FINRA Fines Credit Suisse Securities $1.75 Million for Regulation SHO Violations and Supervisory Failures

FINRA has fined Credit Suisse Securities (USA) LLC $1.75 million for violating Regulation SHO and failing to properly supervise short sales of securities and marking of sale orders. As a result of these violations, Credit Suisse entered millions of short sale orders without reasonable grounds to believe that the securities could be borrowed and delivered and mismarked thousands of sales orders. Reg SHO requires a broker or dealer to have reasonable grounds to believe that the security could be borrowed and available for delivery before accepting or effecting a short sale order. Requiring firms to obtain and document this "locate" information before the short sale is entered reduces the number of potential failures to deliver in equity securities. In addition, Reg SHO requires a broker or dealer to mark sales of equity securities as long or short.

Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, said, "Credit Suisse's Reg SHO supervisory and compliance monitoring system was seriously flawed. Millions of short sale orders were being entered in its systems without locates for over four years because the firm did not have adequate Reg SHO technology and procedures in place."

FINRA Fines Credit Suisse Securities $1.75 Million for Regulation SHO Violations and Supervisory Failures

FINRA Orders Chase to Reimburse Customers $1.9 Million

FINRA announced that it has ordered Chase to reimburse customers more than $1.9 million for losses incurred from recommending unsuitable sales of unit investment trusts (UITs) and floating rate loan funds. FINRA also fined Chase 1.7 million.

FINRA's investigation found that Chase brokers made recommendations to unsophisticated customers with little or no investment experience and conservative risk tolerances, without having reasonable grounds to believe that those products were suitable for the customers. FINRA also found that Chase failed to properly supervise its sales of UITs and floating rate loan funds.

Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, said, "With the growing number of complex products in the market today, it is incumbent upon firms to properly train and provide guidance to their brokers about the products that they sell and supervise the sales practices of their brokers. Chase allowed its brokers to sell risky UITs and floating-rate loan funds without providing them with the training, guidance and supervision necessary to determine whether these products were suitable for their customers, which resulted in losses for Chase's customers."

FINRA's also found that WaMu Investments, Inc., which merged with Chase in July 2009, made similar unsuitable recommendations to customers. FINRA found that like Chase, WaMu failed to provide adequate training and failed to reasonably supervise the sale of floating-rate loan funds to customers.

FINRA Orders Chase to Reimburse Customers $1.9 Million for Unsuitable Sales of UITs and Floating-Rate Loan Funds

Another 100 Uvest Brokers Headed Out the Door at LPL

LPL Financial LLC expects to lose 100 bank brokers this quarter due to the continuing integration of Uvest Financial Services Group Inc., its broker-dealer that specializes in serving financial advisers that work with financial institutions. That is on top of 22 Uvest brokers who left the firm in the third quarter, Robert Moore, chief financial officer of the broker-dealer's holding company, LPL Investment Holdings Inc., said in an interview according to InvestmentNews.com. More...

Small Broker-Dealers Closing At Fast Pace

Over 500 broker-dealers are expected to close in the coming year. That is not a good sign for the industry or for our collective financial health. If investors are limited to dealing with the banks for their investment and financial lives we will see more travesties like Lehman Principal Protection Notes, auction rate securities, CDOs and other "products" that allow the firms to take a position that is opposite what they are telling clients to do.

A large part of the problem, if not the entire problem, is over zealous regulation. While FINRA talks a good game, that message has not filtered down to the field, and there is far too much of a "gotcha" mentality. Its the regulations and overzealous enforcement that is going to put the firms out of business. I just wrote about this problem - FINRA Targeting Small Firms and Brokers?

FINRA needs to wake up. Smaller firms provide the advice, attention and real-deal financial counseling that individual clients need. Sure, there are some great financial advisers at the wire-houses - I represent tons of wire house reps all of whom care deeply for their clients - but the firms themselves are just poorly run machines with no regard for anything other than making a buck. Driving the small firms and brokers out of business with expensive and unnecessary compliance programs, coupled with outrageous fines and penalties for bookkeeping errors is harming our economy, not helping it.

Broker-dealer shrinkage: Closures rapidly outpacing new entrants

FINRA Fines Credit Suisse $4.5M; Merrill Lynch $3M - Financial Planning

The Financial Industry Regulatory Authority has hit Credit Suisse Securities LLC with a $4.5 million fine and Merrill Lynch with a $3 million fine for not properly representing data and supervising the residential subprime mortgage securitizations they sold.
The fines, which were announced by independent regulator FINRA on Thursday, were for improper handling that took place at the firms in 2006 and 2007. Each firm’s violation prevented certain investors from adequately understanding the nuances of residential subprime mortgage securities (RMBS), according to FINRA’s investigation.
RMBS are subject to certain disclosure rules when they are sold. Firms are required to provide investors with past delinquency rates for similar financial products. They are also required to tell investors how they calculated those delinquency rates.
Both Credit Suisse and Merrill Lynch failed to adequately follow those rules, according to FINRA.

Friday Q&A - Are EFLs and Promissory Notes Enforceable?

Friday Q & A – I recently left Bank of America after the ML merger, and they now want me to repay the bonus that I received. BofA killed my business, and ML actually made it worse? Do I have to repay the money? Will they settle or do I have to go to arbitration?

This is almost becoming a daily question in our office, and not only with Bank of America reps. The turmoil in the financial markets has cause turmoil for brokers and firms as well. Add to that the move to become independent, and/or starting your own RIA (finally!) and there is quite a bit going on in broker transition these days.

The short answer is that assuming you have the “standard” promissory note that the firms use you are probably going to have to repay the money. The promissory notes are unconditional promises to repay. In most cases, they are clear that if you do not work at the firm, or any reason, the note is due and payable.

However, that is not the end of the story. Many reps that leave firm have claims against the firm – after all, that is why they left. Those claims may constitute a counterclaim against the firm – for mismanagement, unilaterally changing the terms of your employment (like reducing payouts by 50%), a harassing manager, or even closing your branch. While the counterclaim does not void the note, and award in your favor on the counterclaim may offset, or eliminate, the amount owed on the note, and in some cases, an award on the counterclaim will exceed the amount of the note, resulting in a net payment to the broker, rather than the other way around.

Those cases are not the norm, but they do exist. And like most things legal, the counterclaim depends on the specific facts. I have represented brokers with great counterclaims, and those cases get resolved – that is why you do not see them in the arbitration award database. When the counterclaim is not as viable as it might be, we negotiate the note, enter into a new long term payment agreement, or otherwise settle the case. That sometimes takes some work, but at the end of the day the settlement is typically a better outcome than going to an arbitration and losing for the full amount.

The only way to have an idea of the viability of the claim is to have an experienced securities employment attorney review the facts – and of course your contract and note. Not all employee forgivable loan documents are the same.

And call me for a consultation before you leave your firm, not after. After all of these years it still amazes me how often brokers leave a firm, negotiate a new deal at a new firm, and wait until they are at the new firm to ask for a consultation. Do yourself a favor; call an attorney before you give notice, not after.

Questions? Email me at astarita@beamlaw.com or call my office at 212-509-6544. We represent brokers nationwide and have been doing so for 25 years. My CV is online at SECLaw.com

More Merrill Brokers Suing BofA over Deferred Compensation

The fallout from the turmoil created for employees as the investment banks failed in 2008 continues. Brokers, traders, salespersons and other employees are suing over compensation which was denied to them, as the investment banks attempted to balance their books. Chicago Business is reporting that four former Merrill Lynch brokers in Chicago are suing Merrill Lynch, now owned by Bank of America Corp., to pay about $3 million in deferred compensation. According to the article, Merrill Lynch is again withholding deferred compensation from employees who left the firm. The brokers claim that they resigned from Merrill after the Bank of America merger, that the change in control constituted "good cause" under their employment agreements, entitling them to their deferred compensation. More...

Merrill Brokers Win $1.167 ML Arb Award For Retained Comp

For those who believe that the wirehouses would not deny compensation to an employee simply to save money, this article from Registered Rep provides some telling information. According to the article, Merrill Lynch's employee policies provide that a broker who resigns for "Good Reason" is entitled to have his deferred compensation benefits vest at the time of his resignation.

According to the article, at the time of its merger with Bank of America, brokers were leaving, and Merrill canceled the deferred comp benefits, and simply refused to pay out any funds for a "Good Reason" resignation, something Merrill Lynch had agreed to in the compensation plans.

Why would Merrill Lynch unilaterally breach an agreement with its employees? We have represented brokers against a number of wirehouses in this sort of situation, and the firm always has an excuse. "Good Reason" doesn't really mean "Good Reason", or we were going to fire him, or his reason wasn't really good, or some technical defense that is obviously a ploy to avoid paying.

When the broker points out the obviously ploy, and claims that they denied benefits or compensation to a particular broker as a cost saving measure , the firm chuckles in a smug way, claiming that the firm is so big that an individual broker's compensation would have no effect on the bottom line, and such a claim was absurd.

Really. According to the article, the value of the stock and cash that Merrill refused to pay its departing brokers was significant - between $100 million and $300 million dollars. Sure, one broker didn't make a difference, but deny all of the departing brokers their compensation, and you are talking about a significant sum of money. The theory is, I suppose, deny all of them compensation, a few will sue, but all of them will not, and we will be ahead of the game even if we lose the arbitrations.

A FINRA arbitration panel just awarded two Merrill brokers over 1.1 million dollars for this conduct. Unfortunately, no interest and no attorneys fees were awarded so perhaps the theory of "let them sue" actually works. The Registered Rep article is here, the award is at FINRA's website.

Exodus of brokers still a threat for wirehouses

Exodus of brokers still a threat for wirehouses: Report - Investment News

Keeping Your Signing Bonus May Get Easier?

A recent article at a financial adviser publication ran this headline, without the question mark, reporting on a broker's win on a promissory note case as if it was a major breakthrough in the financial world. It's not.

Certainly the award against the broker of approximately $20,000 on a $142,000 note is a win, but the broker also had to pay $13,000 in forum fees, presumably because he filed a third party claim against two individuals (on which he did not receive any award).

Still, it is a win, but not unusual. I have been representing brokers on promissory note cases for years; decades even. The overwhelming majority of the cases settle, as there are just too many uncertainties in the litigation, and no one wants the risk of loss. I have had instances where my client's note was entirely forgiven, and awards where my clients paid back 20% to 50% of the outstanding balance - which in a case involving a note for over $1 million dollars is a significant win for the broker. In a recent case, the panel awarded my client his attorneys fees, despite the fact that it found for the firm on the promissory note.

The entire concept of structuring a signing bonus as a promissory note in order to keep the new hire at the firm for 5, or 7 or even 9 years is odd, but it certainly has become the standard in the brokerage industry. These  promissory notes have been carefully crafted by the firms to insure that brokers do not leave the firm until the note is completely forgiven, and to insure that the funds are repaid if the broker leaves before the term expires.

In most instances they are completely one-sided affairs - the broker promises to repay the note, and the firm promises nothing except to forgive a percentage of the note on each anniversary date. Firms do not make any representations or promises regarding anything that was said during the recruiting process, and in fact, some firms put language in the compensation agreement that attempts to remove all promises made during the recruiting process.

The promissory note is an unconditional promise to repay, but it does not necessarily stand alone. If the broker had an attorney involved when he was hired, he may have additional clauses in his hiring agreements that provide a defense to the note, or a counterclaim for breach or contract, or the covenant of good faith and fair dealing.

What is going to change these cases is the recent conduct of the wire houses. Firms have always been aggressive in enforcing the notes. Now they are aggressive in attempting to reduce costs by forcing brokers out of the firms, then trying to collect the note. In the last year or so I have seen payout reductions by 50%, removal of all support staff, mysterious re-calculations of payouts, forced changes in business models,  trumped up termination language and a host of other conduct designed to either fire the broker, or force him to leave.

That conduct is resulting in more claims for constructive discharge, as well as breach of contract and related claims, all of which are starting to come to hearing in the next few months.

I expect that we are going to see even more of these cases, where the firms lose on their promissory note claims, and wind up paying the brokers for breach of contract. Firms have been cost cutting off of the backs of brokers for far too long. The recent trend, of forcing a broker to quit, and then aggressively pursuing him for the outstanding promissory note, is going to come back to haunt the firms. The right way to handle a decline in business is to reach an accomodation with the employee, compensate him for the firm's desire to cut his position (or to take his accounts), release him from the promissory note, or some combination of those alternatives, and stop all of this nonsense with forcing brokers to quit, and then suing them because they quit.

If the firms don't act appropriately, you can be sure that arbitration panels will render an award to adjust for what should have been the proper course of conduct. Panels have been doing in in the past, and will continue to do so in the future.

 More>>>

Wells Fargo To Add 1,400 Advisors

Stories about Merrill adding trainees surfaced last week, now we learn that Wells Fargo Advisors is looking to add 1,400 financial advisors. A published report said that the advisors will be a combination of 1,000 recruits from other firms and 400 trainees. More>>>

Technorati Tags: broker transition, stock brokers

Raiding Case Costs Raymond James $12 Million

In a case involving 20 advisers in 4 branch offices, a securities arbitration panel has ordered Raymond James Associates Inc. to pay $12.1 million to Wells Fargo Advisors LLC for alleged raiding.

The award does not provide any detail of the case, but ordered 10,500,000 in compensatory damages, 1,500,000 in attorneys fees and costs. A copy of the award is available here.

The offices were, at the time, Wachovia offices, and according to published reports, Wachovia Securities allegedly lost $5.3 million in production from the departures of these advisors.  FA Magazine has more>>>

FINRA Fines Firm $300,000 For Failing to Verify Account Identity

For those readers who think that the requirement to verify the identity of account holders is not a big deal, think again. FINRA has fined Pinnacle Capital Markets $300,000 for failing to do exactly that.

The FINRA press release does not have any comments from the firm, but I suspect that because the accounts were sub-accounts, the firm may have believed that verification was not necessary. I am guessing of course, but the point is $300,000 is a pretty hefty fine for not obtaining proper account documentation. More>>>

More Private Placements Under Fire

FINRA has announced that it fined Pacific Cornerstone Capital Inc. and its former chief executive, Terry Roussel, a total of $750,000 for making misleading statements and, in some cases, omitting facts in connection with the sale of two private placements.

Private Placements are coming under increased scrutiny. These offerings, with limited registration and regulatory oversight have been the cornerstone of private capital raising for decades. In the past year or so the SEC and FINRA have been investigating numerous private placements  and bringing enforcement actions.

According to press reports Pacific Cornerstone sold two deals, Cornerstone Industrial Properties LLC and CIP Leveraged Fund Advisors LLC, from January 2004 to May 2009. FINRA also says that both offerings were affiliated businesses of Pacific Cornerstone and raised close to $50 million from about 950 investors.

Those investors are undoubtedly looking for securities attorneys to represent them in litigation over these deals, and other broker-dealers should be reminded that due diligence in Reg D offerings is not simply part of the deal, it is the part of the deal that may keep your firm out of the firing line when the business model does not work out as expected.

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Branch Managers Being Forced to Produce

There are hundreds of producing branch managers at the wirehouses, and over recent years, the wirehouses have been pushing their BOMs to drop production and concentrate on supervision. There is some appeal to using a non-producing manager, but the firms seemed to miss an important issue - compensation.

As firms pushed managers out of production there was a disconnect on the compensation side. After all, firms were asking managers to give up a business that many of them had spent years building.

There is of course nothing wrong with having producing managers. If you staff the branch properly, a BOM can service his own clients while running a branch. It happens all over the country all the time, without incident.

But the key is staffing the branch. The BOM needs an assistant, and an ops manager, and maybe a compliance officer. You simply cannot force a BOM to supervise a branch on his own, without proper support, regardless of his personal production.

But after years of forcing managers to drop their own clients, some of the wirehouses are putting managers back into production. Why? To save costs. The firms have figured out that a non-producing manager is an expense. Shocker.

According to Registered Rep Magazine, in an effort to cut costs, some brokerage firms such as UBS and Morgan Stanley Smith Barney are restructuring their branch office organization and changing the rules about which managers must generate production. 

Putting aside the turmoil that this creates for the managers ("no more production" and then "do more production") the move is a complete upheaval of the branch dynamics and creates a conflict between the BOM and the reps in his office.

Brokers like having a non-producing manager because it removes a number of conflicts. Putting non-producing managers into production creates those conflicts, and will undoubtedly increase costs in the long run, as staffing needs to be increased, and brokers feel the effects of the newly created conflicts.

Check out the full article at Registered Rep.

Schwab Receives Wells Notice For Mutual Funds

In an 8-K filed today, Charles Schwab Corp. disclosed that it has received a Wells Notice from the SEC. Accordign to the filing, the Company has been responding to civil litigation claims and regulatory investigations regarding two fixed income mutual funds, the Schwab YieldPlus Fund(R) and the Schwab Total Bond Market Fund(TM). The Wells Notice reflects that the SEC staff intends to recommend the filing of a civil enforcement action against Schwab Investments, Charles Schwab Investment Management, Charles Schwab & Co., Inc. and the president of the funds for possible violations of the securities laws with respect to the two funds.

A Wells Notice is a device used by the SEC to advise a prospective defendant that the Staff is going to make a recommendation to the Commission to commence proceeding. The notice is designed to provide the prospective defendant with the opportunity to inform the Commission as to why an action should not be commenced. The notice is simply that; a notice. It is not a finding of wrongful conduct.

The use of a Wells Notice is something of a unique procedure, and one that is sometimes beneficial to a prospective defendant.  I have represented numerous parties in SEC and FINRA investigations over the years, and wrote a column, "The Wells Notice in SEC and NASD Investigations" for those who are interested in learning more about the process. provides additional information. The column is at SECLaw.com, at http://www.seclaw.com/docs/wellsnotice.htm.

Schwab's 8-K reflects that the company intends to respond to the Wells Notice. More>>>

Trouble Brewing for Small Broker-Dealers?

Trouble Brewing for Small Firms?

Having spent the last 25 years representing small and mid-sized brokerage firms, I completely understand the issues facing these firms. It always seems that FINRA and the SEC fail to pay attention to the ramifications of their rules and regulations on the smaller firms when new regulations are considered.

Those concerns are coming to the forefront again, as the latest economic crisis generates calls for additional rules and regulatory overhaul. SIFMA has taken notice, and is speaking out.

E. John Moloney, the chairman of SIFMA’s small firms committee provided written testimony to the House Committee on Small Business this week, and spoke to On Wall Street magazine afterwards. Moloney, who is the president and chief executive officer of Moloney Securities Co., said that Congress and regulators need to be mindful of unintended consequences in their zeal for regulatory reform.

There are any number of proposals that could negatively impact the small broker-dealer, and Moloney hit a few. He addressed the issue of pre-dispute arbitration agreements, which the NASAA has suddenly decided is a terrible way to resolve disputes. (See my post on their latest position on the topic here). Moloney’s point is that before the use of such agreements are prohibited; the entire process must be examined. As I noted in my discussion, arbitration is often the best way to protect the consumer, as it is not only faster than a traditional court proceeding, it is less expensive.

Today aggrieved investors with smaller claims are able to retain attorneys to represent them, precisely because of the lower cost of arbitration. If pre-dispute arbitration agreements are banned, not only will consumers be able to opt-out of arbitration, brokers and firms will be able to do so as well. The end result: consumers who cannot afford to prosecute their claims in court will have no recourse at all, and “would likely result in a complete denial of justice for individuals with smaller claims” in Moloney’s words.

On Wall Street’s story contains more detail regarding the issue and SIFMA’s concerns, and is available here.

Stifel to sell 1.2 million shares in offering

Stifel Financial Corp. said Wednesday it plans to launch a public offering of 1.2 million shares of common stock. According to a regulatory filing, the company plans to use the proceeds from the offering for general corporate purposes. The company will have 29.8 million shares outstanding after the offering. More>>>