New York Securities Lawyer BlogMichael Farah, a broker formerly associated with the investment firm Wedbush Securities, Inc. (“Wedbush”) won a $4.2 million Financial Industry Regulatory Authority (“FINRA”) arbitration award against the firm regarding Farah’s former sale of risky collateralized mortgage obligations. According the arbitration award, in his Statement of Claim filed in 2005, Farah alleged that “Wedbush made misrepresentations and omitted material facts in connection with the collateralized-mortgage-obligations [“CMO”] investments that he recommended to his clients, causing Farah to lose clients and annual income.” Thereafter, in 2012, Farah amended his claim to include allegations that Wedbush failed to indemnify him in various customer arbitrations raised against the broker-dealer relating to the sale of the CMO investments. In response, Wedbush filed Counter-Claims against Farah alleging the following claims: express indemnification, implied equitable indemnification, interference with contractual relations, interference with prospective economic advantage, intentional misrepresentation, negligent misrepresentation and breach of contract, which all “relate to losses [Wedbush] allegedly suffered as a result of multiple arbitration proceedings arising out of the CMO investments recommended by Farah.” After 15 hearing sessions, the FINRA arbitration panel awarded Farah $1.3 million for loss of income. Further, the arbitration panel found that Wedbush was responsible to pay Farah $1.4 million in punitive damages, $1.47 million for attorneys’ fees, $18,500 for expert witness fees, $21,074 for Farah’s court reporter fees, and $600 for the claim filing fee. The FINRA arbitration panel denied Wedbush’s counter-claims.
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Lawsuits Against UBS in Puerto Rico for Investor Losses in Risky, Highly Leveraged Closed-End Bond Funds
UBS is once again in the midst of legal troubles for the sale and marketing of highly leveraged, risky closed-end bond funds that were heavily invested in Puerto Rican municipal debt, such as the Tax Free Puerto Rico Fund II. According to media reports and lawsuits filed against UBS by investors in Puerto Rico, these closed-end bond funds had a leverage ratio of approximately 50%, which means that for every dollar of customer assets the fund holds, it has approximately another dollar of assets bought with borrowed money. UBS manages other Puerto Rican funds that are similarly leveraged. By way of comparison, an average leverage ratio on funds similar to UBS’s in the U.S. is approximately only 20%. To make matters worse, UBS encouraged clients to borrow money on margin to invest in those funds. According to UBS’s own brokers, UBS lent money to its customers improperly by encouraging them to borrow on credit lines, which caused more investor losses. UBS brokers were incentivized to do so as they received commissions for securities bought on the credit line, and then received more compensation if the customer used the credit line. Most brokerage firms require customers who open a credit line to sign a document that they will not use the credit line to buy securities. According to reports, UBS clients did not sign such documents, in violation of UBS’s policies and procedures. The value of these risky highly leveraged closed-end bond funds managed by UBS have declined in value by approximately 50% or more, resulting in losses to investors. UBS’s clients have been forced to liquidate hundreds of millions of dollars in holdings in the bond funds to meet margin calls. The erosion in government-bond prices in Puerto Rico has also sparked a liquidity problem in shares of these funds.
SEC Files Complaint Against Tibor Klein And Michael Shechtman For Insider Trading
On September 20, 2013, the Securities and Exchange Commission (“SEC”) filed a Complaint in the United States District Court for the Southern District of Florida against registered representative, Tibor Klein, and former registered representative, Michael Shechtman, which alleged that Klein and Shechtman (collectively referred to as “Defendants”) engaged in insider trading of King Pharmaceuticals, Inc. (“King”) securities prior to an October 2010 tender offer announcement. The Complaint alleges that Klein, an investment adviser and owner of Klein Financial Services, learned of nonpublic material information regarding Pfizer’s acquisition of King from his friend who was an attorney representing King. The SEC claims that Klein misappropriated that information and purchased securities in King for himself, and at least 40 of his clients, before the insider information went public. The Complaint also alleges that Klein provided the inside information to Shechtman, a former broker who used to be affiliated with Ameriprise Financial Services, Inc., who also used the information to purchase King securities for himself and his wife. Further, it is alleged that after the information regarding Pfizer’s acquisition of King was made public, Klein sold his and his clients’ King securities which earned Klein a profit of $8,824, and generated profits in his clients’ accounts in the amount of $319,550. Similarly, the Complaint alleges that after the information became public, Shechtman sold his and his wife’s King securities for a profit of $109,040. The Complaint alleges that the Defendants violated Section 10(b) and 14(e) of the Exchange Act, and seeks disgorgement of ill-gotten gains, financial penalties and a permanent injunction enjoining Defendants from future violations of federal securities laws.
Financial Industry Set To Lose High Number Of Investment Advisers In Coming Years
According to a recent report generated by Cerulli Associates Inc. (“Cerulli”), the number of financial advisers and brokers in the financial sector will drastically diminish by 2017 as a result of the security industry’s inability to attract new advisers, while large numbers of aging advisers retire. It is reported that by 2017, the industry will lose approximately 25,000 advisers, mostly from wire-houses, independent broker-dealers and banks, due to retirement as nearly 10% of advisers are over the age of 65. In light of the forecasted large number of retirements, the financial industry must focus on accumulating new advisers. Sean Daly, an analyst at Cerulli, stated to the media that many investment firms are attempting to improve and strengthen training programs and provide various incentives to new advisers, including offering scholarships to Certified Financial Planning programs and providing incentives for teams to add new recruits. It will be interesting to see how firms decide to incentivize new advisers and whether investment firms will begin to target various college for recruits.
Federal Judge Denies Merrill Lynch/Bank Of America’s Motion To Compel Arbitration Of Overtime Compensation Class Action Case
On Wednesday, September 11, 2013, Judge Harold Baer, of the United States District Court For The Southern District Of New York, denied Merrill Lynch & Co., Inc., Merrill Lynch, Pierce, Fenner & Smith, Inc., and Bank Of America Corp.’s (“Defendants”) motion to compel arbitration of overtime compensation claims. According to Judge Baer’s Opinion and Order, Roman Zelster and Anna Tyutyunik (“Plaintiffs”), former Financial Solutions Advisors (“FSAs”), filed a class action complaint on behalf of themselves and all others similarly situated, which alleges that Defendants violated the Fair Labor Standards Act (“FLSA”) and the New York Labor Law (“NYLL”) by refusing to pay FSAs overtime compensation. In response to the filing of the class action complaint, Defendants filed a motion to compel arbitration. The Defendants did not dispute that their employment agreement with Plaintiffs was governed by various FINRA Rules, which prohibit the enforcement of arbitration agreements against members of a proposed putative or collective class action until class certification is denied, and against class actions until members of the class are excluded from the class by the court or opt out of the class. Despite the FINRA rules, Defendants argued that FINRA’s rules were preempted by the Federal Arbitration Act (“FAA”). The Court noted that “[a]lthough recent opinions from the Supreme Court and this Circuit address arbitration in the context of FLSA claims and express a favorable view towards modality, none of these opinions touch on whether arbitration should be compelled for class and collective actions where FINRA rules bind the parties . . . Neither the Supreme Court nor the Second Circuit has held that FINRA is preempted by the FAA in a fact pattern such as the one before me here.” See Opinion and Order, Index. No. 13-cv-1531(HB), Document No. 44, pg. 4. As a result, the Court followed the language of the FINRA Rules and denied Defendants’ motion to compel arbitration at this point in the litigation.
Morgan Stanley Sued By Internal Auditor In Whistleblower Case
On September 11, 2013, Saeed Ahmad, who claims to be a credit audit specialist in the Internal Audit Department, filed a whistleblower claim against Morgan Stanley & Co., Inc. (“Morgan Stanley”) alleging that Morgan Stanley retaliated against him after he repeatedly reported to superiors that Morgan Stanley was taking too much risk in providing certain credit facilities worth at least $68 billion since November 2006. See Saeed Ahmad vs. Morgan Stanley & Co., Inc., Index No. 13-cv-6394 (S.D.N.Y.). Ahmad alleges that for numerous years, he voiced concerns over these loans, which ultimately resulted in billions in losses to Morgan Stanley between 2007 and 2009. Further Ahmad claims that Morgan Stanley lied to its outside auditors, Deloitte & Touche, LLP, by misrepresenting the adequacy of the firm’s risk controls. Ahmad also alleges that in order to fulfill his duties as an auditor, he reported his beliefs to his superiors, and in response was bullied and harassed which made him unable to continue working. According to Ahmad’s complaint, after voicing his concerns to senior Morgan Stanley officials, he experienced so much stress and illness that he missed work for an entire week, which pursuant to Morgan Stanley policy, placed Ahmad on Short-Term Disability. Then, after six months of Short-Term Disability, he was placed on Long-Term Disability, which ultimately resulted in a loss of his 401(k) contributions and ultimately in an alleged loss of compensation. The complaint alleges that Morgan Stanley violated the Securities Exchange Act of 1934, Rule 10b-5, when it misrepresented the adequacy of its risk control to outside auditors. Further, the complaint alleged that Morgan Stanley violated 15 U.S.C. §78u-6(h)(1): Dodd-Frank Securities Whistleblower Incentives and Protection – Prohibition Against Retaliation. As a result of his Whistleblower allegations, Ahmad requested the following relief: (1) reinstatement with the same seniority status [Ahmad] would have had but for the discrimination; (2) two times the amount of back-pay owed, with interest; (3) compensation for litigation costs, expert witness fees, and reasonable attorneys’ fees. Further, Ahmad requested compensatory damages, punitive damages, attorneys’ fees, and costs for his emotional distress. In response, Morgan Stanley will need to either file an answer or motion to dismiss shortly.
FINRA Approves Proposed Rule Change Requiring Broker Disclosure Of Incentive Compensation
On Thursday, September 19, 2013, the Financial Industry Regulatory Authority, Inc. (“FINRA”) Board held a meeting during which it considered whether brokers and associated persons should disclose recruiting incentives and bonuses to their clients. After Thursday’s FINRA meeting, FINRA approved the proposal which will require recruiting compensation of $100,000 or more to be disclosed to any customer who followed the broker to the new firm within one year of the transition, and also would have to disclose future compensation based on performance. Furthermore, FINRA member firms will have to disclose to customers compensation paid to new recruits over $100,000, as well as report to FINRA any increase to the recruits compensation during the first year if the increase amounts to a 25% or $100,000 increase, whichever is higher. Originally, the FINRA proposal requires brokers to disclose recruitment compensation packages that are greater than $50,000, including, but not limited to, signing bonuses, upfront and back-end bonuses, loans, accelerated payouts, transition assistance, to any client they solicited for one year following their transition to their new firm. FINRA’s Chief Executive, Richard G. Ketchum, reported that the rule is meant to present potential conflicts of interest to customers. Indeed, Ketchum made the following statement to the media, “We believe investors should be informed of conflicts involving recruitment packages when they make the important decision to move an account, especially when the decision to move means having to sell off proprietary products and taking a possible tax hit. When a broker moves to a new firm and calls a customer and says ‘You should move your account with me because it will be good for you,’ the customer needs to know all of the broker’s motivations for moving.” After it proposed this change in July 2013, FINRA received over 65 comments letters. Many investment firms, including Morgan Stanley Wealth Management, are proponents of the change and believe it will help protect customers. On the other hand, opponents believe broker-dealers and investment firms are behind the proposed change since they know the change will diminish adviser transitions.
Merrill Lynch Settles Class Action Lawsuit For $2.775 Million Regarding Failure To Pay Commission Claims In A Timely Manner
On August 29, 2013, the Honorable Claudia Wilken of the District Court for the Eastern District of New York ordered and approved an amended class action settlement regarding claims raised by a class of former employees claiming that Bank of America/Merrill Lynch (“Merrill Lynch”) failed to remit their last commission wages during the statutory period. The class action was brought by John LaBriola, on behalf of himself and all other financial advisors similarly situated, who quit or were terminated from employment with Merrill Lynch and were not paid their final commission wages within the period allotted under California Labor Code Sections 201(a) or 202(a). Specifically, the class action complaint alleged that Merrill Lynch “had and continue[s] to have an illegal policy of failing to pay financial advisors the final commissions due to them until the ‘regular commission pay date,’ even if that date was days or weeks after the employee’s last date of employment, or even waiting another month or longer after the next regular commission pay date, all of which are well beyond the statutory permitted period. This policy is in violation of the California Labor Code §§ 201 and 202.” Pursuant to the most recently approved Notice of Proposed Class Action (“Class Notice”), the District Court Judge approved a settlement for $2.775 million. The Class Notice will be mailed to class members within 21 calendar days after entry of the Court’s Amended Order Granting Preliminary Approval. The class member must opt out of the class within 45 calendar days after mailing of the Class Notice. This settlement agreement requires class members to opt-out of the class if they decide they do not want to be bound by the class action settlement agreement and judgment.
Bank of America Settles Bank Of America/Merrill Lynch Gender Discrimination Class Action Lawsuit For $39 Million
On Friday, September 6, 2013, Class Action Plaintiffs filed a motion to approve a settlement agreement with Bank of American/Merrill Lynch regarding gender discrimination claims. Initially, Judy Calibuso, Julie Moss and Dianne Goedtel, on behalf of themselves and all others similarly situated, filed a gender discrimination Class Action Complaint in the United States District Court For The Eastern District Of New York against Bank Of America Corporation (“Bank of America”), Merrill Lynch & Co., Inc., and Merrill Lynch, Pierce, Fenner & Smith, Inc. (collectively “Merrill Lynch”). The Complaint alleged that Bank of America and Merrill Lynch, through various policies and procedures caused “gender-based earnings disparities by intentionally (a) implementing company-wide policies and practices that have allowed and encouraged [Bank of America] and [Merrill Lynch] managers to favor male [financial advisors] over female [financial advisors] in distributing client accounts from departing or retiring [financial advisors]; and (b) implementing company-wide policies and practices that have created a ‘cumulative advantage’ effect by perpetuating and widening the gender-based earnings disparities that Defendants’ discriminatory policies and procedures have caused.” It is reported that the settlement, which requires approval from the District Court Judge, would cover approximately 4,800 women who worked at Bank of America/Merrill Lynch from August 2, 2007 through September 15, 2013. Additionally, the settlement will not only distribute a reported $39 million in cash to the female employees, but will also require Bank of America/Merrill Lynch to change various firm policies. Bill Halldin, a Merrill Lynch spokesperson, made the following statement to the media, “[t]he resolution includes a number of additional and enhanced initiatives that will enrich our existing diversity, inclusion and development programs, providing even more opportunities for women to succeed as financial advisors.”
SEC Files Complaint Against Ronald Feldstein, Mara Capital And Vita Health For Fraud Regarding A Free-Riding Scam
On September 3, 2013, the Securities and Exchange Commission (“SEC”) filed a complaint in the United States District Court for the Southern District of New York which alleged that Ronald Feldstein, Mara Capital Management LLC (“Mara Capital”) and Vita Health of America LLC (“Vita Health”) defrauded three unnamed brokerage firms of $2 million and defrauded customers of $450,000. According to the SEC Complaint, Feldstein pretended to be a money manager and opened accounts at three different broker-dealers in the name of two purported investment funds named Mara Capital and Vita Health. The complaint further alleges that Feldstein engaged in an illegal free-riding scheme where he would purchase securities through deliver versus payment accounts (“DVP accounts”) at the three broker-dealers with no intention of remitting payment or settling trades that were unprofitable. The complaint states, “by definition, such [DVP] accounts allow a customer to buy securities at the executing broker and not pay for them until delivery and settlement, usually arranged with a different custodial account held by the customer at another firm, which the customer identifies to the executing broker upon opening the DVP account.” The SEC claims that Feldstein misrepresented to the three brokerage firms that he held sufficient cash in custodian accounts at third-parties to cover any losses in his DVP accounts, when in reality, he did not have sufficient cash to cover any losses. From September 2008 through February 2009, this free-riding scam resulting in over $2 million in losses to the three broker-dealers.