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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.

On October 10, 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.  The claimant, Brian Chilton, was an adviser in Credit Suisse’s US private banking division (“PBUSA”) and was terminated when Credit Suisse closed PBUSA.  As it did with hundreds of his colleagues, Credit Suisse took the position that Mr. Chilton voluntarily resigned and forfeited his deferred compensation.  A highly sophisticated and experienced three arbitrator panel determined that Credit Suisse terminated Mr. Chilton without cause and awarded him all of his deferred compensation, consisting of 39,980 shares of Credit Suisse AG valued as of the date of his termination at $585,307.20.  The Panel ordered Credit Suisse to pay interest of $131,694.12, attorneys’ fees of $146,326.80, and 100% of the FINRA forum fees, totaling $69,750.00.  The Panel also recommended expungement of Mr. Chilton’s Form U-5, the termination notice a broker-dealer is required to file with FINRA.  Credit Suisse had falsely reported that Mr. Chilton’s “Reason for Termination” was “Voluntary,” i.e. that Mr. Chilton resigned.  The Panel recommended that the “Reason for Termination” be changed to “terminated without cause.”  To view this Award, Brian Chilton v. Credit Suisse Securities (USA) LLC, FINRA Case No. 16-03065.

Credit Suisse announced it was closing PBUSA on October 20, 2015.  Dozens of its former advisers have subsequently filed FINRA Arbitration claims for their unpaid deferred compensation.  The claims are based upon unambiguous language in Credit Suisse’s contracts providing that deferred compensation awards vest immediately upon termination without cause.  In a transparent attempt to evade its deferred compensation liabilities, which amounted to hundreds of millions of dollars, Credit Suisse deliberately mischaracterized its advisers’ terminations as voluntary resignations, notwithstanding that it had announced it was closing PBUSA, told its employees, including the advisers, to find someplace else to work and told its clients to close their accounts.  In its Form U-5 filings, Credit Suisse misrepresented to its regulator that the advisers had voluntarily resigned.

The Chilton Panel was the first to reach a decision on this issue and found that Mr. Chilton’s Form U-5 filing was false and should be changed to termination without cause.  Under the unambiguous terms of Credit Suisse’s contracts, Mr. Chilton was therefore entitled to his deferred compensation.

J.P. Morgan announced this week that it had terminated broker Trevor Rahn. Mr. Rahn’s U5 language, the regulatory filing made to the Financial Industry Regulatory Authority (“FINRA”) associated with any termination, stated the reason for termination as “unacceptable practices” related to the “timing and size of orders entered and resulting transaction charges in a client account.” This practice is referred to as “churning,” in the industry, when a broker repeatedly buys and sells securities in a clients account, not for strategic purposes in the interest of the client, but to generate fees and commissions.

J.P. Morgan reported Mr. Rahn’s date of termination as September 17, 2018. Mr. Rahn was terminated more than three months after reaching a settlement with a Tracey Dewart who filed a complaint against Mr. Rahn and J.P Morgan for the excessive fees charged to her elderly fathers account. Ms. Stewart, using a forensic accountant, found that Mr. Rahn had charged her father approximately $128,000 in commissions, in one year, on an account of approximately $1.2 million. Wealth management fees and commission fees are rarely supposed to exceed 2%, by industry standards, and FINRA has very specific rules regarding fee ratios to account size and profit. Mr. Rahn’s yearly fees exceeded 10% of the total account value.

Broker-dealers, especially large wire houses like J.P. Morgan, are intended to have compliance software that screens customer accounts for excessive churning. It is unknown why such flagrant activity by Mr. Rahn was not detected earlier. According to Ms. Stewart, there was irregular activity in her fathers account going back years. J.P. Morgan settled this churning case, and then continued to allow Mr. Rahn to trade customer accounts for three months before terminating him, a timeline that regulators may take issue with due to the possibility of members of the public being further exposed to Mr. Rahn’s sales practice abuses.

On September 5, 2018 the Securities and Exchange Commission (“SEC”) issued an alert warning investors of scams involving marijuana related stocks. As the marijuana market becomes more mainstream, and legalization efforts continue to expand, there is an increasing number of publicly listed companies involved in the marijuana industry. The SEC alert noted a marked increase in the number of fraudulent schemes related to marijuana stocks.

Many marijuana stocks, such as Canopy Growth Corp (“$CGC”), Tilray (“$TLRY”) and Cronos ($CRON) have increased in value by several hundred percent within the last year. The enormous returns in this space may have attracted large amounts of speculative trading by retail investors. Where retail investors go, fraudulent securities schemes often follow.

As some analysts note, many Canadian listed marijuana stocks are now taking steps to list on US exchanges, so as to target US investors, and the increased trading volume and capital inflow that comes with a US listing. Many of these marijuana companies would be considered microcap stocks and can easily be subject to market manipulation. Stocks with small floats and low trading volume can be marketed to retail investors and manipulated in “pump and dump” schemes.

When financial advisors transition from one bank to another, there is always a litigation risk. This risk can be minimized and greatly reduced by seeking proper counsel and gaining a full understanding of the restrictive covenants and duties of loyalty employment contract impose on financial services employees. A recent move that resulted in litigation was Kirk Cunningham and Todd Helfrich, who together manage close to $14 billion in assets, moving from JPMorgan to Merrill Lynch. JP Morgan has brought a suit against the former employees, claiming that the two advisors engaged in “bad-mouthing” the firm to former clients and that they allegedly violated the one-year non-solicitation clauses in their employment agreements. According to JPMorgan, the team allegedly told clients that the firm “only has junior people left to manage the client accounts,” and “forces its clients to use only its own products.” JP Morgan is seeking a temporary restraining order so as to halt this alleged activity.

The firm is suing Merrill advisors Kirk Cunningham and Todd Helfrich for violating non-solicitation agreements and improperly taking client contact information. Cunningham and Helfrich left JPMorgan’s private bank in February, after nine years as a private banker and seven years as an investment specialist, respectively. Together the pair served over 100 clients, making the $14 billion business a narrow-focused book, according to federal court documents from the U.S. District Court for the Northern District of Illinois.

Cunningham and Helfrich’s alleged solicitation efforts came to JPMorgan’s attention after the bank received complaints from clients about phone calls and emails from the duo. One client claimed his private data was being compromised by the duo and provided emails wherein Cunningham asks to discuss advisory services that he could offer from his new position with Merrill Lynch, according to JPMorgan’s suit.

There have been over 2,000 FINRA arbitrations filed in Puerto Rico in regards to unsuitable leveraged investments in Puerto Rican bond funds, and over $226 million in awards so far. However, many of these cases settle. Some analysts have noted that while banks such as UBS have faced a large number of arbitration claims for investing clients’ funds in unsuitable high-risk leveraged Puerto Rican bond funds, bank of Santander was spared from most of these claims and is subject to only 200 filings. This lower number of claims stands in contrast to the fact that the Santander funds had higher leverage than UBS, and may have been marketed more aggressively to unsuitable clients.

Santander sold over 12 closed end funds and six open end funds in Puerto Rico; designated “First Puerto Rico Funds.” Santander marketed 11 of these funds to clients with conservative investment goals of “capital preservation,” yet these funds declined by 56% on average. In 2013, there were $3.4 billion in assets in these 11 closed end funds. By 2015, there were only $1.6 billion, with $1.8 billion in valuation vanishing as default rates rose on the bonds.

Most municipal bond funds are leveraged at a maximum of 20%, whereas Santander sold Puerto Rican municipal bond funds to conservative investors leveraged at 50% – 100%, doubling potential gains, but also doubling possible losses. Given that Puerto Rican municipal bonds were already paying coupons of between 5% to 6%, leveraging an already-risky bond in which the inflated yield is supposed to compensate for increased risk is unwise at best, according to some investment professionals.

The Georgia Court of Appeals has held that the Protocol for Broker Recruiting (“the Protocol”) does not preclude Financial Advisors from informing their employers of their intentions to leave. Some firms have Notice of Termination provisions in their employment contracts, which require brokers to give notice of their intentions to resign, prior to terminating their employment.

The Protocol is an agreement that was made in 2004. It was designed to allow financial advisors and brokers to transition from one firm to another while taking client information with them. At its peak, the Protocol included the vast majority of brokerage firms, leading to a significant decrease in litigation costs, which had reached staggering levels prior to the institution of the protocol. However, with the withdrawal of firms such as Morgan Stanley, which effectively withdrew from the Protocol on November 3, 2017, the Protocol has lost some of its influence. A recent Georgia court decision has further weakened the Protocol.

The June 2018 decision concerns a 2014 case where several brokers departed from Aprio Wealth Management LLC. Without waiting the obligatory 60 to 90 days outlined in their contracts, the brokers encouraged their clients to transfer their accounts over to Morgan Stanley. Morgan Stanley had recruited the brokers, telling them that the Protocol would override their advanced notice agreements. The Georgia court-of-appeals was tasked with determining what influence the Protocol plays on advanced notice agreements. The presiding judge of the Georgia Court of Appeals ruled that the Protocol does not override the advance notice provisions present in brokers’ contracts. Aprio claims that this decision is beneficial to its purposes, as it protects smaller and mid-sized firms from being poached by larger firms with more resources.

On June 21, 2018 U.S. District Judge William Orrick (“Orrick”) in San Francisco granted a Motion to Dismiss (“MTD”) in the case Christopher M. Laver v Credit Suisse Securities (USA), LLC. Orrick ruled that the plaintiff Christopher Laver was bound by an agreement to arbitrate employment-related disputes and could not pursue his proposed class action on behalf of roughly 200 brokers.

In the Order Granting the Motion to Dismiss, Orrick wrote the following:

As Laver notes, Regulatory Notice 16-25 characterized as dicta a discussion in a FINRA Board of Governors 2014 enforcement action decision. Regulatory Notice 16-25 at fns. 17, 23 (discussing Board of Governor decision in Dept of Enforcement v. Charles Schwab & Co., 2014 FINRA Discipl. LEXIS 5 (April 24, 2014)). The Cohen court relied on that now-FINRA-disapproved-of-dicta from the Schwab decision suggesting firms could contract around employee rights to a FINRA arbitration (but not consumer rights to FINRA arbitration). However, the fundamental point remains; nothing in Regulatory Notice 16-25 indicates that member firms cannot contract around other, less fundamental provisions of the FINRA Code. Rule 13204 itself provides that its subparagraphs “do not otherwise affect the enforceability of any rights under the Code or any other agreement” indicating that the provisions of this specific rule are subject to waiver by private agreement. See Rule 13204

On June 19, 2018 the Securities and Exchange Commission filed charges against multiple individuals and associated companies that defrauded investors out of $102 million. The individuals charged are Perry Santillo, Christopher Parris, Paul LaRocco, John Piccarreto, and Thomas Brenner (collectively “Defendants”).

These individuals accrued client assets largely through buying the books of business of retiring brokers. This method of raising funds allowed the brokers to gain clients trust, by ingratiating themselves with older brokers who were retiring and inserting themselves into the relationship. The Defendants would then convince clients to liquidate safe investments and move funds into companies controlled by Defendants. These companies were represented as real estate development trusts, financial services entities, oil and gas operations, etc. and double-digit investment returns combined with high dividends were promised.

In reality, these companies were simply shell entities controlled by Defendants, and once funds were transferred into the entities, they were transferred to feeder accounts, comingled, and withdrawn and misappropriated by Defendants for personal use. Defendants preyed on elderly victims with Alzheimer’s and deteriorating health, and while building trust and promising the safekeeping of funds, brazenly stole them for personal use.

On May 30, 2018 the Securities and Exchange Commission (“SEC”) charged Steven Pagartanis (“Mr. Pagartanis”) with an $8 million fraud. Mr. Pagartanis was a registered representative of Lombard Securities Incorporated (“Lombard Securities”), an SEC registered broker-dealer. The SEC alleges Mr. Pagartanis had clients, including elderly retirees, write checks to an entity that he controlled that was similarly named to Lombard Securities.

Mr. Pagartanis promised the funds would be safe, and represented guaranteed monthly payments to his clients, while in fact he used the funds to pay personal expenses, or to make interest payments to earlier investors. Mr. Pagartanis hid this fraudulent, illicit activity from investors by creating fictitious account statements showing real estate holdings and interests in private development companies that did not in fact exist. Marc P. Berger, Director of the SEC’s New York Regional Office, said of the fraud: “[A]s part of the alleged scam, Pagartanis preyed on his customers’ trust, duping them to write checks payable to his own entity…regardless of how long investors have worked with their brokers, they should always confirm that recommended investments are approved for sale by their brokerage firm before transferring funds.”

When Financial Advisors engage in fraud and criminal behavior and steal victim’s funds, often times the funds have been spent and are difficult to recover. In some instances, the broker-dealer, custodian, or clearing firm that was involved in holding client accounts for the Financial Advisor that defrauded clients can be held liable for losses caused by the criminal activities of the Financial Advisor.