. The memo estimates that the absence of adequate investor safeguards penalizes IRA holders by as much as $17 billion per year. Hopefully, this development indicates that a rule imposing a fiduciary standard will be promulgated by the U.S. Labor Department soon. The securities industry has been vigorously fighting this requirement for years, some threatening to stop offering IRAs that would be subject to the rule. Of primary concern to investors are built in conflicts of interest that brokers often have in recommending IRA investments that may be lucrative to the broker but not right for the investor. The government should err on the side of investor protection in this dispute because the securities industry has the knowledge and resources to protect future retirees, whereas many investors lack the knowledge to protect themselves in the arena of complicated investment products.

http://www.nytimes.com/2015/02/14/your-money/fiduciary-duty-rule-would-protect-consumers-and-target-investment-brokers.html?_r=0

February 19, 2015

Securities Arbitration Award Against Merrill Lynch Upheld

This week, the New Jersey Supreme Court denied the appeal of an arbitration award against Merrill Lynch by the Associated Humane Societies Inc. of Tinton Falls, N.J. In the original FINRA arbitration, the society alleged that certain of its investments were improper, it improperly sustained penalties and other charges when the investments were liquidated, its accounts were improperly managed and churned, and it was overcharged for management of its accounts. The society sought $10 million in punitive damages, $872,171 in compensatory damages and $544,299 in attorneys’ fees. After an 18-day hearing, the FINRA panel found in favor of the society, but awarded it only $168,103 in compensatory damages and $126,077 in punitives.

The society appealed. A 3-judge appellate division panel upheld the award in October, finding that the FINRA panel did not abuse its discretion. Associated Humane Societies, Inc. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., No. L-4376-13 (Oct. 29, 2014). The New Jersey Supreme Court denied any further appeal on Feb. 17, 2015.

Though the society was ultimately disappointed with the size of the award, the decision shows the reluctance of courts to disturb FINRA arbitration awards.

Rich Intelisano & Katz LLP represents non-profit entities as well as other investors in securities arbitrations.

February 19, 2015

Brokers Must Consider New Market Realities When Determining the Suitability of Asset Allocation for Young Investors

Does the conventional wisdom regarding asset allocation hold up in today’s economy? The New York Times recently featured an article suggesting that a portfolio teeming with risky stocks, derivatives, and other exotic investments may, in fact, not be suitable for even young investors. The Times points out that these young investors experience higher rates of unemployment and are more likely to cash out their 401(k)’s and other investments when they switch jobs. An appropriate suitability analysis under FINRA Rule 2111 would take these factors into account. It is highly likely that many brokers are still using a one-size-fits-all asset allocation formula for their young customers.

Investors may have a variety of claims against such brokers who fail to take into account current market conditions, including unsuitable investment advice, fraudulent misrepresentations and omissions, and failure to supervise.

February 6, 2015

Rich, Intelisano & Katz Opens LA Office

Rich, Intelisano and Katz is proud to announce the opening of our new office in Los Angeles. The California practice will be headed by our new partner Scott Rahn, a former partner at Greenberg Traurig in LA. Scott's bio is here: http://www.riklawfirm.com/scott-e-rahn.html

We look forward to working with Scott in California and to continue representing investors and employees from around the world in disputes with the financial industry.