New York Securities Lawyer BlogRecently, on January 11, 2013, a Financial Industry Regulatory Authority, Inc. (“FINRA”) arbitration panel issued an award which denied all claims raised by the broker-dealers Tullett Prebon Financial Services LLC and Tullett Prebon Americas Corp. (collectively referred to as “Tullett”) against BGC Financial, L.P., a global brokerage company, (“BGC”) regarding BGC’s alleged raiding of Tullett’s repo desk in 2011. See FINRA Dispute Resolution No. 11-01413. Tullett filed its statement of claim on April 4, 2011 against BGC and nine of BGC’s repo brokers who allegedly resigned from Tullett in 2011 to join BGC. Tullett brought the following causes of action in its statement of claim: raiding, breach of contract, breach of duty and loyalty, aiding and abetting breaches of duty of loyalty, unfair competition, breach of fiduciary duty, misappropriation of trade secret, tortious interference with contract, tortious interference with prospective economic relationships and violations of FINRA Rules. Further, Tullett requested $16 million in compensatory damages, punitive damages, and a permanent injunction barring BGC from recruiting and hiring Tullett’s employees in the future. BGC and the nine brokers counterclaimed and alleged: breach of contract, violation of New York Labor Law, right to unpaid commissions, right to unpaid expenses and violation of FINRA Rule of Conduct 2010 (Standards of Commercial Honor and Principles of Trade). After 18 hearing sessions, the FINRA arbitration panel denied all of Tullett’s claims, which many will view as reinforcing BGC’s recruitment and hiring practices, with regard to the nine repo brokers, as lawful and in compliance with industry rules. Moreover, the panel ordered that Tullett pay the nine repo brokers compensatory damages for their unpaid commissions and/or expenses in the amount of approximately $365,000.
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FINRA Reports Increased Restitution In 2012
In 2012, the Securities and Exchange Commission (“SEC”) filed 734 enforcement actions, which was one shy of the record 735 actions commenced in 2011. Of the 734 actions, 147 actions were filed against investment advisers and investment companies, which exceeded that number in 2011. Similarly, the SEC filed 134 enforcement action related to broker-dealers, which constituted a 19% increase from 2011. Most significantly, the majority of the enforcement actions regarded highly complex products, transactions and practices, including those relating to the financial crisis of 2008, trading platforms and market structure and insider trading. Two specific cases the SEC touted included: (1) a case against UBS Financial Services of Puerto Rico (“UBS”) and two of its executives for disclosure violations regarding closed-ended funds; and (2) a case against OppenheimerFunds (“Oppenheimer”) for misleading investors of two funds which incurred significant losses during the financial crisis. Based upon these cases, UBS and Oppenheimer were required to remit penalty payments in the amounts of $26 million and $35 million, respectively. As a result of the various enforcement actions actions, the SEC obtained orders requiring payment of $3 billion in penalties and disgorgement for the benefit of victimized investors, which is an 11% increase from 2011. Robert Khuzami, the Director of the SEC’s Division of Enforcement stated, “It’s not simply numbers, but the increasing complexity and diversity of the cases we file that shows how successful we’ve been. The intelligence, dedication, and deep experience of our enforcement staff are, more than any other factors, responsible for the Division’s success.” Similarly, Mary Schapiro, the SEC’s chairman, stated, “The record of performance is a testament to the professionalism and perseverance of the staff and the innovative reforms put in place over the past few years.”
The SEC Changes AUM Reporting Requirements For Registered Investment Advisers
Pursuant to the Dodd-Frank Act, investment advisers with $100 million in assets under management (“AUM”) must not only register with the Securities and Exchange Commission (“SEC”) by filing a Form ADV, but now must also register with state securities regulators. Prior to the enforcement of the Dodd-Frank Act, the AUM threshold which triggered SEC registration requirements was $25 million, and registration only needed to be completed with the SEC, not the state regulators. The new registration with state securities regulators has many investment advisers concerned since state regulators conduct more frequent examinations than the SEC. Further, the new requirements mandate that when investment advisers calculate the firm’s AUM, they must include family and proprietary accounts, accounts for which they are not paid, and foreign client accounts, which must be reported on a gross basis, net of margin debt. Many investment advisers, who do not have the requisite $100 million in AUM, are inflating their assets in an effort to be considered an SEC-registered investment adviser. Indeed, advisory firms with assets under the $100 million threshold inflate their assets after calculating assets for registration for image and marketing purposes to clients. This, however, exposes firms who are inflating their AUM figures to potential state and federal regulatory actions for misleading clients. In light of the SEC’s awareness that firms are inflating their AUM figures, the SEC has implemented a stricter program to scrutinize firm’s Form ADV’s and is expected to bring more enforcement actions as a result.
Lax & Neville LLP has nationally represented registered investment advisory firms, as well as securities industry employees, financial services professionals and securities industry companies in regulatory matters and securities-related and commercial litigation. Please contact our team of attorneys for a consultation at (212) 696-1999.
FINRA Awards Former MSSB Manager $1 Million In Compensatory Damages
On Friday, January 4, 2013, a Financial Industry Dispute Resolution, Inc. (“FINRA”) Arbitration Panel awarded a former Morgan Stanley Smith Barney (“MSSB”) manager $1 million in compensatory damages. See Gregory Carl Torretta vs. Morgan Stanley Smith Barney – Case Number 11-01914. On or about May 12, 2011, Gregory Carl Torretta (“Torretta”), the former MSSB manager, filed a statement of claim with FINRA alleging MSSB forced him to resign in September 2010 and asserted the following causes of action: violation of FINRA Rules; breach of employment contract; and wrongful termination. Torretta alleged that he was forced to resign when an underperforming branch manager, who Torretta was preparing to terminate, informed Torretta’s superiors that he was interviewing at other firms. Although those allegations were untrue, MSSB refused to allow Torretta to explain or refute them in his defense. In his Statement of Claim, Torretta requested compensatory damages in the amount of $4.5 million, but raised his request for compensatory damages to between $8 million and $9 million at the hearing in this matter. After ten (10) days of hearing in this matter, the arbitration panel awarded Torretta $1 million in compensatory damages.
Former SAC Portfolio Manager Pleads Not Guilty In Insider Case
On November 19, 2012, the Department of Justice filed criminal charges for insider trading against Mathew Martoma, the former portfolio manager of SAC Capital Advisors, a $14 billion hedge fund based in Stamford, Connecticut, in the District Court for the Southern District of New York. Specifically the pending counts against Mr. Martoma include: (1) Conspiracy to commit securities fraud; (2) manipulative and deceptive devices; and (3) conspiracy to defraud the United States through securities fraud. The complaint against Mr. Martoma remains sealed and the matter is pending before Judge Paul G. Gardephe.
FINRA Releases Further Information Regarding Its Proposed Broker Compensation Disclosure Rule
During the December 6, 2012 FINRA Board of Directors meeting, the Board authorized FINRA to seek comment on a proposed rule that would require brokers switching firms to inform customers they are soliciting from their old firm of the recruiting bonus they receive from their new firm. In Regulatory Notice 13-02, FINRA requested comment from the industry by March 5, 2013 on its proposed rule.
Bernard Madoff’s Brother, Peter Madoff, Sentenced to 10 Years In Prison
Recently, on Thursday, December 20, 2012, Federal District Judge Laura T. Swain, in the Southern District of New York, sentenced Bernard Madoff’s younger brother, Peter Madoff, to 10 years in prison for his role in the Bernard L. Madoff Investment Securities (“BLMIS”) Ponzi scheme. During his tenure at BLMIS, Peter was the chief compliance officer. Reportedly, Peter claimed he was unaware that BLMIS was operating a Ponzi scheme until the days before its collapse in December 2008. Judge Swain stated that Peter’s ignorance of the fraud was “frankly not believable.” Judge Swain also stated, “Peter Madoff’s role was not at all passive. Peter Madoff did nothing in the way of oversight. But still worse than doing nothing to oversee the operation, he lied to authorities.” According to authorities, Peter, as compliance officer, authorized documents and made false statements to regulators to make it seem as if he was performing his compliance duties, when he was doing nothing. In exchange, Peter accepted gifts from Bernard Madoff which he never declared on his tax returns. Several months prior to his sentencing, Peter plead guilty to criminal charges and forfeited all of his personal assets, including a Ferrari and over $10 million in cash. Lax & Neville LLP effectively assists investors, on both a regional and national level, that may have suffered losses as a result of their broker dealer’s breaches of fiduciary duties and/or disregard for their investment interests, including losses suffered in Ponzi Schemes. Please contact our team of securities fraud attorneys for a consultation at (212) 696-1999.
FINRA Fines 5 Broker-Dealers For Failure To Deliver Mutual Fund Prospectuses
Recently, on December 31, 2012, the Financial Industry Regulatory Authority, Inc. (“FINRA”) fined five broker-dealers for failure to deliver mutual fund prospectuses to their customers from January 2009 through June 2011. The five firms are LPL Financial LLC (“LPL”), State Farm VP Management Corp. (“State Farm”), Deutsche Bank Securities Inc. (“Deutsche Bank”), Scottrade Inc. (“Scottrade”) and T. Rowe Price Investment Services Inc. (“T. Rowe”). Specifically, in a settlement agreement with the five firms, FINRA stated that LPL relied on its brokers to deliver mutual fund prospectuses to customers, however, had no supervisory procedure to determine whether or not the mutual fund prospectuses were ever delivered. Additionally, FINRA stated that State Farm also inadequately supervised its brokers or a third party service provider in delivering 154,129 mutual fund prospectuses. Moreover, FINRA stated that Scottrade failed to deliver 14,000 mutual fund prospectuses out of 300,000 transactions, Deutsche Bank failed to deliver 3,800 mutual fund prospectuses out of 71,000 transactions, and T. Rowe failed to deliver 2,500 mutual fund prospectuses out of 68,000 transactions. Although there were no findings as to liability since the fines resulted in a settlement agreement, hopefully the fines will help impose stricter supervisory systems and controls to ensure these firms comply with prospectus delivery rules and requirements. Lax & Neville LLP can effectively assist investors, on both a regional and national level, that may have suffered losses as a result of their broker dealer’s sales practice abuses. Please contact our team of securities fraud attorneys for a consultation at (212) 696-1999.
Polish Brokerage Owner, Roman Sledziejowski, Defrauds Polish Customers
On November 28, 2012, the Financial Industry Regulatory Authority Inc. (“FINRA”) filed a Disciplinary Proceeding Complaint against Roman Sledziejowski, the President and Owner of TWS Financial LLS (“TWS”). (Disciplinary Proceeding 2012033559602). The Complaint states that Sledziejowski defrauded three (3) of his Polish customers by using approximately $4.8 million of customer funds for his own use. Additionally, according to the Complaint, FINRA determined that Sledziejowski would instruct TWS customers to transfer their funds to him in order to invest in a Polish vodka company or deposit in a Polish bank, but instead, Sledziejowski would use the funds for his own benefit. In some cases, customers asserted that the wire transfers Sledziejowski made were unauthorized. After misappropriating the customer funds, Sledziejowski would then generate false account statements and/or account snapshots for clients, which made the transactions appear legitimate. According to the FINRA Complaint, this fraud transpired from June 2009 through August 2012. To date, there is still approximately $3 million in customer funds which are unaccounted for by regulators. Sledziejowski is now refusing to cooperate with FINRA and refuses to testify regarding the fraud. TWS withdrew its broker-dealer registration with FINRA on November 9, 2012. As a result, FINRA is requesting sanctions against Sledziejowski including to fully disgorge any and all “ill-gotten gains” to TWS’s defrauded customers and/or make a full and complete restitution. Lax & Neville LLP can effectively assist investors, on both a regional and national level, that may have suffered losses as a result of their broker dealer’s sales practice abuses. Moreover, Lax & Neville LLP has effectively recovered losses for investors suffered as a result of broker-dealer’s fraudulent misappropriation of customer funds and has victoriously prosecuted claims against defunct broker-dealers who are no longer in business and no longer registered with FINRA. Please contact our team of securities fraud attorneys for a consultation at (212) 696-1999.
Massachusetts Regulators File Sales Practice Abuse Complaint Against LPL Financial, LLC Regarding Non-traded Real Estate Investment Trusts
On December 12, 2012, William Galvin, the Massachusetts Secretary of the Commonwealth, filed an Administrative Complaint in order to commence an adjudicatory proceeding against LPL Financial, LLC (“LPL”) regarding sales practice abuses in connection with the sale of non-traded Real Estate Investment Trusts (“REITs”). The Administrative Complaint, amongst other things, alleges that LPL sold approximately $28 million of the non-traded REITs to approximately 600 customers in seven (7) non-traded REITs from 2006 through 2009. These sales allowed LPL to generate a gross commission of at least $1.8 million during that time period by charging enormous sales commissions and offering fees ranging from fifteen percent (15%) to eighteen percent (18%).