Financial Counsel by Eccleston Law

FINRA Finds Both Claimant and Respondent/Counter-Clamaint Wells Fargo Advisors Liable on Breach of Promissory Note and Breach of Contract Theories

In March 2011, Jason Schlesinger filed a Statement of Claim with the Financial Industry Regulatory Authority (FINRA) alleging breach of contract and seeking $1 million in compensatory damages, punitive damages, costs, and attorneys' fees. He also sought a declaration that Wells Fargo, LLC may not enforce the promissory note against him. In the Matter of the FINRA Arbitration Between: Jason Martin Schlesinger, Claimant v. Peter Yan Hong; Wallace Lawrence Key; Wells Fargo Adivsors, LLC, Respondents v. Jason Martin Schlesinger, Counter-Respondent.

In particular, Schlesinger (Claimant) alleged that he was fraudulently induced to join Wachovia Securities by a couple of promises. Those promises were: "a position in which he would be the sole broker in a start-up hub office specializing in high net worth investors; and that he would have access to a pool of names of so called orphan accounts left from a previous merger of Wachovia Securities and Gold West World Savings." See Statement of Claim.

Claimant understood this to be a promise that he would be entitled to receive all the leads of the bankers in the new office since he would be the only broker in the office. Respondents denied these allegations and asserted affirmative defenses.

In Wells Fargo Adivsor's (Respondent/Counter-Claimant) Counterclaim, it asserted that Claimant breached a promissory note (Note) executed by Claimant. It was alleged that when Claimant joined Wachovia the Note was executed for $925,306 on April 14, 2008. Furthermore, on July 16, 2010 the Note was amended and went down to $792,776. Respondent/Counter-Claimant requested the principal balance due on the Note ($734,052.27) plus 3.25% annual interest, costs, and attorneys' fees.

The FINRA Arbitration Panel (Panel) did not find fraud on behalf of the recruiters Respondents Peter Yan Hong and Wallace Lawrence Key. The Panel did find, however, there was considerable confusion on the part of Respondents as to why Claimant was paid only $87,000 for his first year at Wachovia Securities. There was also confusion on how it was calculated.

Ultimately, the Panel found Claimant liable and he was ordered to pay $734,052.27 to Respondent/Counter-Claimant Wells Fargo Advisors. In addition, the Panel found Respondent/Counter-Claimant Wells Fargo Advisors liable to Claimant and ordered it to pay him $100,000. Thus, the net final award that Claimant owed was $634,052.27.

FINRA Finds Merrill Lynch Liable for Libel and Wrongful Termination

In January 2011, Nicole Cannava filed a Statement of Claim with the Financial Industry Regulatory Authority (FINRA) seeking $68,117 in compensatory damages plus interest, attorneys' fees, costs, and expungement of her Central Registration Depository (CRD) as a result of alleged libel on her Form U5 and for wrongful termination. In the Matter of the FINRA Arbitration Between Nicole Alise Cannava, Claimant, v. Merrill Lynch Pierce Fenner & Smith Inc., Respondent. Merrill Lynch denied the allegations and asserted affirmative defenses.

In April 2012, the FINRA Arbitrator hearing the dispute found Merrill Lynch liable and ordered it to pay Cannava $68,117. In addition, the Arbitrator found defamation and recommended the expungement of the answers to Question 14J(1) on Cannava's Form U4 and Questions 7F(1) on her Form U5.

In the section "Termination Disclosure" in Form U4, Question 14J states: "Have you ever voluntarily resigned, been discharged or permitted to resign after allegations were made that accused you of: [V]iolating investment-related statutes, regulations, rules, or industry standards of conduct? [F]raud or the wrongful taking of property? [F]ailure to supervise in connection with investment-related statutes, regulations, rules or industry standards of conduct?"

In the section "Termination Disclosure" in Form U5, Question 7F it states: "Did the individual voluntarily resign from your firm, or was the individual discharged or permitted to resign from your firm, after allegations were made that accused the individual of: [V]iolating investment-related statutes, regulations, rules or industry standards of conduct? [F]raud or the wrongful taking of property? [F]ailure to supervise in connection with investment-related statutes, regulations, rules or industry standards of conduct?"

Specifically, the Arbitrator recommended that the answers to the above questions be changed from "Yes" to "No," and also the Disclosure Reporting Pages that accompany the questions be enitrely expunged. Lastly, the Arbitrator recommended that the "Reason for Termination of Discharge" in the Form U5 be replaced with "Voluntary."

Succession Plans Become a Necessity with an Aging Base of Brokers

Many large institutions have been bustling around while attempting to implement a plan to retain business. This is because of older brokers who continue to age and who have even older clients. On April 18th, a six-person panel at the Securities Industry and Financial Markets Association (Sifma) addressed this issue of succession planning.

Chief administrative officer private wealth management at Robert W. Baird, Scott Falk, said there are two approaches that work well for their organization to talk transferring business to a younger advisor:

First, there are Baird qualified teams which is a creative group with various generations of advisors. Within this team there are certain rules and incentives to carry this on. Second, there is the codified succession planning. Baird has put together a binder of information and in turn formalized a program to make it easier for advisors to prepare in advance and accomplish succession plans.

Specifically, business growth begins to slow down, usually through attrition (either for health reasons or age), for advisors aged around 50. The problem typically comes to fruition when it comes time to sell their book and advisors do not have much left. It is said the most serious concern is when advisors reach the average age of 59 and do not have a plan in place to recruit younger representatives. Advisors fall victim to this problem when they fail to plan to transfer client relationships and the problem is right there in front of them. Not to mention, the number of advisors to take over the book is not very deep.

Another solution for this problem was created by RBC Wealth Management - US. That firm created a plan that creates a team with an "anchor," which facilitates conversation between the advisors. An "official" team, according to the firm, has to have a formal strategy with roles and responsibilities as well as a succession plan for death and/or disability.

There are other firms that have used different spins on the aforementioned plans to prevent this issue from occurring. Either way it is nice to see that firms are recognizing the issue of the aging base of brokers and have been active to implement plans to remedy the problem.

Morgan Keegan and Raymond James: Comparing the Retention Bonus Math to Transition Bonus Math Is Just the Beginning of the Analysis

Top producing transitioning advisers should expect to receive two and one-half to three and one-half times their trailing 12 month production, while top producing reps at Morgan Keegan reportedly are expected to be paid a mere 65% to 70% of their trailing 12. This disparity prompted Investment News this week, and several pundits, to begin speculating as to how many top producing reps will leave Morgan Keegan for greener pastures. Investment News went so far as to run a lead story on the matter, “RJ Buy May Be Tough Sell to Keegan Reps.” No doubt, Investment News and the pundits may be right. Indeed, Raymond James has built in clawback provisions in the deal to remedy any rep departures.

But there is much more to the analysis than just the mathematical, bonus percentage comparison. Beyond comparing the math, one needs to compare the terms of the promissory notes, the new firm’s employment agreement restrictions on solicitation, competition, confidentiality, and, of course, termination and TROs (court injunctions). That’s the starting point, for an analysis that we frequently are retained to conduct on behalf of reps contemplating a move. A move may make sense, but only after careful attorney analysis, as well as negotiation with the new firm (well in advance of the move date) to improve upon the always-one-sided contract provisions that firms try to have unsuspecting reps sign.

New Supervision Guidelines Will Require Technology, Vigilance and Documentation

The SEC and FINRA have issued a new branch inspection program that includes guidelines for firms to better supervise advisers.

Among other components of an effective supervisory system, the guidelines recommend that offices be surprise “re-audited” when routine inspections reveal a high number of deficiencies.  Additionally, firms should use comprehensive checklists that use previous inspection findings and trends noted in internal reports.  Finally, the regulators recommend that firms provide branch office managers  with the firm’s internal inspection findings and require them to take and document corrective action.

Breaking News: Raymond James Acquires Morgan Keegan

Raymond James announced that it has entered into a definitive stock purchase agreement to acquire Morgan Keegan for approximately $930 million.  Morgan Keegan is believed to have upwards of 1,200 financial advisors who may be considering their options.

If you are an adviser at Morgan Keegan and are considering a transition as a result of this acquisition, please contact Eccleston Law for a FREE, no obligation consultation to discuss your options. 
Eccleston Law Offices assists advisers nationwide in their transition.  Working with recruiters nationwide, we negotiate the non-numbers parts of the deal, including the employee forgivable loan terms and the employment agreement. If you are a Morgan Keegan adviser contemplating a transition, or a recruiter with a candidate, contact Jim Eccleston at 312-332-0000.    

FACAAP Recovery Options for Former Merrill Lynch Brokers

Eccleston Law is pleased to announce that its attorneys are continuing investigation to offer representation to former Merrill Lynch (Bank of America) financial advisors with unpaid Financial Advisor Capital Accumulation ("FACAAP"), Wealthbuilder, Growth Award, and Long Term Incentive Compensation ("LTICP") deferred compensation.

Prior to 2009, the FACAAP provided for awards to eligible employees in Merrill Lynch’s Global Wealth Management division generally based upon their prior year’s performance. Payment for an award was contingent upon continued employment for a period of time and subject to forfeiture during that period. Awards granted in 2003 and thereafter are generally payable eight years from the date of grant in a fixed number of shares of Bank of America common stock. For outstanding awards granted prior to 2003, payment is generally made ten years from the date of grant in a fixed number of shares of Bank of America common stock unless the fair market value of such shares is less than a specified minimum value, in which case the minimum value is paid in cash. FACAAP is no longer an active plan and no awards were granted in 2009. At December 31, 2009, there were 26 million shares awarded under FACAAP outstanding, of which 6 million shares were granted prior to 2003. The weighted-average fair value of awards granted under FACAAP during 2008 and 2007 was $45.04 and $83.30 per award, respectively.

When Bank of America acquired Merrill Lynch in September 2008, it negotiated certain deal terms affecting deferred compensation for the financial advisors.  Namely, as part of the acquisition documents, a "change in control" clause was triggered that affected the way certain deferred compensation plans vested.  The affected plans include the FACAAP, Wealthbuilder, Growth Award, and Long Term Incentive Compensation ("LTICP") plans.  As structured, if a broker with the firm leaves for "good reason" as defined by the plan documents, Merrill Lynch is required to pay must immediately vest and pay the departing awards.

If you are a broker who left Merrill Lynch after August of 2008 to join another brokerage, you may be able to recover your unpaid FACAAP, Growth Award, Wealthbuilder, or Long Term Incentive Compensation ("LTICP") deferred compensation.

Eccleston Law represents financial advisers nationwide in regulatory, compliance, disciplinary and employment matters in arbitration, litigation, and before regulatory bodies such as the SEC, FINRA and state securities regulators.  If you are a former Merrill Lynch broker with an unpaid FACAAP, Growth Award, Wealthbuilder, or Long Term Incentive Compensation ("LTICP") deferred compensation, contact one of our attorneys at 312-332-0000 to discuss your case.

Eccleston Law Announces FACAAP Representation for Former Merrill Lynch Brokers

Eccleston Law is pleased to announce that its attorneys have expanded their investigation of unpaid Financial Advisor Capital Accumulation ("FACAAP") awards and continues to offer representation to former Merrill Lynch (Bank of America) financial advisors with unpaid FACAAP, Wealthbuilder, Growth Award, and Long Term Incentive Compensation ("LTICP") deferred compensation.

Prior to 2009, the FACAAP provided for awards to eligible employees in Merrill Lynch’s Global Wealth Management division generally based upon their prior year’s performance. Payment for an award was contingent upon continued employment for a period of time and subject to forfeiture during that period. Awards granted in 2003 and thereafter are generally payable eight years from the date of grant in a fixed number of shares of Bank of America common stock. For outstanding awards granted prior to 2003, payment is generally made ten years from the date of grant in a fixed number of shares of Bank of America common stock unless the fair market value of such shares is less than a specified minimum value, in which case the minimum value is paid in cash. FACAAP is no longer an active plan and no awards were granted in 2009. At December 31, 2009, there were 26 million shares awarded under FACAAP outstanding, of which 6 million shares were granted prior to 2003. The weighted-average fair value of awards granted under FACAAP during 2008 and 2007 was $45.04 and $83.30 per award, respectively.

When Bank of America acquired Merrill Lynch in September 2008, it negotiated certain deal terms affecting deferred compensation for the financial advisors.  Namely, as part of the acquisition documents, a "change in control" clause was triggered that affected the way certain deferred compensation plans vested.  The affected plans include the FACAAP, Wealthbuilder, Growth Award, and Long Term Incentive Compensation ("LTICP") plans.  As structured, if a broker with the firm leaves for "good reason" as defined by the plan documents, Merrill Lynch is required to pay must immediately vest and pay the departing awards.

If you are a broker who left Merrill Lynch after August of 2008 to join another brokerage, you may be able to recover your unpaid FACAAP, Growth Award, Wealthbuilder, or Long Term Incentive Compensation ("LTICP") deferred compensation.

Eccleston Law represents financial advisers nationwide in regulatory, compliance, disciplinary and employment matters in arbitration, litigation, and before regulatory bodies such as the SEC, FINRA and state securities regulators.  If you are a former Merrill Lynch broker with an unpaid FACAAP, Growth Award, Wealthbuilder, or Long Term Incentive Compensation ("LTICP") deferred compensation, contact one of our attorneys at 312-332-0000 to discuss your case. 

Eccleston Law Launches Investigation of the Firing Practices of Northern Trust Securities, Including Possible Instances of Form U-5 Defamation

All securities firms are required to file Form U-5 termination notices based with accurate and complete information.  Failure to do so can result in liability and damages.  Reasons for termination and language used in Disclosure Reporting Pages (DRPs) can be defamatory.

Eccleston Law welcomes inquiries from former Northern Trust Securities financial advisers as to whether the language placed on their Forms U-5 was accurate and complete.

Eccleston Law Seeks Information From Employees of MF Global

As part of its investigation, Eccleston Law wishes to speak to current or former employees of now-defunct MF Global.  Any employees who worked in sales, trading, investment banking, research, European sovereign debt investment management or brokerage may have information to assist Eccleston Law in its investigation.  Eccleston Law is a national law firm representing both investors and advisers in securities and financial services employment matters.

Investment Advisers Unprepared For Succession and Thus Face Risks, TD Ameritrade Finds

While the average age of an RIA is 54 years, 60% don’t have a succession plan.  TD Ameritrade finds that RIAs understandably are busy building their businesses. 

But it doesn’t take more than a few war stories to highlight the importance of planning, documenting and implementing a succession plan.  Take the unfortunate case of an adviser who had just a handshake deal, until that adviser began suffering from a terminal illness, and the buyer backed out.  Or the poor adviser who suffered a heart attack.

What advisers need to realize is that a seller needs to plan from a position of strength, not weakness.  Buyers will discount the business value plenty absent exigent circumstances; don’t add to that de-valuation by including an element of desperation.

An effective succession plan can involve a lengthy term (for example, we have implemented five year buy-ins for internal successions).  By planning now, in an effective manner, advisers can lock in their business value and rest comfortably knowing that they and their clients will be taken care of.

Investment Advisory Firm M&A Activity Is Robust

Despite market volatility, merger and acquisition activity among investment advisory firms showed strong numbers in the 3^rd Quarter.  At Schwab, for example, there were 17 deals in the quarter totaling nearly $17 billion in acquired assets under management.  Year to date Schwab reports 44 deals totaling nearly $440 billion in assets under management.

The good news is that the robust activity is expected to continue.

That may be due in part to the average age of the RIA firm principal, which is 55 this year. It never is too early for investment advisers should plan their succession strategies.  Those strategies may involve an internal plan or an external plan.

Finally, several firms nationwide have notified us that they are seeking to grow their businesses through acquisitions, and are “buyers” in this market.  For further information about those buyers, please contact us.

 

Another Aggregator For Advisers, With A Few New Twists

Concert Wealth Management doesn’t want to be just like HighTower Advisors or Focus Financial Partners.  So the firm isn’t offering ownership shares.  But it is offering  to pay some up-front costs and may offer small loans.  It also offers compliance, technology and back-office services.  And it is offering so-called “managing directors” of its offices a 20% share in overall office profits.  The cost for all this is a payout share ranging from 30% to 5%.

No doubt, advisers now have as many flavors for transition as Baskin Robbins has ice cream flavors!  The trick is to pick the right flavor.  Eccleston Law’s transition services for brokers and investment advisers include lift outs, buy-side advice and sell-side advice, coupled with strategic consulting, contract review and negotiation.  Contact us to determine which flavor is your favorite!

New Publication Defines The "Fiduciary Ethos" For Financial Advisers Acting As Fiduciaries

"Fiduciary Ethos; Living in a Fiduciary World" is superb guidance for any financial adviser serving as or planning to serve as a fiduciary to clients.  Whether the adviser is a financial planner, wealth manager or retirement adviser, or whether the clients are retail, institutional, individuals, private trusts, foundations, endowments, or retirement plans, the publication written by Donald P. Trone is a must-read.  Perhaps the best feature of the publication, endorsed by the Financial Planning Association (FPA), is that its guidance is grounded upon existing standards and codes promulgated by the FPA as well as the Certified Financial Planner (CFP) Board of Standards.

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Mistakes Advisors Should Avoid in Transitioning

LaSalle Street Securities has published an informative piece entitled, “Top 5 Mistakes to Avoid When Making the Transition to Independence.”

Among the top five mistakes, LaSalle cites not understanding the current financial industry legal landscape.  Included are tips to review the current employment agreement and to review with SEC Reg S-P.

Another mistake to avoid is not understanding all fees associated with a transition.  LaSalle lists ACAT fees, stock registration fees, penalties and postage.

Finally, make sure that the transition is well-orchestrated.  According to LaSalle, a well-orchestrated transition results in at least 80% of the book of business being moved to the new firm within 3 weeks.

Succession Planning By the (Disconcerting) Numbers

More than ½ of all advisory firms have no succession plan in place.  That is true despite the fact that 48% of all owners expect to retire within 12 years and almost 18% expect to retire within 7 years.

To be effective, succession planning must take place well in advance of the succession.  That is because effective succession planning will result in a smooth transition of the business, from servicing clients, to developing business, and to overseeing management.

Another interesting fact is that in 2010, fewer than 1 in 6 advisory firm staff members were primary owners of firms (defined as owning more than 5% of the firm).  That number falls to 1 in 10 advisory firm staff members in the larger firms.  If advisory firms wish to consider this approach to succession planning, firms need time, and expert guidance, to groom qualified succession candidates and to put a multi-year agreement in place.

 

Protect Your Employment Record (Form U-5) By Negotiating Your Termination Language

We’ve counseled several advisers who didn’t appreciate the importance of maintaining a “clean” Form U-5 – until prospective employers and customers started asking about it!

Remember the U-5 basics.  Firms have 3 termination options: “Voluntary”, “Permitted to Resign” and “Discharge”.  It is important that the U-5 be marked Voluntary if at all possible.  Permitted to Resign sometimes is used for a “mutual” decision for the adviser to move on, and other times for special circumstances.  Discharge always is a red-flag, both for prospective new employers as well as the regulators (who often follow up with their own inquiries to advisers).

Moreover, both Permitted to Resign and Discharge require firms to explain the reason for the termination.  This is where competent, knowledgeable securities legal counsel can assist negotiate an explanation (and sometimes the type of termination) which is as innocuous as possible.  Note that time is of the essence as firms have 30 days to file the U-5 and most firms file it sooner.

Finally, advisers do have some negotiation leverage in all of this.  That’s because the U-5 must be accurate and complete.  A few states (wrongly) have given firms an absolute privilege (immunity) to file what they want without legal consequence, but the great majority of states allow advisers to sue for U-5 defamation and to seek damages and other relief (such as changing the official language of the Form U-5 both in terms of the type of termination and the explanation for the termination).

With employment records being publicly available, advisers need to protect their very best asset: their reputation.

Eccleston Law Actively Seeking Current or Former David Lerner Associates or Apple REIT Employees

The attorneys at law are interested in speaking with current or former employees of David Lerner Associates or any of the Apple REITs, holding companies or related entities, who purchased shares in a retirement plan such as a 401(k) plan. Please contact one of our attorneys at 312-332-0000 for important information about the implications of having Apple REIT shares in your retirement plan.

Eccleston Law represents individual and institutional investors nationwide to recover their investment losses caused by securities fraud, unsuitable investment recommendations, breach of fiduciary duty, negligence or other misconduct. We have extensive experience representing investors in arbitration and litigation disputes with securities broker-dealers and investment advisory firms, and have recovered tens of millions of dollars for investors.

SEC and CFTC Launch Whistleblower Programs; Eccleston Law Helps Advisers File Claims Anonymously

Both regulators now have adopted landmark regulations that give advisers powerful rights to blow the whistle on impermissible conduct on the part of their current or former employers.

Advisers likely will find attorney representation to be beneficial for a host of reasons. Due to its familiarity with the securities industry, Eccleston Law is in a unique position to assist advisers file and document their whistleblower claims, meet critical deadlines, and deal with the SEC.

Moreover, the SEC in its final rule has acknowledged that “many whistleblowers may wish to provide information anonymously”, and specifically recognizes (indeed requires) representation of an attorney in that regard. 

Eccleston Law welcomes all inquiries and will evaluate all possible whistleblower claims – at no charge of course.  Should Eccleston Law file a claim on behalf of a whistleblower (anonymously or not), Eccleston Law will only be paid only on a contingency fee basis from any recovery when the claim is concluded. We look forward to assisting you.

 

Advisers: Are You Prepared for a Regulatory Exam?

Adequate preparation for a SEC review of your brokerage firm is becoming increasingly complex. Recently, additional documents are requested, among of which include questions regarding risk management from the standpoint of investment and portfolio management as well as risk relative to operational and compliance.

To approach answers to these questions, it is advisable that firms perform an annual risk assessment as part of their annual CCO review. These reports will need to be provided to the SEC during a regulatory exam. The frequency and scope of regulatory reviews coincides with how well the SEC believes the advisor’s risk profile is maintained and understood by the firm itself. Naturally, regulators will want to review issues that represent the greatest threat to investors. Additionally, the best way to prepare for a regulatory exam is to perform mock audits. Mock audits will allow the firm to recognize what documents or issues that they need to be able to produce before an actual regulatory exam. Furthermore, it will allow the firm to understand which items are not applicable or required. If a firm is fully prepared for a regulatory exam and can provide all the necessary information to regulators then the frequency and scope of their exams will substantially decrease.

Eccleston Law Offices stands ready to assist, we have extensive experience consulting advisers in the mock audit process as well as whether they should transition. We also assist by serving as their counsel to effectuate a successful transition to a new firm and to negotiate the most favorable employment terms.  Contact us for a free consultation at (312) 332-0000.

Securities America Broker Transition Services

Following a $160 million settlement with investors after they sued the Securities America over failed private placements that were sold by the firm’s brokers between 2003 and 2008, Ameriprise Financial Inc. put the firm up for sale.  However, Securities America CEO Jim Nagengast claims that in the final stages of the running “the key issue is a retention package for the firm’s 1,800 reps.”  Within the coming weeks potential buyers will finalize their proposals which will include structure, valuation, and approaches to financial advisor retention and/or equity participation.

For those Securities America registered representatives seeking to transition to another firm, Eccleston Law stands ready to advise those brokers in their transition by both consulting advisers as to whether they should transition and by serving as their counsel to effectuate a successful transition to a new firm.  Our goal is to negotiate the most favorable employment terms for transitioning Securities America reps. 

To discuss our transition services, please call one of our attorneys at 312-332-0000 for a free, no obligation consultation.

Reps At David Lerner Associates Exploring Other Employment Opportunities May Have Defenses To Their Training Agreements

As we understand it, reps at David Lerner Associates are spending their time not providing investment services and earning sales commissions, but instead attempting to answer countless questions about the underlying misrepresentation and omissions relating to Apple REITs, FINRA’s disciplinary action against the firm and other related issues.

Reps sometimes are innocent victims, especially with product cases, where they have been duped by their firms just as the clients have been duped by their firms.

Under those circumstances, reps may have defenses to their David Lerner Associates Training Agreements.  We understand that David Lerner Associates may seek to enforce such agreements, but there may a number of defenses to such an action.  For example, a common defense may be that a rep effectively was not able to continue to earn a living at the firm, or that it was immoral for the rep to continue to wish to be employed at the firm.

Eccleston Law maintains a robust employment law practice for financial advisers nationwide and would be pleased to discuss a rep’s particular facts to determine if such defenses may exist.

Eccleston Law Consults Financial Advisers Troubled By News of Securities America Sale

Advisers, first stunned by the magnitude of client losses related to sales of private placements such as Provident Royalties, now face an uncertain future given news that parent company Ameriprise is putting Securities America up for sale.

Concerned advisers want to know how any sale may affect their business, and some advisers aren’t planning to hang around to find out. Advisers considering transition have asked several questions, including whether EFL (employee forgivable loan) balances can be forgiven, and whether their employment agreements contain any provisions that they should consider.  They also want to know what protections they can negotiate with their new firms.

We stand ready to assist, both by consulting advisers as to whether they should transition and by serving as their counsel to effectuate a successful transition to a new firm and to negotiate the most favorable employment terms.  Contact us for a free consultation.

Morgan Stanley Smith Barney Cuts 300 Advisers

Morgan Stanley Smith Barney, the largest brokerage firm in the industry, recently cut 300 of its trainees and low producing advisers in an effort to improve the overall productivity of its sales force. 

The general guidelines for the advisers that were terminated were advisers who had at least one year with the firm and production of less than $75,000 or trainees who had been with the firm for less than 36 months with under $25,000 in annual production. 

Recruiters believe that there will be more departures of Morgan Stanley advisers in 2011, particularly among those advisers who came on board from the Smith Barney acquisition. Regional firms have already expressed interest in those Morgan Stanley advisers who are recently departed.

Advisers are cautioned that wirehouse firms such as Morgan Stanley have been aggressively pursuing advisers for monies owed on promissory note or training cost agreements. Wirehouses are committed to collecting these outstanding debts through FINRA arbitration proceedings.  Former Morgan Stanley advisers should be aware of their obligations under any outstanding promissory note or training cost agreement and seek counsel to discuss their options.

The experienced securities attorneys at Eccleston Law stand ready to assist and defend, by asserting all available legal and equitable defenses (as well as any counterclaims, if appropriate).  If you are a former Morgan Stanley adviser being pursued on a promissory note claim, or have more information regarding Morgan Stanley’s collection efforts, please contact Jim Eccleston at Eccleston Law Offices at 312-332-0000.

Amato Comments on Garden Leave in WSJ Article

Eccleston Law attorney Ronald M. Amato is quoted in the February 22, 2011 Wall Street Journal article,  US Trust's 'Garden Leave' May Start Trend.  The article is featured in Broker's World, a Dow Jones Newswires column.  It discusses the exit policy known as Garden Leave recently instituted by U.S. Trust and if it will be an isolated event or if it will force competitors to implement similar policies. 

Mr. Amato states, "If U.S. Trust can do it and get away with it, who's to say someone like Morgan Stanley Smith Barney won't try it?"

James Eccleston Named An Illinois Super Lawyer for 2011

Eccleston Law Offices is pleased to announce that James Eccleston has once again been named an Illinois Super Lawyer.  He has been recognized as a Super Lawyer every year since its inception in Illinois in 2005.  

Each year Law & Politics mails approximately 47,000 ballots to active lawyers in Illinois to nominate the best lawyers they observed in action. The selection process includes peer recommendations, blue ribbon panel review, and independent research on each nominee.  Only 5% of the attorneys in Illinois are chosen each year. 

Jim's work is recognized nationally by other peer review organizations as well.  Martindale-Hubbell has bestowed the distinguished AV® Peer Review Rating (the highest possible rating for both integrity and ethics).  A third independent rating service has designated him as an Illinois Leading Lawyer for Employment Law.

Advisers Need to be on the Lookout for Clients with Dementia

As the American population continues to age, advisers need to be on the lookout for clients with signs of Alzheimer’s disease, dementia or other cognitive diseases.  Not only does this protect clients from making or agreeing to financial decisions that they do not fully comprehend, but also it protects advisers from liability and lawsuits.

For advisers, the signs dementia or other cognitive diseases are subtle and difficult to perceive even for the most sensitive adviser, as advisers historically have not been trained to deal with needs of those suffering from cognitive degeneration.  However, with the aging of the American population advisers educate themselves and be prepared to take steps to protect everyone involved as soon as the initial symptoms of a cognitive disease appear.

Advisers are in a unique position to spot these diseases on the front end and prevent financial ruin before it occurs.  Signs that a client may be beginning to suffer from dementia or Alzheimer’s include: (I) signs of dramatic personality change, such as going from trusting to paranoid; (ii) asking the same question multiple times in a row; (iii) inability to understand changes in the portfolio; (iv) inability to recall past conversations; (v) difficulty in comprehending simple changes in a portfolio; or (vi) forgetting current events or family members.

Interestingly, many early stage dementia patients may not overtly show signs of the disease as they continue to live life as normal and may cover the signs of the disease with humor or questions.

When a client begins to truly suffer, however, it is crucial that an adviser takes immediate action.  This includes notifying the family or brining in a third person, such as another relative, attorney, or guardian.  By having a third party put on notice of the degeneration and brought into the financial decision making process.  While advisers must still maintain the same confidentiality and professional obligations to the client, it is important that the adviser get formal permission to discuss the client’s portfolio with a third party.  Some advisers now routinely get this permission on a routine basis as part of the new client intake process.

Being aware of dementia and other cognitive diseases which the elderly can suffer from can protect not only the client, but the adviser as well.

If you are an adviser and have questions about how to best handle a client suffering from dementia, contact Jim Eccleston at the Eccleston Law Offices at 312-332-0000 to discuss.

New Hires Faced With Golden Handcuffs from Major Firms

Broker recruiting has become fiercely competitive, and firms have resorted to novel strategies to attract and retain new recruits.  While signing bonuses are at unprecedented levels, they come with a price for advisers as major wirehouse firms now are attempting to make it much harder for reps to leave once they switch firms. Now, more than ever, advisers need to retain competent securities counsel to negotiate the deals and especially the “fine print.”

Typical signing bonuses from major wirehouses now are as high as 360 percent of trailing twelve. However, firms now are proposing employee forgivable loan terms as long as 14 years, a substantial increase from what has been a 9 year standard. 

Additionally, firms are proposing to pay a much larger portion on the back end.  That is, an adviser may be offered only 130 percent up front, with the balance paid in seven back-end bonuses instead of five.

Eccleston Law Offices assists advisers in their transition.  Working with recruiters nationwide, we negotiate the non-numbers parts of the deal, including the employee forgivable loan terms and the employment agreement. If you are an adviser contemplating a transition, or a recruiter with a candidate, contact Jim Eccleston at 312-332-0000.     

Switching Firms Without Getting In Trouble

For brokers and advisors, switching firms can be one of the most rewarding and exciting moments in their career.  Unfortunately, brokers and advisors who change firms often violate their employment agreements governing their relationships with their firms, clients, and colleagues. In many cases, brokers and advisers may not even be aware of their contractual obligations regarding transitioning between firms because they don’t have a copy of the employment contract that they signed. 

Brokers and advisers need to be aware of the ramifications of some more common contractual provisions (such as non-solicitation clauses) and increasingly popular contractual provisions (such as “garden leave” restrictions), as well as more general restrictions related to the confidentiality and privacy of certain information and documentation.  One also needs to incorporate into any advance planning the the Protocol for Broker Recruiting.

Brokers or advisers who do run into trouble during a transition often find themselves facing a TRO in court, a FINRA arbitration or even a FINRA Enforcement regulatory inquiry.  Those disputes can be costly, and can in many cases leave the broker, and in some cases the clients, in a worse position than if they never had left the old firm.

To help brokers and advisers avoid these issues, Eccleston Law offers a $2,500 fixed fee package for transitioning advisers to help them move between firms without running afoul of their employment contracts or the Protocol for Broker recruiting.

If you are a broker or financial adviser and have questions about your employment agreement, the Protocol for Broker Recruiting, or simply your transition to a new firm, contact Jim Eccleston at the Eccleston Law Offices at 312-332-0000 to discuss your matter.

Advisers Should Exercise Caution When Using a Professional Designation

In recent years, professional designations and credentialing programs have not only helped advisers satisfy their continuing education requirements, but also have provided advisers with a valuable marketing tool that helps them stand out from their competitors. 

However, as a result of a recent amendment to Form ADV Part 2, advisers now will be required to provide more detail about professional designations that they use in their practice. The new regulations do not require advisers to disclose designations, but those who do must include a sufficient explanation of minimum qualifications to obtain the designation. 

For designations that require rigorous training, such as the chartered financial analyst (CFA), disclosure on the ADV will likely only help bolster the client’s confidence in the advisor.  However, this transparency could call into question professional designations that do not require much effort or training to obtain, and in turn call into question the advisers using such designations. 

Concerned by the growing number of professional designations used by advisers today, in 2008 the North American Securities Administrators Association issued guidelines aimed at preventing abuse of professional designations by advisers.  FINRA rules also prevent advisers from using professional designations in a manner that would mislead a customer. 

Advisers should therefore exercise caution when making the decision to use a professional designation as part of their practice.  Advisers are encouraged to seek designations with a more rigorous training curriculum, continuing education requirements, and those designations that have been accredited.  And most importantly, advisers should not to use any designation in a manner that could mislead a client.

If you are an adviser and have questions about the new credential disclosure rules, compliance with the amendments to Form ADV Part 2, or about a professional designation, contact Jim Eccleston at the Eccleston Law Offices at 312-332-0000 to discuss your matter.

Considerations for Advisers Recommending Private Placements to Customers

A “private placement” is an offering of securities that is not sold through an initial public offering, but rather one that is sold privately through pre-existing relationships.  Although these securities are subject to the Securities Act of 1933, they do not have to be registered with the SEC and therefore do not pass the same level of scrutiny as a public offering of securities.  Instead, companies rely on a set of rules known as Regulation D, which provide companies raising capital with an exemption from registration with the SEC.  Companies offering a private placement of securities may also be required to comply with state securities laws (known as “blue sky” laws) as well, depending on the Regulation D exemption they are relying on. 

Although private placements serve a valuable role in the capital formation process, they are by their nature very risky investments in that there is virtually no oversight from a regulatory agency.  Moreover, advisers often have to rely on the representations of the issuer in that private placements and the due diligence conducted by their firm.

Private placements tend to offer very high commissions for advisers, ranging anywhere from 5%-15% of the entire investment.  However, these high commissions can create a conflict with the broker’s duty to recommend suitable investments for the customer.

Advisers therefore should take great care to fully understand the investment and the rules regarding selling private placements before recommending the purchase of a security offered through a private placement offering. 

If you are an adviser who believes that your firm has failed to follow the applicable guidelines and rules governing the sales of private placement securities, and wish to discuss options available to you or defense in a customer complaint, contact Jim Eccleston at the Eccleston Law Offices at 312-332-0000 to discuss your matter.     

Do Advisers Have A Claim Against Their Firms For Wrongful Hire? One Court Says That They Do.

In securities industry employment disputes, advisers typically bring a host of claims against their former employers, such as U-5 defamation, employment discrimination, and wrongful termination.  However, under a new court decision, advisers may also be able to allege that they were wrongfully hired.

In Vaidyanathan v. Seagate U.S. LLC (D. Minn. Nov. 19, 2010), Chandramouli Vaidyanathan alleged that in November 2007 he was offered a position at Seagate in Minnesota.  At the time, Vaidyanathan was living in Dallas, Texas working for Texas Instruments as an engineer.  Vaidyanathan accepted the job offer, and moved his entire family to Minnesota.  Within a year, Seagate laid off Vaidyanathan.

Vaidyanathan learned that the reason they hired him in the first place was to use him to help market one of the divisions of Seagate that it was in the process of selling.  Vaidyanathan alleged that when Seagate hired him they knew that this position did not exist, but falsely represented to him that it existed so that he would move to Minnesota to work for Seagate.  Vaidyanathan claimed that he was, in essence, wrongfully hired under a Minnesota statute that makes it illegal to make false statements to induce someone into employment. 

Vaidyanathan ultimately prevailed at trial.  The jury awarded him $1.9 million to compensate him for the losses in future compensation and benefits that he suffered as a result of the move.

While this case involved hiring misrepresentations made to an engineer in the technology industry, the same concepts can be applied to an adviser in the financial services industry.  If a firm made misrepresentations about the material terms or conditions of employment, or made false statements to induce an adviser to accept a position with the firm, the adviser may have a wrongful hire claim and may recover damages caused as a result of that wrongdoing.

Eccleston Law Offices represents advisers nationwide in employment and employment transition matters. If you believe that you have been wrongfully hired as a result of a misrepresentation and/or false statement made by your employer, please contact Jim Eccleston at the Eccleston Law Offices at 312-332-0000 to discuss your matter.     

Whistleblowers Stand to Benefit as SEC Settlements Increase in 2010

As 2010 nears an end, the number of SEC settlements were up this year as compared to the past few years.  During 2010, the SEC settled cases with 694 defendants, which represented a 14% increase over settlements in 2009.  The bulk of the settlements this year came from individuals, as settlements against companies reached the second lowest point since the passage of the Sarbanes-Oxley Act.

2010 was a notable year for the size of the SEC settlements, as it had two of the top ten largest settlements since the passage of SOX.  Goldman Sachs and State Street Bank settled for $550 million and $314 million for misrepresentations to financial services customers.

With an increasing trend in SEC settlements and monetary payments, whistleblowers who provide the SEC with information that leads to a successful enforcement action, which includes a settlement, could stand to benefit under the new SEC whistleblower program. 

The Dodd-Frank Act of 2010 authorized the SEC to create whistleblower program to incentivize those with information of securities violations to come forward.  The SEC was also authorized to create a fund, which has recently topped $450 million, dedicated to paying whistleblowers for their valuable information.  This new program provides whistleblowers with an award of 10-30% for information that results in a successful SEC enforcement action. 

If you have knowledge of what you believe to be a securities violation, you may be entitled to a whistleblower award under the new SEC program and Eccleston Law Offices can represent you, guiding you through the process, and maintaining your anonymity until an award is paid. Please contact Jim Eccleston at the Eccleston Law Offices at 312-332-0000 to discuss your matter.  All consultations will be kept anonymous and in strict confidence.

What Every Adviser Should Know About Recruitment Bonuses

Adviser recruitment programs today typically feature a variety of incentives to move from firm to firm, including signing bonuses as well as back-end bonuses. 

In today’s highly competitive environment, typical signing bonuses are running between 100%- 150% of the trailing 12 month production.  These signing bonuses generally require the adviser to transfer a certain percentage of their assets within the first year to qualify for the back end bonuses along with a certain percentage of gross production within the first year of employment. 

Unlike the signing bonuses, typical back end bonuses can extend for 3-6 years and are based on hitting various asset and production goals.  For example, a typical back end bonus could require that the broker bring in more than 75% of assets from the previous firm within twelve months, and produce about 75% of the trailing twelve months commissions during the first year.  Thereafter, the expectation is typically that the broker will produce 95% of the onboard gross production during the second year, 120% the third year, and so on.

The back end bonuses can add up to as much as 150%, making the total transition bonus package worth anywhere from 250% to 300%.

Although these recruitment programs may seem very attractive, they are generally reserved for some of the industry’s most successful advisers.  Moreover, firms are targeting those advisers that are fee-based and that have average revenue to asset ratios. Firms are also targeting those advisers who they are willing and able to sign longer term contracts which range anywhere from 8-10 years. 

Such recruitment bonus programs have not gone without concern by industry regulators.  SEC Chairman Mary Schapiro recently commented that today’s recruitment programs “compensate and incentivize people who take short-term risks at the expense of the long-term franchise and at the expense of investors”.  Although brokerage firms typically give new recruits ample time to transition so that they are not pressured to overtrade in their client accounts to meet production goals, regulators fear that such programs may lead to churning.  However, most firms have watched the account turnover ratios for new transitional hires very carefully to combat this fear.        

If you are an adviser and contemplating a transition that involves transitional bonus compensation, contact Jim Eccleston at the Eccleston Law Offices at 312-332-0000 to discuss your transition.     

“Garden Leave” Provisions in Employment Agreements

What happens when a financial adviser submits his job resignation but informs his customers that he nonetheless will be sitting at home for the next 90 days?  Not much by the way of servicing customers, if that adviser’s “garden leave” provision is enforced.

A “garden leave” provision in an employment agreement typically provides that a resigning employee will provide a certain, lengthy amount of notice to his or her employer.  During this garden leave, the employee receives his or her normal wage (and other benefits), and often the employer will not expect the employee to come to work.  Of course, in a competitive industry, the employer gains a tremendous advantage. That is, the employee cannot compete with the employer, cannot service or solicit customers, cannot solicit other employees to join him or her in the new venture and cannot access corporate or customer documents and information.  All the while, the employer can spend that time attempting to entice and convince the adviser’s customers to remain as customers of the firm.  Thus, garden leave provisions accomplish all of the goals of both the often-disfavored covenants not to compete as well as the less-disfavored and frequently-utilized non-solicitation provisions contained in employment agreement.

Nonetheless, advisers may be able to defeat or minimize their garden leave restrictions.  If you are an adviser and you believe that your employment agreement contains a garden leave provision, contact Jim Eccleston at the Eccleston Law Offices at 312-332-0000 to discuss the options available to you.     

Offering Assistance to Victims of USA Retirement Services in Completing and Submitting SEC / Receiver Claims Forms for Recovery By December 27, 2010

We are being retained to assist defrauded investors file claim forms for recovery of investment losses / theft in the matter entitled, SEC v. Francois Durmaz, with Receiver Stephen Donell, in connection with the USA Retirement Management Services $20 million scheme to defraud.

Owing to the nature of the victims -- retirees who in some cases lost substantial sums, some of which was nest egg retirement money to live on -- we are offering a reasonable fixed fee in order to analyze documents, complete the claim form and submit it in a timely manner (on or before 12/2710).

Please contact us at 312-332-0000.

 

 

Broker Protocol Revisited; An "Industry Standard" For Employment Transitions

In early 2009, I examined the Protocol for Broker Recruiting (the "Protocol") and court opinions applying it to situations in which financial advisers had transitioned their employment from one financial services firm to another.  The Protocol initially was conceived as a "safe passage" set of procedures which allowed signatories to the Protocol to avoid litigation (TROs, other injunctive relief and damages) associated with the solicitation of clients and the taking of client information from one signatory firm to another signatory firm.

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Lack Of Disclosure Custom And Practice Is No Defense For Securities America Regarding Its Sale Of Medical Capital Notes, Massachusetts Regulator Argues

In a highly unusual legal maneuver in its battle with Massachusetts securities regulators, Securities America is requesting that other broker-dealers that sold the private-placement investments of Medical Capital Holdings be issued subpoenas.  The move is designed, according to InvestmentNews, to demonstrate that Securities America met industry standards when 400 of its affiliated brokers sold close to $700 million of now worthless Medical Capital notes to clients.  Securities America is one of dozens of broker-dealers that sold the series of Medical Capital private placements.  Last summer, the SEC charged Medical Capital with fraud in an alleged $2.2 billion Ponzi scheme.

In January, The Massachusetts Securities Division sued Securities America, alleging that it misled clients who bought the notes.  According to recent documents related to the Massachusetts case, Securities America is attempting to dispel the concept that it had a duty to show investors due-diligence reports done by third-party firms that raised questions about Medical Capital.

The Massachusetts motion quotes the firm as saying that it "intends to show that its practices were consistent with that of other broker-dealers, including those who sold Medical Capital."

Not so fast say regulators in Massachusetts.  "Industry standard does not pertain to the case at hand," the Massachusetts Securities Division wrote in a May 28 motion in response to a Securities America legal filing.  Securities America's "basis for requesting subpoenas to be issued on part of the industry is premised on a very dangerous false presumption that its duty to disclose information to investors is determined by what other broker-dealers who also sold Medical Capital notes disclosed to their investors," according to the document.

An administrative hearing at the Massachusetts Securities Division is expected on Securities America's request next month.

Source: InvestmentNews

FINRA Outlines Regulatory Priorities To Protect Investors

Recently, Richard Ketchum, The Chairman and CEO of FINRA (the Financial Industry Regulatory Authority), discussed how FINRA seeks to protect investors from fraud and other wrongdoing.  Let's discuss two of the principal areas that he covered: the enhancement of FINRA's examination programs and its broadened new investment product review.

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SEC Comments On Pending Legislative Initiatives Impacting Investment Advisers And Investors

SEC Commissioner Elisse Walter recently spoke before the Investment Adviser Compliance Forum and shared her thoughts as to the legislative initiatives currently before Congress.  Several initiatives would greatly impact investment advisers and investors.  Let's review her remarks.

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More Movement Among And Between Transitioning Independent Firm Reps

According to InvestmentNews, more than 1/3 of the 3,531 registered representatives who changed firms last month came from independent broker-dealers.  The bulk of the brokers, 68%, moved to other independent brokers, according to Discovery, a database firm.  A little less than one in four shifted to broker-dealers affiliated with mutual funds, banks, insurers and other institutions.  Finally, just 13% of the brokers who picked up stakes last month, or 468, were from the three wirehouses - Bank of America, Merrill Lynch, Wells Fargo Advisors and Morgan Stanley Smith Barney.

Source:  InvestmentNews

Schwab Hit With Large Employee U-5 Defamation And Wrongful Termination Award

According to InvestmentNews, a FINRA arbitration panel last month ordered Charles Schwab to pay a former employee $1.8 million in back pay and punitive damages.  Dow Jones Newswires first reported the award last week.  According to that report, Mr. Leahy, a former cashiering director at a Schwab office near Orlando, Florida, processed incoming and outgoing checks. 

In his claim, he said that Schwab made defamatory comments on his U-5 termination notice and that he was wrongfully terminated.  According to FINRA records, he was employed by Schwab from 1991 until 2008.  According to the FINRA award, Schwab conducted an inefficient human resources investigation.  It falsely cited HR violations as the reason for his termination and it included those "false violations" on his termination notice.

The FINRA arbitration panel awarded Mr. Leahy $279,000 plus interest for lost wages.  It then awarded him $1.5 million in punitive damages.  At the heart of the arbitrators' decision was the role of Schwab's HR personnel and procedures in firing Mr. Leahy.  The award, however, didn't make clear the initial conflict between Schwab and its former employee.  The FINRA panel also recommended a change to his U-5.  The reason for termination the panel said, should be changed from "discharged" to "other," and the commentary should be changed from a failure to adhere to human resources policies to "termination without cause."

Schwab "disagrees with the findings and is evaluating the opportunities for challenging the award," according to a spokesperson.

Source:  InvestmentNews

Securities Regulator Issues Guidance To Firms And Brokers As To Communications On Social Networking Web Sites

FINRA (the Financial Industry Regulatory Authority) recently announced new guidance as to the obligations of financial services firms and their brokers related to their use of social networking sites such as Facebook, Twitter, LinkedIn and blogs to communicate with the public.  Regulatory Notice 10-06 is meant to protect the public and addresses important areas such as suitability of investment recommendations and accurate and balanced communications.  Let's highlight two key aspects of the guidance.

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Raymond James Ordered To Pay $12 Million In Raiding Case

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. 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 advisers.

Source:  Financial Advisor magazine

Disbarred Advisers Sue State Securities Regulators For Wrongful Prosecution

Two former financial advisers who were barred from the securities industry have sued Utah for $357 million, accusing state regulators of targeting them without proof of wrongdoing in an overzealous campaign to bring down securities violators according to a recent issue of InvestmentNews.

Advisers Henry Brock and Jay Rice both lost their brokerage licenses after separate investigations by the Utah Division of Securities found them to have committed a host of securities violations, including making false promises to seniors at seminars.

The pair struck back last month by filing a lawsuit in U.S. District Court for the District of Utah, claiming that the Securities Division heaped dozens of allegations on each of them - 25 for Mr. Brock and 28 for Mr. Rice - without giving them a chance to appear before a judge in a timely manner.  They claim that they were put out of business and forced to declare bankruptcy as a result of the agency's actions.

We'll stay tuned to see what happens in this very interesting lawsuit.

Source:  InvestmentNews

Former SunTrust Robinson Humphrey Rep Wins Defamation Case Involving False Pretense Of Auction Rate Security Complaint

A former SunTrust Robinson Humphrey broker has won $4 million in a defamation claim against the firm.  The award includes $2.5 million in punitive damages for the representative. Such large punitive awards are unusual in arbitrations. 

In a written ruling, the three-person arbitration panel said that the firm "had specific intent to cause harm" to the representative in blaming him for a client complaint that arose from a $2.9 million investment in an illiquid auction-rate security.

In the decision, the panel said that the rep was told that the firm would support its ARS product.  And indeed, other SunTrust Robinson Humphrey brokers whose clients complained about auction-rate securities weren't fired.

Source: InvestmentNews

Merrill Lynch Thwarted In Its Efforts To Sue Reps In State Courts To Collect On Promissory Notes

A judge in New York ruled last week that Merrill Lynch & Co. must go to arbitration to pursue a broker for an unpaid promissory note.  New York State Supreme Court Judge Bernard Fried rejected the argument by the issuer of the retention notes, Merrill Lynch International Financial, that it isn't a broker-dealer and is therefore not required to arbitrate disputes with Merrill Lynch brokers.  The broker in the case, Todd Gutkin, left Merrill Lynch in April.  Merrill is bringing a series of promissory note collection cases in New York state courts against brokers who owe money on the retention payments that they received after the merger with Bank of America Corp.

Source: InvestmentNews

SEC Sends Message That Branch Managers Must Be Vigilant To Protect Investors

A recent enforcement action by the Securities and Exchange Commission (SEC) clearly sends the message that branch managers at financial services firms must be vigilant in supervising their financial advisers in order to protect investors.  A branch manager who fails to do so will face sanctions.  Let's consider the recent matter involving Banc of America Investment Services, Inc. ("BAI") and its branch manager, Virginia Holliday.

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FINRA To Get Tough On Reg D - Private Placement - Offerings Following Investor Complaints

According to InvestmentNews, FINRA is expected to get tough on Reg D offerings.  FINRA, the Financial Industry Regulatory Authority, expects to bring cases against brokerage firms involved in selling private-placement offerings next year, its head of enforcement said last week. "We have a number of investigations under way involving allegations of wrongdoing arising from the sales of these Regulation D private placements," James Shorris, executive vice president and executive director of enforcement at the Financial Industry Regulatory Authority said in an interview with InvestmentNews.  FINRA expects to bring enforcement cases on private placements next year, he said.

Reg D refers to the securities regulations that govern the sale of private-placement investments, which are generally exempt from having to be registered with regulators. The investments usually are made in small companies.  The self-regulatory organization has been receiving an increasing number of complaints from investors in recent months concerning sales of private placements, Mr. Shorris said. FINRA is looking at misrepresentations made by brokers in connection with the sale of the products, as well as whether sales made to customers were suitable. 

FINRA has been increasing the resources it devotes to investigations of private placements throughout this year, and it expects to begin bringing cases "soon," he said.

The industry regulator also is questioning whether brokerage firms and registered representatives who sold to private placements did due diligence on the products they sold, as well as whether some brokerage firms had a conflict of interest with the issuers, Mr. Shorris said.

Among the allegations FINRA is looking into is whether private-placement sales were made with only a single source of due-diligence information and whether the due-diligence provider was independent of the company issuing private-placement securities.

"If the due-diligence report was paid for by the issuer, there's clearly a potential conflict," Mr. Shorris said.

FINRA is also examining whether brokerage firms that sold the products were affiliated with companies that issued the securities, as opposed to sales made by brokerage firms that were independent of the issuers.

"If it turned out the issuer was engaged in wrongdoing or fraud and the firm had a captive entity wholesaling the product we have more questions about the access [the brokerage] firm may have had to information about potential wrongdoing about the issuer," Mr. Shorris said. 

Source:  InvestmentNews

FINRA Fines Scottrade $600,000 For Inadequate Surveillance System

The Financial Industry Regulatory Authority fined Scottrade $600,000 for failing to have adequate anti-money laundering procedures in place to detect and report suspicious transactions.  In a statement, FINRA noted that as an online brokerage executing more than 150,000 trades daily, Scottrade's business model makes it vulnerable to heightened risks of identity theft, unauthorized access to customer accounts, or even money laundering activities.  The Bank Secrecy Act of 1970 requires brokerages to have anti-money laundering programs tailored to their own unique business models.  "Despite the large volume of online trading at Scottrade, the firm failed to establish any systematic or automated surveillance until 2005," FINRA executive vice president and chief of enforcement Susan Merrill said in the  statement.  "Then the automated system the firm implemented remained inadequate because it focused only on suspicious trading that was accompanied by suspicious money movement." According to Scottrade, it is taking this matter very seriously and it has made enhancements to its anti-money laundering program.

Source: InvestmentNews