Report Will Criticize SEC Over Madoff Failures

The Inspector General of the Securities and Exchange Commission is expected to deliver a stinging report today on the agency’s failure to prevent or detect Bernard Madoff’s $65 billion Ponzi scheme. More>>>

USDJ Rakoff Rejects SEC-BofA Settlement.

Judge Rakoff wants the explanation behind why a Bank of America proxy statement last November misled investors about bonuses for employees at Merrill Lynch, which was about to be acquired by the bank. On Tuesday, he stated another desire: to get the SEC to better explain why had agreed to a settlement without pressing the bank’s executives harder. The judge is also questioning how anyone can judge the merit of a reliance on the advice of counsel defense, when the defendant has not waived the attorney-client privilege.

This is obviously a tough decision for the SEC, and is starting to suggest an apparent willingness on the part of the Commission to let a big player off the hook for serious violations with the payment of a significant sum of money. As we have said in the past, if this wasn't Bank of America, and instead was a small or regional firm, not only would the SEC be looking to put them out of business, prosecutors would be filing criminal charges. More>>>

Lehman Principal Protected Note Arbitrations

Spurred by an enforcement proceeding by the State of New Hampshire and a class action complaint filed against Lehman Brothers executives, retail investors are retaining attorneys to attempt to recover their investment losses in Lehman Brothers. This article from SECLaw.com examines the potential for these cases, and the defense of same.  More>>>

Obama to Nominate Bernanke For Second Term

President Obama on Tuesday will nominate Ben S. Bernanke to a second term as chairman of the Federal Reserve, administration officials said. More>>>

SEC and BofA Try to Convince Judge to Approve Settlement

Bank of America Corp (BAC.N) and the top U.S. securities regulator sought to persuade a judge to approve their $33 million settlement of a civil lawsuit over the lack of disclosure of billions of dollars of bonuses at Merrill Lynch & Co.
The SEC says that BofA misled shareholders by not telling them that it was going to pay Merrill employeees $3.6 billion dollars in bonuses, Bank of America claims that it was clear from the public disclosures that the bonuses would be paid. Both side contend that the settlement, where Bank of America is going to pay $33 million to settle the charges, is a fair settlement.

Judge Rakoff has not yet approved the settlement.
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Madoff Losses May Be Covered Under Homeowner’s Policies

Madoff investors who believe they are without any remedy to recover their losses should look to their homeowner’s insurance to determine if they are covered by the Madoff fraud.

Some homeowner’s policies contain a provision which covers the homeowner from loss of money, securities or properties that results from fraud, typically defined as an intentional act by someone other than the homeowner designed to induce the homeowner to part with something of value.

At least one suit has been brought under such a policy against AIG in California. As investors check their own policies, more suits may follow.

For more information contact us at 212-509-6544 or 973-559-5566.

AIG New CEO's $7 Million Salary

American International Group, the insurer that received billions of dollars in a U.S. bailout, said on Monday that it will pay newly-appointed Chief Executive Robert Benmosche an annual salary of $7 million.

AIG says that the Obama Administration's Pay Czar approved the salary.

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SEC Proposes Alternative Uptick Rule - Extends Comment Period

The Securities and Exchange Commission today announced that it is seeking public comment on an alternative approach to short selling price test restrictions that may be more effective and easier to implement than previously proposed price test restrictions currently under consideration.

The alternative uptick rule would allow short selling only at an increment above the national best bid. As a result, the Commission has determined to reopen the comment period for 30 days in order to receive input specifically on this alternative.

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NY Sues Schwab Over ARS Sales

New York Attorney General Andrew Cuomo filed a lawsuit today against The Charles Schwab Corp., claiming the brokerage firm misled customers about the safety of auction rate securities — and the firm is digging in for a fight.

“The [attorney general’s] lawsuit casts blame for a bad situation in the wrong direction. Clients who purchased these products, and companies like Schwab that filled client orders, were misled by the major Wall Street underwriters who concealed the degree to which the auction rate securities market was so dependent on their support, Schwab spokeswoman Sarah Bulgatz wrote in an e-mail.

On its face, this appears to be over-reaching by the AG. There is a flow to these cases, and the early cases were relatively easy for the regulators. Get some customers together, tell their story, use the firm's documents, and soon enough you have a good case for misleading sales material or failing to disclose risks to investors.

Assuming that to be the case, those claims work with a firm that actually made representations or recommendations. Unless there is something odd about this case, it is difficult to see Schwab's liability here. Schwab claims that did not underwrite any of these securities, and did not market them.

So why is the NYAG going after Schwab? Well, it has a different set of allegations, and according to the press release, the AG is alleging that firm falsely represented auction rate securities as liquid, short-term investments without discussing the risks. These representations gave investors a false sense of security that their investments would always be liquid when auction rate securities, in fact, faced significant, inherent liquidity risks.

The press release also alleges that there are tape recordings of telephone calls where Schwab brokers make such statements and recommendations.

It will be an interesting battle, made more so by the fact that another discount broker, TD Waterhouse, settled similar allegations.

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FINRA Admits Getting Tipped Regarding Stanford

FINRA acknowledged today that  it received a tip from an employee in 2003 that the company was running a Ponzi scheme—but did not follow up. The reason for the lack of follow up is, according to testimony that Dan Sibears of FINRA will present today, is supposedly because FINRA policy is to only follow up on complaints from customers, not employees.

Sibears says that the policy was changed in March of this year.

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Krawcheck Buys $1 Million of BofA Stock

A new executive officer buying stock in her company is not terribly unusual. It is often a sign of good faith, and an expression of confidence in her abilities to lead a team forward. What is somewhat unusual is when she buys a million dollars of the stock, which is exactly what Sallie Krawcheck, the new head of Bank of America's wealth management business did this week. More>>>

Bank Of America Drops Arbitration Agreements

The dispute over pre-dispute arbitration agreements between consumers and corporations continues, but the credit card issuers took a significant body blow last month when revelations were made about the National Arbitration Forum's involvement in the process.

Yesterday Bank of America announced that it is dropping a requirement that forces consumers with disputes on credit cards and other accounts into an arbitration process, which critics say favors card issuers.

The new policy applies to credit card, auto, marine and recreational vehicle loans, as well as deposit accounts, and means unhappy consumers will be able to file lawsuits against the bank to address perceived unfair or illegal activity.

No mention was made of the agreements in its retail brokerage customer accounts. More>>>

SEC Says It Will Not Re-File Against Mark Cuban

The SEC hold a federal judge yesterday that it will not be re-filing its complaint for insider trading against Mark Cuban. The complaint was dismissed earlier, and the SEC had 30 days to refile.

While this is great news for Mr. Cuban, the party doesn't start until another 30 days passes and we find out if the SEC decides to appeal the dismissal.

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Brokers Leaving Wirehouses, Going Independent

According to this article, in July, only 28% of the 990 wirehouse representatives who left their firms relocated to other wirehouses. The other 72% relocated to independent broker-dealers, regional and institutional firms has been on the rise.
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Is Merrill Schizophrenic?

Less than a year ago Merrill Lynch was chasing its brokers out the door with a transition bonus that was so low it was insulting for anyone producing less than a million dollars a year. Readers will recall that many Merrill Lynch brokers were faced with the choice of remaining at Merrill and taking something less than one times trailing 12 to stay, or leaving Merrill and taking something more than two times trailing 12 to leave.  I discussed the problems with the retention in the post Merrill's Retention Bonuses Come In Low.

It was not a difficult choice for many brokers, and they left. Undoubtedly, Merrill structured the retention bonus to entice the small producers to leave, as it seems that firms have decided that anyone producing less than $750,000 is not worth the trouble keeping.

But that was October, 2008. This is August 2009 and now Merrill has decided it wants small producers. While it may be caused by a sanity introduced by Sallie Krawcheck, it sure has a psychotic look to it. A complete about face in less than a year.

So, Merrill is rolling out the welcome mat for brokers of all production levels, according to InvestmentNews.com in its article, The New Merrill Mantra: We Want Broker, Brokers, Brokers.

Time to change firms and join Mother Merrill? We will analyze the package in another post but for anyone considering moving. Please have an attorney negotiate and review the compensation package. Those agreement are negotiable, and you can take some steps to protect yourself should your schizophrenic employer decide that it no longer wants to employ you down the road.

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The Final Days of Merrill Lynch

The Atlantic explores what happened behind the scenes in the final days of Merrill Lynch, when the Wal-Mart of banking took over the former Wall Street powerhouse. A great read.

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Rakoff Wants More Information on SEC-BofA Settlement

Southern District of New York Judge Jed S. Rakoff took strong exception Monday to a proposed settlement in which the Bank of America would pay a $33 million fine for not disclosing that Merrill Lynch was authorized to pay more than $5 billion in discretionary bonuses before the two entities merged in 2008.

According to Law.com, Rakoff told the parties that he had "serious misgivings" about a settlement that "lacked in transparency." The judge repeatedly expressed concern that money the Bank of America received from the government through TARP was used, "as a practical matter," to pay the bonuses and noted that the proposed $33 million fine was "a tiny, tiny fraction" of the billions of dollars the two banks paid out in bonuses in 2008. More>>>

FINRA Fines Credit Suisse For Settlement Violations

What happens when a major brokerage firm violates its settlement agreement with FINRA? Well, it pays another fine. No one is barred or suspended, the firm pays some more money to FINRA, and everyone is happy.

Readers will recall the historic settlement reached in April 2003 with 10 major investment firms and every securities regulator over the research issue. The fines were huge - $1.4 billion combined. There were also other provisions, including a provision to make research available to their investors.

Well, it seems that Credit Suisse may not have lived up to that part of the deal. FINRA announced today that it had fined Credit Suisse $275,000 for failing to fully comply with the part of the settlement that required it to make independent research available to their customers.

The FINRA press release is at finra.org and it confirms that not only was the violation a failure to compy with "one of the key terms of the 2003 Global Research Analyst Settlement" but that no individuals at Credit Suisse were sanctioned in any way.

According to the FINRA press release, beginning in 2004, Credit Suisse failed "on a number of occasions" to post all of the required and current independent research to its Web site. The firm posted independent research for companies not covered by Credit Suisse and was allegedly delayed in providing independent research "in a timely manner after offerings." 

It gets worse. FINRA also claims that after the firm discovered these problems, the firm "failed to implement effective measures to detect and prevent additional failures."

A brokerage firm enters into a historic settlement caused by its alleged failings with its research, it then fails to live up to a key provision of the settlement agreement, and once it learns of the failure, it fails to take sufficient steps to correct the failure. FINRA's response is a $275,000 fine against the firm.

I don't know anything about the settlement or the underlying facts, but I do know that individuals at small and mid-sized brokerage firms have been suspended for significant periods of time for less. There are often good reasons not to sanction an individual at the firm, but far too often FINRA takes the position that a violation is "too serious" for the firm to take the hit, an individual must be held responsible.

Apparently that is not so, since it is tough to imagine a more serious violation than the failure to abide by the terms of an agreement that settled a significant enforcement action.

So, the next time FINRA tells you that "someone must take responsibility" for this violation, remind them of Credit Suisse......and the dozens of other settlements where no individual was sanctioned.

Madoff CFO To Plead Guilty To Criminal Charges

Frank DiPascali, self-proclaimed chief financial officer at Bernard Madoff’s investment advisory business, will be charged by the U.S. in connection with the multibillion-dollar Ponzi scheme. The announcement came Friday afternoon from the U.S. attorney’s office in Manhattan.

DiPascali has been under investigation by federal prosecutors since Madoff was arrested Dec. 11 of last year. The government’s notice, signed two days ago, said that DiPascali will waive the right to an indictment. More>>>

Changes at the SEC. Benefit to Advisers?

When President Obama appointed FINRA chief Mary Schapiro as the new Chairman of the Securities and Exchange Commission, the nation was promised an overhaul of the agency and of securities regulation in general. Given the turmoil created by the financial meltdown and the Bernard Madoff mess, we are seeing those changes happen very quickly.

Indeed, we are seeing new rules and proposals, including the re-introduction of short-selling restrictions, increasing calls for registration of investment advisors and more tinkering with rules regarding the operation of public companies. At the same time, there is a renewed effort to toughen the enforcement of existing rules and regulations.

The real question for you is: How will these changes affect individual advisors? More>>>

Citi's Krawcheck to Head BofA's Wealth Management Group.

Former top Citigroup executive Sallie Krawcheck is joining Bank of America Corp. as head of its global wealth and investment management group, according to a statement from the Charlotte, N.C.-based company. She replaces Brian Moynihan, who was named to a new position as the head of consumer banking.

Ms. Krawcheck — who was reportedly being considered to take over the top spot at UBS AG's U.S.-based wealth management business — was most recently in charge of the wealth management business at Citigroup Inc. of New York.

Financial Advisers Change Their Business Approach

There are some interesting, but not surprising, survey results at InvesmentNews.com. A recent industry survey of financial advisers reflects a clear change in the way they do business.

InvestmentNews.com's summary of the survey is at its website, in an article titled "Downturn has changed the way most advisers do business, survey indicates".

Fifty-seven percent of advisers indicated that the crisis had had a “large impact” on their business. A full 60% said they had met or spoken more frequently with clients to help them manage their investments, and 46% of advisers were recommending different products than they had previously. These products were generally more conservative, the survey found. More>>>

An attorney was was suspended for 18 months, stayed, placed on two years of probation with a 45-day actual suspension and was ordered to take the MPRE within one year after it was found that not only did he fail to disclose that he was an attorney during jury selection, once he was selected for the jury he posted comments about the trial on his blog during the trial, including identification of the judge, and the criminal defendant (by his first name only).

The criminal defendant's conviction was overturned after this conduct came to light. More>>>

UBS Retail Product's Executive Takes Leave

Michael Weisberg, the head of products and services for UBS AG's U.S. and Canadian wealth management businesses, has taken an indefinite leave of absence, according to an article in todays electronic version of Investment News.

According to the site, Weisberg's departure was announced internally this week, as rumors swirled that the firm's U.S. brokerage business was likely to be reorganized. More>>>

Morgan Keegan Appeals Arbitration Decisions

Morgan Keegan, a regional brokerage owned by Birmingham-based Regions Financial Corp. (RF), has faced a flood of claims by investors who were hit by sizable losses in 2007 and 2008 in seven funds that made bets in debt and other mortgage-related holdings.

Morgan Keegan has filed motions to vacate a number of the arbitration awards against it, although such awards are typically very difficult to vacate on appeal.

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Bank of America Fined $33 Million In Fines For Merrill Disclosure

Bank of America agreed to pay $33 million on Monday to settle federal charges that it hid from investors plans to pay billions of dollars in bonuses to employees of Merrill Lynch.The SEC accused the firm of misleading shareholders when the bank asked them to approve the deal, which was ultimately concluded under intense federal pressure as Merrill Lynch teetered on the verge of collapse. The SEC's press release announcing the charges is available at SEC Charges Bank of America for Failing to Disclose Merrill Lynch Bonus Payments, and a copy of the underlying complaint is available at SECLaw.com. More>>>

New Plan to Register Investment Advisers

The Obama Administration is proposing legislation that will remove the exemptions from registration enjoyed by managers of private investment partnerships and hedge funds. The legislation will require the registration of virtually all investment advisors who operate from the United States, or who provide services to United States citizens, and who manage over $25 million in assets. More details and commentary are at SECLaw.com - New Plan to Register Investment Advisers.

Investor's Guide to Securities Industry Disputes

The Pace Law School Investor Rights Clinic, has just published the Investor’s Guide to Securities Industry Disputes: How to Prevent and Resolve Disputes with Your Broker.  The Guide, authored by Professor Jill Gross, the Director of the school's Investor Rights Clinic, and Clinic Staff Attorney Alice Oshins, is designed to help individual investors with modest investment accounts. The Guide is designed to prevent disputes, to help investors learn their obligations as investors, to assert their rights as investors, and pursue a securities arbitration or mediation claim if needed to resolve any disputes that do arise.  

While designed for investors, a quick read wouldn't hurt the retail broker either.

Rise in Broker Employment Disputes Noted

As FINRA announces the significant increase in arbitration filings this year over last, many have assumed that the increase is caused by customers filing complaints against their brokers. That may not be the case.

Our law firm is seeing a marked increase in complaints by brokers over the termination of their employment at some of the major investment banks. We have confirmed with FINRA that the arbitration filing numbers include claims between brokers and firms. We have also confirmed that while FINRA breaks down its statistics for types of customer claims, in its total statistics it does not distinguish between customer cases and broker vs. firm cases.

The rise in cases filed in 2009 (which has now passed 4,000) may not be an indication of a significant increase in brokers accused of wrongful conduct, but rather an rise in disputes between brokers and firms as pressure mounts on firms to increase productivity and decrease costs.

Given the fact that we have witnessed a marked increase in inquiries from brokers at most of the major wirehouses over employment issues, the rise in arbitration claims may very well be in the broker-firm category of cases.