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Recently, the Financial Industry Regulatory Authority (“FINRA”) Department of Enforcement fined and suspended an ex-Merrill registered financial advisor, who had been in the industry for nearly 35 years, for breaching FINRA Rule 2010 and firm policy by violating his duty to maintain the confidentiality of a customer’s nonpublic information.  Merrill Lynch’s Employment Agreement also requires a financial advisor to preserve the confidentiality of nonpublic customer information and refrain from taking and disclosing such information upon termination of their employment.  Customers’ nonpublic information, including dates of birth, social security and driver’s license numbers, account numbers, and tax information, is also protected under Regulation S-P.  FINRA Letter of Acceptance, Waiver, and Consent No. 2021071850601, 2 (2021).

The financial advisor’s violative conduct consisted of taking pictures of confidential client information from the Merrill Lynch electronic systems.  According to FINRA, the advisor took photographs, which contained customers’ names, dates of birth, social security numbers, and account numbers, for approximately 35 clients and advised the junior members of his team to take similar photos for at least 100 other customers.  These photos were taken in anticipation of transitioning to another brokerage firm. When the advisor and his team resigned from Merrill Lynch, they retained the nonpublic personal information of customers.  The information “was secured by the firm through which [the advisor] had become registered, and the firm returned the customers’ nonpublic personal information to Merrill Lynch prior to its use.”  Id.

The advisor executed a letter of Acceptance, Waiver, and Consent (“AWC”) wherein he accepted the finding of a violation, consented to the imposition of sanction, and agreed to waive the right to a hearing before any panel, court, or administrative body.  The FINRA AWC states that the Merrill Lynch advisor “improperly retained the customers’ nonpublic personal information” when transitioning to a new firm in violation of FINRA Rule 2010.  Id.  FINRA suspended the financial advisor for 10 workdays and fined him $5,000.

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On September 9, 2022, the Superior Court of the State of California entered judgment on a FINRA Arbitration Award against Credit Suisse Securities (USA) LLC, ordering it to pay more than $10 million to seven investment advisors formerly employed in the Los Angeles and San Francisco branches of its now-closed US private bank. This follows the July 8, 2022 decision of the Circuit Court of Cook County, Illinois confirming an award against Credit Suisse and entering a $9.5 million judgment for eight advisors in Chicago.

These fifteen advisors are among the more than three hundred Credit Suisse laid off when it closed its US private bank in 2015.  Credit Suisse purported to “cancel” the more than $200 million in earned and vested deferred compensation it owed its three hundred advisors by claiming each of them voluntarily resigned at the same time Credit Suisse was closing their branches and eliminating their positions.  The FINRA Panels in Los Angeles and Chicago, like eight other FINRA Panels thus far, unanimously found that Credit Suisse terminated the advisors without cause, breached their employment agreements, and violated their respective states’ labor laws, the California Labor Code (“CLC”) and Illinois Wage Payment and Collection Act (“IWPCA”).  The FINRA Panels ordered Credit Suisse to pay the deferred compensation, statutory interest and penalties, and a total of more than $2 million in attorneys’ fees and costs.

Credit Suisse subsequently petitioned to vacate the FINRA Panels’ Awards.  Among other grounds, Credit Suisse contended that the FINRA Panels exceeded their authority when they determined that Credit Suisse had violated the labor law and awarded statutory attorneys’ fees.  The California and Illinois Courts disagreed, denying the petitions to vacate in all respects and confirming the Awards, including the labor law violations and more than $2 million in attorneys’ fees and costs.

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Need legal tips for your financial advisor practice? Recent media coverage of an advisor’s transition from RBC to UBS and then back to RBC has shone a light on the legal missteps an advisor can make when moving their book of business to a new firm partner. In this episode, Elite Consulting Partners CEO Frank LaRosa is joined by Brian Neville, Founding Partner of Lax & Neville LLP, for a discussion that puts their substantial combined industry expertise to work and tackles the broad topic of the legal side of transitions, providing advisors with insights that prove practical and actionable.

Topics covered in the conversation include:

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Lax & Neville LLP has successfully brought claims on behalf of former Credit Suisse investment advisers for their portion of the over $200 million of deferred compensation that Credit Suisse refused to pay its advisors when it closed its US private bank in 2015, violating the advisers’ employment agreements and the firm’s own deferred compensation plans. Nine have gone to award thus far, including seven brought by Lax & Neville LLP totaling 172 hearing days and resulting in awards of more than $30 million to 25 former Credit Suisse advisers. See Prezzano et al. vs. Credit Suisse Securities (USA) LLC, FINRA No. 19-02974, Hutchinson et al. vs. Credit Suisse Securities (USA) LLC, FINRA No. 16-02825, Galli, et al. v. Credit Suisse Securities (USA) LLC, FINRA No. 17-01489; DellaRusso and Sullivan v. Credit Suisse Securities (USA) LLC, FINRA No. 17-01406; Lerner and Winderbaum v. Credit Suisse Securities (USA) LLC, FINRA No. 17-00057; Finn v. Credit Suisse Securities (USA) LLC, FINRA No. 17-01277; and Chilton v. Credit Suisse Securities (USA) LLC, FINRA No. 16-03065. All nine FINRA arbitration panels, three New York Supreme Court Commercial Division Judges (Credit Suisse Securities (USA) LLC v. Finn, Index No. 655870/2018 (N.Y. Sup. Ct. 2019); Lerner and Winderbaum v. Credit Suisse Securities (USA) LLC, Index No. 652771/2019 (N.Y. Sup. Ct.), Credit Suisse Securities (USA) LLC v. DellaRusso and Sullivan, Index No. 657268/2019 (N.Y. Sup. Ct.)), and a unanimous panel of the New York Appellate Division have found for the advisers and ordered Credit Suisse to pay the deferred compensation it owes them.

Lax & Neville LLP has won more than $30 million in compensatory damages, interest, costs, and attorneys’ fees on behalf of former Credit Suisse investment advisers. To discuss these FINRA arbitration Awards, please contact Barry R. Lax, Brian J. Neville, Sandra P. Lahens or Robert R. Miller at (212) 696-1999.

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On February 4, 2021, the Securities and Exchange Commission (“SEC”) charged three individuals and affiliated entities with running “a Ponzi-like scheme” that raised over $1.7 billion by selling unregistered, high commission private placements issued by GPB Capital Holdings, an alternative asset management firm.  The SEC alleges that David Gentile, the owner and CEO of GPB Capital, and Jeffry Schneider, the owner of GPB Capital’s placement agent Ascendant Capital, lied to investors about the source of money used to make the annual distribution payments to investors.  According to the Complaint filed by the SEC in the U.S. District Court, Eastern District of New York, GPB Capital actually used money raised from investors to pay portions of the annualized 8% distribution payments due on private placements sold to earlier investors.  The SEC complaint alleges that GPB Capital, Mr. Gentile, and former GPB Capital managing partner, Jeffrey Lash, manipulated the financial statements of certain funds managed by GPB Capital to give the false appearance that the funds’ income was sufficient to cover the distribution payments – when in fact it was not.

In addition, the SEC complaint alleges that GPB Capital allegedly violated whistleblower protection laws by including language in separation agreements that forbade individuals from coming forward to the SEC, and by retaliating against whistleblowers.

Financial advisors sold GPB Capital private placement investments to their customers, including retirees and unsophisticated investors.  The 8% annual distribution payment appealed to investors.  Those payments, however, stopped in 2018.  In 2019, GPB’s chief financial officer was indicted and GPB Capital reported sharp losses across its funds.  Following the announcement, some broker-dealers allegedly instructed their broker-dealer clients to remove GPB issued private placements from their platforms within 90 days.  Investors of the GPB private placement investments paid as much as 12% of the money they invested to broker-dealers in the form of fees and commissions.   Brokers and financial advisors allegedly touted and pushed these investments onto their clients, thousands of which are retirees and unsophisticated, and in some instances over concentrated their portfolios in GPB Capital.  Private placement investments are risky investments only suitable for sophisticated, accredited investors who understand the risks and can afford to lose their investment.  Financial advisors and brokers have duties to recommend investments that are suitable to their clients and perform due diligence on the investment products they recommend and sell to investors.  If your financial advisor sold GPB Capital investments to you, you may have a claim to recover your investment losses.

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Lax & Neville LLP is investigating claims involving Amarin, a speculative biotech stock recommended and sold to investors by financial advisors. Amarin is a biopharmaceutical company with one significant commercial product, Vascepa, a fish oil drug designed to reduce cardiovascular risk among patients with elevated risks of cardiovascular events and elevated triglyceride levels.  Amarin’s stock skyrocketed from $3 a share to $18 a share in a single day following the release of positive clinical data in September 2018, (and traded in that range, including in the mid to low $20s during the next 18 months), but declined to low single digits in March 2020 after losing a key patent litigation decision.  See Amarin Pharma v. Hikma Pharmaceuticals USA Inc., Case No. 2:16-cv-02525-MMD-NJK (D. Nev. 2016).  The patent litigation was a known risk to the stock, and eventually caused a collapse in Amarin’s share price.

Upon information and belief, financial advisors at Morgan Stanley and other brokerage firms solicited and concentrated customer accounts in Amarin, even while the company was defending its patent on Vascepa in litigation.  This litigation was a material risk in any Amarin investment.  If generic versions of Vascepa could enter the market, Amarin’s sales would be substantially reduced, and even if the introduction of generic versions did not start right away, the perception that their development would create could also materially impact Amarin’s value and stock price.

Upon information and belief, financial advisors failed to adequately disclose the risks of investing in Amarin and in having concentrated positions in one stock.  Financial advisors have duties, including a fiduciary duty, to provide customers with full and fair disclosure of all material facts, such as the risks of litigation, the ongoing risks of overconcentration; and to diversify an investor’s portfolio.  Financial advisors also have a duty to continually update “buy,” “hold,” and “sell” recommendations for any security.  Financial advisors must develop a suitable plan for customers’ investments, and to recommend transactions and investment strategies only where they have a reasonable basis to believe that their recommendations are suitable for the customer based on the customer’s financial needs, investment objectives, investment experience, risk tolerance, and other information that they know and have obtained about the customer.  An investment in Amarin, particularly in concentrated positions is risky and not suitable for all investors.  The failure by a financial advisor to provide suitable investment advice with fair and balanced risk disclosures is a violation of his or her fiduciary duties and other duties.

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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.

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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.

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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.

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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:

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