New York Securities Lawyer Blog

Published on: October 1, 2020

MASSACHUSETTS SUPERIOR COURT CONFIRMS ADVISORS’ $2.094 MILLION ARBITRATION AWARD AGAINST CREDIT SUISSE, INCLUDING INTEREST AND ATTORNEYS’ FEES, FOR ITS UNLAWFUL WITHHOLDING OF DEFERRED COMPENSATION

On August 31, 2020, the Massachusetts Superior Court confirmed a Financial Industry Regulatory Authority (“FINRA”) Arbitration Award against Credit Suisse for more than $2 million owed to four former Credit Suisse advisors represented by Lax & Neville LLP, including approximately $1.6 million in unlawfully withheld deferred compensation, more than $83,000 in costs and more than $411,000 in attorneys’ fees.

The former Credit Suisse advisors sued Credit Suisse for, among other things, violations of the Massachusetts Wage Act, breach of contract, breach of the implied covenant of good faith and fair dealing and unjust enrichment after it closed its U.S. wealth management business on October 20, 2015 and unlawfully cancelled their earned deferred compensation. On February 14, 2020, a three-member FINRA Arbitration Panel found for the advisers and ordered Credit Suisse to pay compensatory damages totaling $1,602,609.95 plus costs, interest and attorneys’ fees.

Credit Suisse petitioned the Court to vacate in part or modify the Award, challenging the Panel’s authority to award attorneys’ fees on the basis that the advisors had no contractual right to attorneys’ fees and that Credit Suisse did not agree to submit the issue of attorneys’ fees to the Panel. In rejecting Credit Suisse’s petition and refusing to modify or vacate the Award, the Court held that Credit Suisse itself had originally submitted a request for attorneys’ fees against its four former advisers, giving the Panel the authority it needed to award attorneys’ fees. Under New York law, which governed the parties’ agreements, a mutual request for attorneys’ fees forms a binding contract between the parties and authorizes a Panel to award attorneys’ fees. The Court further noted that given Credit Suisse’s many losses in the Credit Suisse Deferred Compensation Arbitrations, its surprise at, and defense to, the Panel’s award of attorneys’ fees when both parties had requested them was unreasonable, stating that the “theory should have come as no surprise to Credit Suisse, which had already been required to pay the attorney’s [sic] fee of the prevailing party in another arbitration,” referencing the $585,307 in compensatory damages, $131,694 in interest and $146,326 in attorneys’ fees awarded to Brian Chilton, another former Credit Suisse financial advisor represented by Lax & Neville LLP. Another $1.34 million in attorneys’ fees were also awarded to former Credit Suisse advisors Joseph Lerner and Anna Winderbaum and Richard DellaRusso and Mark Sullivan, all of whom were represented by Lax & Neville LLP, as well as Christian Cram, Andrew Firstman and Mark Horncastle.

Published on: September 29, 2020

RIK Files $3 Million Claim Related to the UBS Yield Enhancement Strategy (“YES”)

By Rich, Intelisano & Katz

Rich, Intelisano & Katz, LLP (RIK) filed a $3 million FINRA arbitration this month on behalf of clients that invested in UBS Financial Services, Inc.’s Yield Enhancement Strategy (YES). UBS claimed the YES Program had minimal risk, but unbeknownst to its customers, the risks of this options trading strategy significantly outweighed any potential gain. Unfortunately, investors around the world lost hundreds of millions of dollars investing in YES.

Although UBS and its brokers claimed the YES Program had limited risk of loss, in actuality, this was a high-risk strategy. UBS implemented the YES Program beginning in 2016 after it recruited a high-profile team of brokers from Credit Suisse with massive up front bonuses. To entice customers to invest, UBS represented that the YES Program was a low-risk way to generate incremental income of 3% to 6% annually (before the deduction of fees). UBS further stated that the Program used protective options trading combinations to create a market-neutral strategy, meaning the Program’s performance would have little correlation to the markets, thereby protecting investors from significant losses. These low-risk and loss protection statements made by UBS contradict the actual risks associated with the Program.

The fact is that the YES Program was a high-risk, complex options strategy that subjected UBS customers to significant market exposure and risk of loss. This complex options strategy involved hundreds of combinations of puts and calls. The complexity of the program and the lack of adequate risk controls exposed YES investors to significant risk of loss – loss that was far beyond the alleged risk protection. Specifically, YES investors were exposed to 15% to 40% of losses depending on their holding period, even though their expected annual income was only 3% to 6%. In sum, YES was not the low-risk, market neutral, downside protection strategy that UBS had stressed to its customers.

Published on: July 31, 2020

Merrill Lynch and At Least One of its Top Brokers Face Investigation Over Alleged $200 Million Losses Due To Churning After Paying a Record $40 Million Settlement in a FINRA Arbitration

By Lax & Neville LLP

The New Hampshire Bureau of Securities Regulation is reportedly investigating Merrill Lynch and Charles Kenahan, one of its top-producing brokers, over customer complaints alleging “churning” in their accounts that resulted in damages of approximately $200 million. Churning, or excessive trading, occurs when a broker or financial advisor trades securities in a customer’s account at high frequency in order to generate commissions rather than advance the customer’s best interests. According to multiple sources familiar with the New Hampshire securities regulator’s investigation, the churning claims that alerted the regulator stem from two arbitrations filed before the Financial Industry Regulatory Authority (“FINRA”), one by former New Hampshire Governor Craig Benson and the other from Benson’s long-time friend and business partner, Robert Levine.

According to CNBC, which obtained documents from the FINRA arbitrations, Benson’s claim, currently pending before FINRA, names Merrill Lynch, Kenahan, and another Merrill Lynch advisor Dermod Cavanaugh and alleges damages in excess of $100 million due to churning and unauthorized trading. Levine’s arbitration claim sought approximately $100 million in damages based on allegations of churning, unsuitable investment recommendations and misrepresentation.

According to news outlets, Benson and Levine originally met Kenahan through Cavanaugh, who had been the accountant for Cabletron Systems – a company Levine and Benson co-founded out of Levine’s garage. Levine and Benson said they thought they could trust and that Cavanaugh and Kenahan would act in their best financial interests, so they decided to move their individual investment accounts into the care of the two men.

Published on: July 21, 2020

Merrill, Ledford and Jerzieski Sentenced By Federal Judge in a $396 Million Investment Fraud Ponzi Scheme

By Lax & Neville LLP

In October 2019, a Maryland District Court judge sentenced Kevin B. Merrill, a salesman, and Jay B. Ledford, a former CPA, to 22 years and 14 years in federal prison, respectively, each followed by three years of supervised release, arising from an investment fraud Ponzi scheme that operated from 2013 through September 2018 and raised more than $345 million from over 230 investors nationwide. The judge ordered Merrill and Ledford to pay full restitution for victims’ losses, which is at least $189,166,116, plus forfeiture of additional sums still to be determined. Cameron R. Jezierski, a key employee of two companies controlled by Merrill and Ledford, was sentenced in November 2019 to serve 2 years in prison and an additional year of home confinement for his role in the fraud. The criminal charges and recent sentencing stem from an action filed by the U.S. Attorney’s Office for the District of Columbia.

In a parallel action, the U.S. Securities and Exchange Commission’s (“SEC”) filed a complaint in federal district court in Maryland in September 2018 against Merrill, Ledford and Jezierski alleging that, from at least 2013 to 2018, they attracted investors by promising substantial profits from the purchase and resale of consumer debt portfolios. Consumer debt portfolios are defaulted consumer debts to banks/credit card issuers, student loan lenders, and car financers which are sold in batches to third parties that attempt to collect on the debts. Instead of using investor funds to acquire and service debt portfolios—as they had promised— Merrill, Ledford and Jezierski allegedly used the money to make Ponzi-like payments to investors and to fund their own extravagant lifestyles, including $10.2 million on at least 25 high-end cars, $330,000 for a 7-carat diamond ring, $168,000 for a 23-carat diamond bracelet, millions of dollars on luxury homes, and $100,000 to a private fitness club. Merrill, Ledford and Jezierski allegedly perpetrated their fraudulent scheme by lying to investors, creating sham documents and forging signature. The victims included small business owners, restauranteurs, construction contractors, retirees, doctors, lawyers, accountants, bankers, talent agents, professional athletes, and financial advisors located in Maryland, Washington, D.C., Northern Virginia, Boulder, Texas, Chicago, New York, and elsewhere.

The SEC obtained an emergency asset freeze and the appointment of a receiver. The receiver is empowered to pursue actions on behalf of the receivership estate to recover assets for the benefit of defrauded investors, victims, and creditors. Avoidance (“clawback”) actions are often brought by a receiver in bankruptcy court after a Ponzi scheme or fraud is revealed. Clawback actions are commenced to recover funds distributed to victims or investors by the fraudster operating the Ponzi scheme or fraud.

Published on: July 17, 2020

NEW YORK SUPREME COURT CONFIRMS FORMER ADVISERS’ $6.68 MILLION ARBITRATION AWARD, INCLUDING LIQUIDATED DAMAGES, FOR CREDIT SUISSE’S VIOLATION OF THE NEW YORK LABOR LAW WHEN IT WITHHELD DEFERRED COMPENSATION

By Lax & Neville LLP

On July 17, 2020, the Supreme Court of the State of New York (Commercial Division) confirmed a FINRA Arbitration Award against Credit Suisse for approximately $6.68 million, including unlawfully withheld deferred compensation, interest, attorneys’ fees, and liquidated damages pursuant to the New York Labor Law. See Lerner and Winderbaum v. Credit Suisse Securities (USA) LLC, Index No. 652771/2019 (N.Y. Sup. Ct.), Doc. 140.

The two former Credit Suisse investment advisers, represented by Lax & Neville LLP, sued Credit Suisse for breach of contract, fraud and violation of the New York Labor Law after it closed its US wealth management business in October 2015 and cancelled their earned deferred compensation. Credit Suisse defended the claims on the grounds that its former advisers voluntarily resigned after it told them they were being terminated, that future compensation by their next employer “mitigated” their damages, and that the New York Labor Law does not apply to deferred compensation. A three member FINRA Arbitration Panel found for the advisers and ordered Credit Suisse to pay compensatory damages totaling $2,787,344 and interest, attorneys’ fees, FINRA forum fees, and liquidated damages equal to 100% of the advisers’ unpaid wages pursuant to New York Labor Law § 198(1-a). The FINRA Panel also recommended that the “Reason for Termination” on the advisers’ Form U-5 be changed from “Voluntary” to “terminated without cause.”

Credit Suisse petitioned to vacate the Award for manifest disregard of the law, “challeng[ing] FINRA’s finding that petitioners’ deferred compensation qualified as wages under Labor Law §198 (1-a).” Lerner at 3. Rejecting Credit Suisse’s petition to vacate the Award in its entirety, the Court held:

Published on: April 30, 2020

Merrill Lynch, RBC and Two Other Investment Advisory Firms to Return $4.72 Million to Investors for Improper Mutual Fund Fee Practices

By Lax & Neville LLP

The Securities and Exchange Commission (“SEC”) announced this month that four investment advisory firms—Merrill Lynch, RBC Capital Markets, Eagle Strategies, and Cozad Asset Management—agreed to pay $4.72 million to settle charges that they recommended and sold mutual share classes to its customers when cheaper shares were available to those investors. The majority of that sum, namely, $3.88 million, is attributable to RBC Capital Markets. The mutual fund fee disgorgements resulting from the settlements with the SEC are part of the SEC’s initiative, launched in February 2018, wherein the SEC agreed to waive civil penalties against investment advisers who self-reported and admitted that they had been putting investors into high-fee mutual fund classes and agreed to reimburse those customers. These settlements are the last ones the SEC will accept as it concludes the mutual fund amnesty program.

A mutual fund share class represents an interest in the same portfolio of securities with the same investment objective, with the primary difference being the fee structures. For example, some mutual fund share classes charge what are called “12b-1 fees” to cover fund distribution and sometimes shareholder service expenses. Many mutual funds, however, also offer share classes that do not charge 12b-1 fees, and investors who hold these shares will almost always earn higher returns because the annual fund operating expenses tend to be lower over time.

In the various cease and desist orders, the SEC found that Merrill Lynch, RBC Capital Markets, Eagle Strategies, and Cozad Asset Management purchased, recommended or held for their clients mutual fund share classes that paid the firms or the advisors 12b-1 fees instead of lower cost share classes of the same funds for which their customers are also eligible. The firms also failed to disclose these conflicts of interest, either in its Forms ADV or otherwise, related to their receipt of 12b-1 fees and/or the selection of mutual fund share classes that pay higher fees and result in higher commissions to the investment advisors. Investment advisors owe a fiduciary duty to their customers to act in their best interest, including disclosing conflicts of interest. The SEC found that the investment advisory firms’ failures to adequately disclose that the advisors were actually incentivized to recommend funds with higher fees when the same mutual funds without those fees were available violated the firms and advisors’ fiduciary duty to their customers.

Published on: April 28, 2020

FINRA Arbitrations During the COVID-19 Pandemic

By Diane Mall Sammarco

Arbitration at FINRA has long been known as a quicker, more efficient alternative to court litigation of disputes eligible for submission to FINRA’s Dispute Resolution forum. This continues to be true, to an even greater extent, during the COVID-19 pandemic.

Many courts at the federal and state levels, both in New York and across the US, have indefinitely suspended the filing of new nonessential cases during this time. Courts have also frozen the commencement of trials and the perfection of appeals in pending cases. And conferences, depositions and other in-person court appearances cannot take place where social distancing and large-group gathering guidelines are in effect. Thus, both new and pending court cases are in large part on hold until further notice, to protect the safety of parties, court personnel and the public.

At FINRA, however, the processing and handling of arbitration cases is primarily done electronically, with very little need for in-person contact until the final hearings on the merits. Even during the current unprecedented situation, parties can still file new cases at FINRA using the Dispute Resolution Portal, and can choose arbitrators and engage in discovery. Because FINRA arbitration does not allow for depositions except in extraordinary circumstances, the discovery process and exchange of documents and information can be done completely remotely and electronically, and without delay. Parties or potential parties should be reassured that their new or already-pending cases will continue to be administered as they were before the current pandemic.

Published on: April 17, 2020

Cantor Fitzgerald Partnership Award Claims at FINRA

By Ross B. Intelisano

Cantor Fitzgerald has a practice of awarding its FINRA registered employees compensation in the form of partnership units in an associated entity called Cantor Fitzgerald, L.P. (CFLP), which is not a member of FINRA. The employees are often employed by or registered with Cantor Fitzgerald & Co. (CF&Co.), the main Cantor FINRA-registered broker dealer. Many Cantor employees have employment agreements with CF&Co. which provide for payment in CFLP partnership units. The compensation in the form of CFLP partnership units can only be for the employees’ work as FINRA-registered representatives for CF&Co since the employees don’t work for CFLP.

As Bloomberg reported. Cantor recently announced layoffs. https://www.bloomberg.com/news/articles/2020-04-16/cantor-to-cut-hundreds-of-jobs-in-break-from-wall-street-pledge

Many employees who are laid off may own significant amounts of CFLP partnership units. If an employee believes he or she is not being compensated fairly with respect to the partnership units, what can an employee do? Our firm has handled this issue with Cantor before. The answer, if the employee is a FINRA registered representative, is he or she can bring a FINRA arbitration against CF&Co. to recover the value of the partnership units.

Published on: April 15, 2020

Beware of Indirection at “Self Directed” Investment Firms

By John G. Rich

We are increasingly hearing from investors who say that their investment representative at their “self directed” broker dealer—such as T.D. Ameritrade—recommended an outside investment advisor who was not formally affiliated with the firm and incurred investment losses as a result.

There could be many reasons why this may happen: the investment representative may have a financial arrangement with the advisor, or a personal relationship, or even just trying to be helpful. However, this is a problem that is obviously foreseeable for such firms, and sometimes lands an unwitting investor with a fraudster. In fact, such firms discourage their investment representatives from giving any investment advice because that can expose them bring to potential liability if the advisor or advice is unsuitable or fraudulent. Nevertheless, investment representatives sometimes make recommendations of outside unaffiliated advisors to their customers. The question is can the firm be legally responsible if the recommended advisor’s strategy is not suitable or fraudulent. The general rule is that if an investment representative recommends that a customer use an outside advisor, or even brings such an advisor or her strategy to the attention of the customer, the firm may be liable in FINRA arbitration to the customer if the advisor/strategy is unsuitable or fraudulent and losses are incurred as a result.

Brokerage firms that use the self directed business model try to protect themselves by inserting language in their client agreements that purports to absolve them of such liability. However, FINRA frowns on brokerage firm attempts to insulate themselves contractually for liability resulting from breach by their registered representatives of industry rules, such as the suitability rule. In addition, at least one FINRA panel has awarded damages against T.D. Ameritrade in just such a case. https://www.finra.org/sites/default/files/aao_documents/18-01404.pdf

Published on: April 14, 2020

Broker Transitions During the COVID-19 Pandemic

By Jaimie F. Dockray

The market for financial advisors to transition from one firm to another is thriving despite less broker dealers being part of the Broker Protocol, the global economy being at a near standstill, and millions of Americans applying for unemployment on a weekly basis. The wire houses are actively recruiting and Fidelity recently announced its hiring efforts: https://jobs.fidelity.com/ With a volatile stock market causing extreme angst among investors, advisors are in high demand as they calm unsteady nerves and identify investment opportunities for weary clients. Given these realities, it would seem an unlikely time for advisors to make the jump from one firm to another. But many advisors – and the firms who have stepped up their recruiting efforts during the pandemic – feel otherwise.

Attempting to move an entire book of business during unprecedented market volatility can certainly be a risky endeavor, but there are good reasons to consider taking the leap at this particular time. Having experienced counsel will help too.

First, in light of the stock market roller coaster of the past several weeks, investors are more inclined to remain with the advisor upon whom they’ve come to rely, regardless of which firm he or she works.