Considering the enormous size of the private equity market, institutional and individual investors should ensure that any private equity investments in their portfolios are with well established, reputable managers. Just like in the hedge fund world, private equity investments often lack complete transparency. The private investment structure leaves room for potential fraud. A place to start is by doing proper due diligence on a private equity funds’ auditor.
We expect as the hedge fund industry is heading toward greater regulation due to the recent string of Ponzi schemes such as Madoff, that the private equity space will attract its own share of fraudsters. Be careful.

Representing investors who have been defrauded by brokerage firms, investment advisors, banks, hedge funds and trust companies is a very specialized practice area. Investors searching for counsel should ensure that any securities attorney they hire has been through the wars with the investment industry. Significant securities cases are often defended by the large Wall Street law firms. A neophyte will be exposed.

How does one find an experienced securities attorney? A good place to start is PIABA – the Public Investors Arbitration Bar Association (piaba.org). PIABA is a national organization of attorneys who represent investors in arbitration proceedings against Wall Street firms. The PIABA site has a listing of attorneys by state who handle these matters. Speak to multiple attorneys before you hire one. After being taking advantage of once by the investment industry, make sure you’re not making mistake number two. Hire attorneys who practice securities law for a living.

According to Reuters yesterday, U.S. Representative Stephen Lynch said that “taking a ‘soft approach" to regulating OTC derivatives would be a mistake, but that appears to be the direction lawmakers are leaning.” Representative Lynch further said "by allowing a significant part of the derivatives market to just go off unregulated ... we're setting ourselves up to fail."

After the meltdown of 2008 and 2009, now is the opportunity to address the concerns related to OTC derivatives. Hopefully, Representative Lynch’s perspective will prevail and public investors will be further protected.

According to Bloomberg, Jeff Spill, deputy director of securities regulation for enforcement, said "The safety of these products was exaggerated” and “UBS presented these notes as simple, safe investments when in fact they are highly volatile and are subject to shifting market conditions."

UBS pitched these notes to investors as safe investments. But they were extremely risky and became worthless when Lehman filed for bankruptcy. Our firm represents former UBS clients who bought Lehman notes from UBS. The New Hampshire complaint may help shed some light on these cases and help investors worldwide. Hopefully, other state securities regulators will weigh in as well.

This is one of the most significant employment awards ever rendered in arbitration. We have no information regarding the potential collection of said award.

For FINRA registered representatives in the securities industry, employment arbitration is mandatory. Many other industries are including pre-dispute arbitration clauses in their employment agreements as well. We expect to see a surge in employment arbitrations filed in the U.S. due to the declining economy.

FINRA's proposal was filed with the SEC in March and intended to increase the responsibilities of investors who file customer arbitrations to produce, among other things, complete tax returns (instead of certain pages and schedules) for five years prior to the first transaction identified in the statement of claim (instead of three years).

The SEC received more than 50 comment letters about the proposal, mostly from attorneys who represent investors who objected. FINRA filed a two-page notice with the SEC, withdrawing the rule proposal, on May 21.

It’s good to see FINRA admitting it made a mistake and withdrawing the proposal.

The U.S. Secretary of the Treasury, Tim Geithner, announced last week the Obama Administration’s broad plan on regulatory reform of OTC derivatives. Much of the news coverage focused on the systemic risk portions of Mr. Geithner’s memo. However, the last section of the memo stated that Treasury’s objective is also “ensuring that OTC derivatives are not marketed inappropriately to unsophisticated parties.” This is a very important mandate.

Our firm represents investors who were improperly sold various over-the-counter derivatives without the requisite risk disclosure made by the parties selling them. OTC derivatives fraud cases have become more and more prevalent as the OTC market mushroomed to greater than $600 trillion in notional amount in 2008. There is no room for fraudulent misrepresentations in this extremely complex market. Investors should be wary. Let’s hope the government follows through on its objectives and protects investors from the risks posed by OTC derivatives.

According to FINRA’s website, there were 2,403 securities arbitration cases filed at FINRA so far this year. That’s an 81% increase over the same time period in 2008. This news is not surprising. Since the market decline in October 2008 and the exposure of the Bernie Madoff and Allen Stanford scandals, securities fraud has become a hot topic. Many investors who may not have known they have potential remedies for abuses in the securities, commodities and hedge fund world, have since reached out to securities attorneys to determine whether they have a case.

Based upon our firm’s increased caseload and anecdotal evidence from other practitioners in this niche market, we expect FINRA case filing numbers to continue to grow, possibly to 2001 and 2002 levels. Unfortunately, due to the great media attention given to the Madoff affair, there are many attorneys now promoting themselves as experts in securities fraud. Investors who think they’ve been wronged should make sure they speak to attorneys who specialize in securities arbitration. Luckily, securities arbitration attorneys may handle cases nationally (and internationally) despite not being licensed in every state so there is a strong pool to choose from. PIABA, the Public Investors Arbitration Bar Association, is a great place to find a securities arbitration practitioner. Check out piaba.org for more information. The FINRA statistics are available at FINRA.org.

The funds were run by Jim Kelsoe, the chief-fixed income investment officer of the Memphis-based brokerage's Morgan Asset Management. The seven mutual funds include four Regions Morgan Keegan closed-end funds: Advantage Income Fund, High Income Fund, Multi-Sector High Income Fund and Strategic Income Fund; and three open-end funds: Regions Morgan Keegan Select Short Term Bond Fund, Intermediate Bond Fund and High Income Fund.

Morgan Keegan represented the Regions Morgan Keegan funds as low-risk bond funds. They turned out to be highly concentrated in subprime mortgage-backed securities and collateralized debt obligations (CDO’s). The losses are astounding. For example, The Select High Income lost 75% through February 28, 2008 and the Select Intermediate Bond lost 84%.

The recent run of arbitration victories bodes well for other investors who are either awaiting their hearing dates or have not yet filed an arbitration.

According to a recent BusinessWeek article, a Lehman Brothers subsidiary in Amsterdam manufactured $30 billion in structured notes from 2003 through 2008. A structured note can be defined as a debt obligation which also contains an embedded derivative component with characteristics that may adjust to the security's risk-return profile. The performance of a structured note tracks that of the underlying debt obligation and the derivative embedded within it. Many of these notes are extremely complex and hard to understand by even institutional investors. The BusinessWeek article reports that “Lehman's Amsterdam notes were bafflingly complex. In all, the unit issued some 4,000 variations, and the documentation for each type often ran to 600 pages.”

International firms including UBS and Citigroup pitched these notes to investors as safe investments. However, they were extremely risky and became worthless when Lehman filed for bankruptcy. Attempting to recover one’s investment through any of the Lehman bankruptcy proceedings may prove difficult. However, investors in the U.S. and worldwide may have potential claims against the entities (such as UBS and Citigroup) which sold the Lehman notes. Our firm and others in the U.S. have already been retained by many investors. Investors outside the U.S. should investigate whether they can bring potential claims against any U.S. based broker-dealer or an affiliate of a U.S. based bank in the U.S. court system or in arbitration. Historically, international investors have been able to commence FINRA arbitrations against U.S. broker-dealers or affiliates of U.S. firms in New York for actions which took place abroad.

Here is the link to the very interesting BusinessWeek article by David Henry and Matthew Goldstein. http://www.businessweek.com/magazine/content/09_20/b4131038438462.htm?chan=top+news_top+news+index+-+temp_top+story

Mr. Smith and Ms. Gaviria were very impressive during their interview of me. I expect the show to be the best of its kind on Madoff. It’ll be available online as well.

The SEC brought the case in the U.S. District Court in the Southern District of New York. The complaint alleges that Jon-Paul Rorech, a 38-year-old salesman for Deutsche Bank AG, passed confidential information about the 2006 buyout of Dutch media company VNU NV to Renato Negrin, a 45-year-old former trader for the hedge fund Millennium Partners. The complaint also alleges that Mr. Rorech told Mr. Negrin about the new bond offering for VNU and when Mr. Negrin asked to handicap the likelihood of the deal, Mr. Rorech said, "You're listening to my silence, right?" The two men then had a three-minute cell phone call and ten days later after Mr. Negrin had bought €20 million of credit-default swaps on VNU, he had pocketed a cool €950,000, or $1.2 million. Not bad for a weeks work.

However, the interesting aspect of the SEC complaint is not that the alleged fraud took place in the CDS market, it is that there are still allegations of employees of banks providing selective information to hedge funds and other high priority clients prior to disseminating said information to the public. Despite the public outcry over the research analyst scandals in the early 2000's, banks continue to have two sets of playing rules: one for the big hitters and another for the little guys. Hopefully, the SEC’s new found set of sharp teeth will eventually even the playing field.

The case is Securities and Exchange Commission v. Jon-Paul Rorech, et. al., Civil Action No. 09 CV 4329- (JGK)(SDNY). The complaint is available on the SEC’s website.

The SEC Complaint recites some juicy facts: the Friehling family invested for many years with Madoff, up to $14 million. David Friehling tried to hide his investment by replacing his name with his wife’s name and later with “Friehling Investment Fund.” The family withdrew $5.5 million since 2000. And the Friehling firm made $186,000 per year from1991 to 2008 – that’s over $3 million in fees over 17 years. Also, the SEC Complaint alleges that Friehling lied to the AICPA that didn’t do audit work he claimed to do and lied to the SEC about Madoff’s Form X-17-A-5.

What does this mean? Criminally, it looks like the government started by arresting Friehling: the low hanging fruit. Friehling is an easy one. The big question is who’s next? Likely DiPasquale and the other Madoff Securities employees. What about family? Who knows.

It is essential that attorneys review all of the arbitrators’ prior awards, not just the ones from the NASD. NYSE and AAA awards are available from the Securities Arbitration Commentator. NYSE awards are available on the NYSE website and on Westlaw.

Attorneys should not just review the awards from securities cases. Employment awards may be important too. For example, whether an arbitrator has awarded punitive damages in an employment case would be important to know.

Pro se cases should be disregarded unless there is big award given to a pro se claimant which is very rare.

Counsel must also study the attorneys involved in each arbitration award. You can’t just look at the awards. For example, there are some claimants’ attorneys who are known for bringing a high volume of weaker cases. A zero award for an attorney like that doesn’t tell me much; but if it’s a zero on a case brought by someone with a strong reputation, that would interest me.

Finally, call attorneys who have appeared before the arbitrators to get their first hand commentary on arbitrators. Awards often don’t tell the whole story on their face. There is nothing more helpful than hearing the war story from a trial attorney.

1. Exhibit Binders and Tabs

You’d be surprised how many attorneys come to arbitration proceedings without bringing binders and tabs for the arbitrators to hold exhibits. It’s a mistake. Arbitrators appreciate the organized presentation of exhibits. Bring one for opposing counsel and a witness binder as well.

2. Discovery Binder

There are often discovery disputes during arbitration hearings. Make sure you have a binder with all of the document requests, document responses, motions to compel and their responses, orders by the Panel and indices of what documents have been produced by both sides.

3. Securities Arbitration Desk Reference

Professors Seth Lipner and Joe Long have put together an essential reference book which all attorneys should bring to the hearing. The Securities Arbitration Desk Reference has the arbitration statutes, SRO arbitration and conduct rules, the Blue Sky Laws, the Securities Acts and insightful commentary by two experienced securities arbitration professionals.

4. Federal Rules of Evidence

Along with the Reference by Professors Lipner and Long, attorneys should bring a copy of the Federal Rules of Evidence. One never knows how stringent a panel will follow the rules of evidence in a securities arbitration. It’s good to know you have the FRE with you.

5. Calendar

Unfortunately, large and complex securities arbitration hearings often take longer than the amount of days scheduled. Therefore, always remember to have your calendar with you to potentially schedule more hearing dates. Hopefully, tips one through four will help you avoid needing tip five.