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On September 16, 2019, the Financial Industry National Regulatory Authority (“FINRA”) reported that it had censured and fined J.P. Morgan Securities (“JPM”) $1.1 million for failing to timely disclose 89 internal investigations. Firms have a regulatory obligation to disclose to FINRA or the appropriate regulatory body all internal reviews and allegations of misconduct by registered individuals or associated persons.

Broker-dealers such as JPM are required to file with FINRA a Uniform Termination Notice for Securities Industry Registration (“Form U5”) within 30 days of terminating a registered representative. They are also required to file an amendment with FINRA within 30 days of learning that anything previously disclosed on the Form U5 is inaccurate or incomplete. Firms are required to disclose allegations involving fraud, wrongful taking of property, or violations of investment-related statutes, regulations, rules or industry standards of conduct.

FINRA uses the information filed in the Form U5 to help identify and investigate potential misconduct and sanction individuals as appropriate. The Form U5 is a critical source of information on a financial adviser, and informs regulators, future employers, and potential clients of the nature of the adviser’s misconduct.  State securities regulators and other regulators use the information to make informed regulatory and licensing decisions.

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On August 14, 2019, the Securities and Exchange Commission (“SEC”) charged Canaccord Genuity LLC (“Canaccord”) with violating gatekeeping provisions aimed to protect investors. Small market cap, thinly traded securities, such as those that trade over-the-counter (“OTC”), are generally not subject to the same level of investor scrutiny and due diligence as stocks that trade on large established exchanges and are covered by assigned analysts. As such, broker-dealers such as Canaccord are expected to provide some “gatekeeping” functions, before listing the securities offerings of small cap companies.

The Exchange Act Rule 15c2-11 mandates that broker-dealers have a reasonable basis for believing that the prospectus and other information made available by the issuer of the securities are accurate. According to the SEC, Canaccord enabled dozens of OTC companies to list and trade, without making any proper effort to ensure prospectus information and offering figures were accurate or obtained from reliable sources. The SEC alleged that Canaccord assigned a compliance associate to review OTC listings; however, the compliance associate had no trading experience or training required by the rule. For example, the SEC noted that he did not have experience related to the analysis of financial statements. Simply assigning a compliance individual to a task does not waive firms of their obligations to ensure the task is done properly, adequately, and to full extent mandated by the SEC and/or the Financial Industry National Regulatory Authority. Compliance is a robust process of checks and balances so as to ensure fairness and transparency within the financial services industry.

Canaccord consented to the institution of cease and desist proceedings ordering that it cease and desist from committing or causing any violations relating to Exchange Act Rule 15c2-11, and it agreed to pay a $250,000 fine and censure.

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On September 18, 2017, Lax & Neville LLP was appointed special securities litigation counsel for court-appointed Receiver, Richard W. Barry, in an action commenced by the Attorney General of New Jersey on behalf of the Chief of the New Jersey Bureau of Securities. The action alleged securities fraud in the sale of securities, as well as other violations of the New Jersey Uniform Securities Laws, by defendants Osiris Fund Limited Partnership (a hedge fund), Peter Zuck, and others.  State of New Jersey, et al. v. Peter Zuck, et al., Docket No.: HDU-C-125-12.

The Receiver—who was empowered to pursue actions on behalf of the receivership estate to recover assets for the benefit of defrauded investors, victims, and creditors—filed a motion to approve the retention of Lax & Neville LLP as special securities counsel to assist the Receiver in his duties and seek relief on behalf of those defrauded.  Given the sophisticated nature of the securities-related issues, the Receiver sought to retain a law firm with specialized skill, knowledge and experience in securities law and arbitration.  Lax & Neville LLP’s retention as special securities counsel was approved by court order on September 18, 2017.

On December 30, 2017, Lax & Neville LLP commenced a Financial Industry Regulatory Authority (“FINRA”) arbitration claim on the Receiver’s behalf against Interactive Brokers and Kevin Michael Fischer, who is the head of Interactive Brokers LLC’s block trading desk.  The FINRA arbitration concerned the collapse of Osiris Fund, a fraudulent Ponzi scheme orchestrated by Peter Zuck, a convicted felon who was banned from the securities industry (specifically, the National Futures Association (“NFA”)) fifteen years before he opened accounts with Fischer at Interactive Brokers.  The Receiver’s Statement of Claim alleged that, from April 2009 through December 2011, Interactive Brokers ignored numerous red flags, including obviously fraudulent account opening documents, suspicious fund transfers, ludicrously high “management fees,” and hundreds of e-mails and hours of recorded phone calls between Osiris Fund’s employees and Fischer.  The Receiver further alleged that Interactive Brokers and Fisher became instrumental to the scheme, with Interactive Brokers providing substantial participation in the form of what was apparently a completely unsupervised platform that gave Osiris Fund credibility with Investors, and with Fischer participating substantially in marketing and solicitating new investors, recommending securities, directing Osiris Fund’s employees, and at times managing Osiris Fund’s investments himself.  The Receiver alleged that Interactive Brokers, Fisher, and Osiris Fund defrauded approximately 72 investors out of approximately $6.5 million.

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On May 7, 2019, two former Credit Suisse investment advisers represented by Lax & Neville LLP won a $6.68 million FINRA arbitration award against Credit Suisse Securities (USA) LLC for unpaid deferred compensation and violations of the New York Labor Law (“NYLL”).  This is the fourth FINRA Award against Credit Suisse for unpaid deferred compensation.

The claimants, Joseph Todd Lerner and Anna Sarai Winderbaum, were advisers in the New York branch of Credit Suisse’s US private banking division (“PBUSA”) and were terminated when Credit Suisse closed PBUSA.  Credit Suisse took the position, as it has with hundreds of its former investment advisers, that Ms. Winderbaum and Mr. Lerner voluntarily resigned and forfeited their deferred compensation.  A three member FINRA Arbitration Panel determined that Credit Suisse terminated Ms. Winderbaum and Mr. Lerner without cause, breached their employment agreements by cancelling their deferred compensation and violated the NYLL.    The FINRA Panel was chaired by a law professor and expert in labor and employment law.

The FINRA Panel awarded Ms. Winderbaum and Mr. Lerner compensatory damages totaling $2,787,344, which included 100% of their deferred compensation awards, 2015 deferred compensation, and severance.  Having concluded that the cancellation of deferred compensation violated the NYLL, the FINRA Panel awarded statutorily mandated interest, attorneys’ fees and liquidated damages equal to 100% of the unpaid compensation.  See NYLL § 198(1-a).  The FINRA Panel ordered Credit Suisse to pay 100% of the FINRA forum fees, totaling $50,250.00, and recommended expungement of Mr. Lerner and Ms. Winderbaum’s Form U-5, the termination notice a broker-dealer is required to file with FINRA.  As with hundreds of their colleagues, Credit Suisse falsely reported that Mr. Lerner and Ms. Winderbaum’s “Reason for Termination” was “Voluntary,” i.e. that they voluntarily resigned.  The FINRA Panel recommended that the “Reason for Termination” be changed to “terminated without cause.”   The FINRA Panel also denied Credit Suisse’s counterclaims.  To view this Award, visit 17-00057.

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On April 5, 2019, the Financial Industry Regulatory Authority (“FINRA”) issued Regulatory Notice 19-10, which clarifies conduct regarding how brokerage firms and brokers should communicate with clients in the event a broker transitions to a new firm. FINRA Regulatory Notice 19-10 makes two key points:

  1. in the event of a registered representative’s departure, the member firm should promptly and clearly communicate to affected customers how their accounts will continue to be serviced; and
  2. the firm should provide customers with timely and complete answers, if known, when the customer asks questions about a departing registered representative.
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On March 5, 2019, the Securities and Exchange Commission (“SEC”) entered into a settlement agreement with BB&T Securities in which the firm agreed to return approximately $5 million to retail investors and pay a penalty of $500,000. These fines and violations were related to the brokerage firm Valley Forge Asset Management (“Valley Forge”), which was acquired by BB&T, making BB&T responsible for Valley Forge’s liabilities.

Valley Forge represented to clients that it was a full-service brokerage house with high levels of client servicing, and clients must pay a premium for that servicing. Valley Forge did not disclose to clients that investors who did not choose in house advisory services paid fees 25% less than those who used the in-house service. Valley Forge justified these high fees by making false representations to clients that the fees were actually discounted by 70%, when in fact there was no higher price they were discounted from, and even the supposedly discounted rate was far above market rates for the level of service provided.
The SEC increasingly scrutinizes small broker-dealers and investment advisors for charging fees for services that have not in fact been delivered, or for charging fees not in line with the general mark to market for that level of service.  The attorneys at Lax & Neville LLP have extensive experience in successfully prosecuting claims on behalf of customers who have suffered losses as a result of investment and securities fraud. Additionally, attorneys at Lax & Neville are experienced with employment law in the financial services industry, and dealing with regulatory bodies such as the SEC. If you are a victim of fraud or are a Financial Advisor with a prospective regulatory issue, please contact Lax & Neville LLP today at (212) 696-1999 to schedule a consultation.

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On February 8, 2019 the Financial Industry Regulatory Authority (“FINRA”) accepted an Acceptance Waiver and Consent (“AWC”) from Elizabeth Marie Garcia, a Merrill Lynch Financial Advisor, pursuant to which Ms. Garcia consented to a complete and total bar from the securities industry. FINRA’s investigation concluded that Ms. Garcia filed fake childcare reimbursement expenses to Merrill Lynch, through the Merrill Lynch Business Development Account (“BDA”). The investigation concluded that approximately $9,015 in false expenses were improperly reimbursed to Ms. Garcia.

Financial services firms such as Merrill Lynch have business development accounts, or travel and entertainment spending allowances, for Financial Advisors, and other client facing/business development personnel. It is common for firms to contribute a sum to the accounts, and Financial Advisors to also contribute to the account, and there are generally tax advantages to this practice. Because Financial Advisors contribute their own money to the account, there is a trend towards advisors filing false expense reports, as they view a large portion of the money set aside as their own.

This view is unfounded: a percentage of the monies in any BDA account are contributed by the firm, therefore some percentage of any fraudulent expense is paid for with firm money. Additionally, filing a false expense report is taken very seriously by FINRA, and seen as both a violation of the just and equitable principles of trade, and a violation of the requirement to maintain accurate books and records. Individuals who file false expense reports can expect to face possible termination by their employer, face negative U5 language, and be investigated by FINRA. These investigations can have a wide range of outcome, with anything from a letter of warning, to a complete bar from the industry, depending on FINRA’s view of the specific circumstances surrounding the matter.

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On January 17, 2018 State Street Advisors announced the intention to reduce its work force by 1,500 employees, including 15% of senior management positions. This layoff may affect many veteran employees, impacting complicated compensation packages involving deferred compensation, equity awards, and bonuses in addition to base pay.

Lax & Neville has extensive experience negotiating severance packages on behalf of financial services executives. Lax & Neville can help ensure executives are protected when they transition to a new firm and provide input on draft U4 and/or U5 language to make it more favorable for the departing individual.

Lax & Neville can also assist departing employees in navigating restrictive covenants within their former firm’s employment agreements and negotiate contract language and compensation in new firm agreements.

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Wells Fargo has made its recruiting packages more generous than ever. The current deals on the street reflect Wells Fargo giving brokers with Trailing 12-month production (“T12”) exceeding $500,000 upfront forgivable loans that equal two times the previous year’s T12. The total value of some of these deals if the onboarding broker achieves back end bonuses of revenue and asset targets can exceed 325%.

The new deals Wells Fargo is offering resemble those that wirehouses such as Merrill Lynch, Morgan Stanley, and UBS used to make, during the peak of recruiting frenzies. Many firms have since scaled back on these expensive deals, due to the weight of forgivable-loan debt on their balance sheets and questions regarding the net return on such expensive broker book acquisitions.

Wells Fargo ended 2018 with approximately 13,970 brokers across its Private Client Group, branch bank group, and independent channel. Many brokers have been leaving Wells Fargo, possibly due to reputational issues affecting client’s perception of the banks abilities and platform.

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On November 6, 2018, a former Credit Suisse investment adviser represented by Lax & Neville LLP, a leading securities and employment law firm, won a FINRA arbitration award against Credit Suisse Securities (USA) LLC for unpaid deferred compensation.  This is the second FINRA Award against Credit Suisse for unpaid deferred compensation. 

The claimant, Nicholas Finn, was an adviser in Credit Suisse’s New York US private banking division (“PBUSA”) and was terminated when Credit Suisse closed PBUSA.  Credit Suisse took the position, as it has with hundreds of other former investment advisers, that Mr. Finn voluntarily resigned and forfeited his deferred compensation.  A three arbitrator panel determined that Credit Suisse terminated Mr. Finn without cause and awarded him all of his compensatory damages in the amount of $975,530, which included all of his deferred compensation awards valued as of November 23, 2015, the day he left Credit Suisse, and his 2015 deferred compensation.  The Panel ordered Credit Suisse to pay 100% of the FINRA forum fees, totaling $27,300, and recommended expungement of Mr. Finn’s Form U-5, the termination notice a broker-dealer is required to file with FINRA.  As with Mr. Finn’s colleagues, Credit Suisse falsely reported that Mr. Finn’s “Reason for Termination” was “Voluntary,” i.e. that Mr. Finn resigned.  The Panel recommended that the “Reason for Termination” be changed to “terminated without cause.”   The Panel also denied Credit Suisse’s counterclaims.  To view this Award, Nicholas Finn v. Credit Suisse Securities (USA) LLC, FINRA Case No. 17-01277 

Credit Suisse raised a mitigation defense based upon compensation Mr. Finn received or may receive from his current employer, UBS Financial Services Inc.  Like the Panel in Brian Chilton v. Credit Suisse Securities (USA) LLC, FINRA Case No. 16-03065, the Finn Panel  rejected Credit Suisse’s mitigation defense when it awarded Mr. Finn all of his Credit Suisse deferred compensation.