New York Securities Lawyer BlogBradley Birkenfeld, a former banker and employee of UBS, received a monetary award in the amount of $104 million from the Internal Revenue Service (“IRS”) for revealing information relating to UBS’s practice of advising and assisting its clients on how to shield their assets from the IRS – a clear violation of the Internal Revenue Code. Birkenfeld’s disclosure to the IRS ultimately led to a $780 million settlement between UBS and the federal government, as well as the enrollment of more than 35,000 American taxpayers in IRS amnesty programs, which will allow the repatriation of their offshore accounts. The IRS has stated that it expects to recover an estimated $5 billion as a result of Birkenfeld’s disclosure. According to a website maintained by the IRS’s Whistleblower Office, which was established as a result of the enactment of the Dodd-Frank Act in 2010, monetary awards will be provided to whistleblowers that provide specific and credible information about violations of the Internal Revenue Code. Anti-retaliation protections are also afforded to those who choose to disclaim such information. In a statement confirming the award, the IRS emphasized the importance of the whistleblower statue and acknowledged it as a “valuable tool to combat tax non-compliance.” At Lax & Neville LLP, we represent individuals, securities industry employees and securities industry companies seeking representation in employment matters and securities-related and commercial litigation. Please contact our team of attorneys for a consultation at (212) 696-1999.
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LIBOR Manipulation Scandal Investigations and Litigation
In 1986, the British Bankers’ Association (“BBA”) created the London Interbank Offered Rate (“LIBOR”) to assist BBA members to set corporate loan interest rates. LIBOR is an average interest rate that determines the cost of inter-bank lending, sets the average rates banks pay to borrow from one another and is very influential in the marketplace as it establishes the benchmark for interest rates in the financial system. LIBOR is determined by the largest London/Wall Street banks submitting estimated rates. The highest and lowest four estimated rates are disregarded, and the remainder of the rates are averaged which sets the LIBOR. The LIBOR is published daily by Thomson Reuters.
Court Rules that Financial Advisors of Waddell & Reed Are Independent Contractors, Not Employees
The U.S. District Court for the Southern District of California (“U.S. District Court”) recently ruled in favor of Waddell & Reed, Inc. (“Waddell & Reed”) in a dispute resulting from Waddell & Reed’s common practice of classifying its Financial Advisors as independent contractors, rather than as firm employees. (Taylor v. Waddell & Reed, Inc., 2012 U.S. Dist. LEXIS 117258 (S.D. Cal. Aug. 20, 2012).) In December 2009, current and former Financial Advisors of Waddell & Reed, Inc. filed a class action suit against the firm and alleged that the firm’s misclassification of their employment status is in direct violation of the Fair Labor Standards Act (“FLSA”), 29 U.S.C. §§ 206-207, the California Labor Code, and California’s Unfair Competition Law (“UCL”), Cal. Bus. & Prof. Code § 17200. In making its determination to reject the Financial Advisors’ claims, the District Court referred to California’s common law test for determining worker status and considered a number of factors including, but not limited to: (1) whether the advisor’s work was done under the direction of the principal or by a specialist without supervision; (2) the skill required in the occupation; (3) the length of time for which the services were/are to be performed; (4) the method of payment; (5) whether the work is part of the regular business of the principal; and (6) whether the parties believe they are creating an employment relationship. See S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal. 3d 341, 256 Cal. Rptr. 543, 769 P.2d 399 (1989). As was implied in the Taylor decision, the likelihood for the formation of such a relationship is commiserate with the level of autonomy exerted by the Financial Advisors over their clientele, reported earnings, planning services, and the work location. See Taylor v. Waddell & Reed, Inc. After weighing and considering these factors as a whole, the District Court ultimately held that the terms of the employer/employee relationship as evidenced between Waddell & Reed and its Financial Advisors was representative of a true independent contractor relationship. This potentially precedent-setting case serves as a reminder to Financial Advisors throughout the country of the necessity to devise appropriate risk management strategies in order to safeguard against alternative employee classification. At Lax & Neville LLP, we represent individuals, securities industry employees and securities industry companies seeking representation in employment matters and securities-related and commercial litigation. Please contact our team of attorneys for a consultation at (212) 696-1999.
MiddleCove Capital LLC and Noah Myers are Accused of Fraud
The Securities and Exchange Commission (“SEC”) has alleged that MiddleCove Capital LLC, a Connecticut based investment adviser firm, and Noah Myers, its founder, engaged in fraudulent allocation of trades from October 2008 through February 2011 when Myers made block purchases of securities through a master account and waited to allocate those trades until late in the day, or the next day, after he knew whether there was a gain or a loss on the trade. According to the SEC administrative order, Myers would sell a security and allocate that day-trade profit to his personal and business accounts, if the security increased in price the day it was purchased. Pursuant to the SEC order, Myers generally allocated the trade to a client, if the security’s price failed to increase the day it was bought. The SEC order stated that “the securities on which Myers was disproportionately making money were the same securities on which his clients were disproportionately losing money.” Reportedly, Myers made $460,000 for himself, while losing $2 million for his clients. In addition, the SEC found that the fraud involved the use of leveraged exchange-traded funds (“ETFs”), which are investments that attempt to deliver returns that represent a multiple or inverse of a particular stock index’s return. Leveraged ETFs can be volatile and risky and should be used only by sophisticated investors. The fraud was reportedly first detected by an internal program at Charles Schwab & Co. Inc., the custodian for MiddleCove client accounts and for the master account Myers used for the block trades. In a November 2011 interview with the SEC, Myers admitted to using a day-trading strategy in a personal account that was profitable 95% of the time, “but he did not offer a plausible explanation for his stellar day-trading performance.” The SEC administrative order institutes civil proceedings against Myers. If found liable, Myers could face fines and the SEC can demand disgorgement of profits plus interest from him and his firm, MiddleCove.
Merrill Lynch Settles Class Action Broker Compensation Suit
On August 14, 2012, nearly two years after the commencement of a class action lawsuit seeking the reimbursement of deferred compensation by thousands of former brokers of the Bank of America Corporation’s (“Bank of America”) Merrill Lynch & Co. (“Merrill Lynch”) unit, a formal disclosure was filed with the United States Securities and Exchange Commission (“SEC”) stating that the parties have finally “reached an agreement in principle” to settle the class action suit. On August 24, 2012, just over one week after this announcement was made, the class participants asked United States District Court Judge Alison Nathan to approve a $40 million settlement. This settlement, which is still pending the Judge Nathan’s approval, has been purported to compensate more than 1,400 of the aggrieved brokers participating in the suit. The basis giving rise to the broker’s claims for deferred composition is the direct result of Merrill Lynch’s merger agreement with Bank of America in September, 2008, which caused nearly 3,300 brokers to depart from the firm. After the merger was effectuated, many of the departing brokers placed a formal request with Merrill Lynch for the disbursement of their duly owed deferred compensation. However, Merrill Lynch was aggressive in addressing these claims. Generally, deferred compensation is payable to a broker once the broker has stayed with the firm for a specified number of years. Brokers are also entitled to their deferred compensation in the event that they discontinue their employment with the firm for a “good reason.” The brokers participating in this class action cite Merrill Lynch’s merger with Bank of America as a “good reason.” In addition to this class action, Merrill Lynch not only faces claims from more than 1,000 brokers in the Financial Industry Regulatory Authority’s (“FINRA”) arbitration forum, but it has also already lost quite a few high-dollar deferred compensation cases in arbitration.
MF Global Chief Executive Officer, Jon S. Corzine, Not Likely To Face Criminal Charges
Last year, in October 2011, MF Global, Inc. (“MF Global”), one of the world’s leading financial derivatives, futures and commodities brokers, collapsed after engaging in extremely risky proprietary trading involving European sovereign debt and repo trades. After the failure of MF Global, the United States Department of Justice launched a criminal investigation to determine whether the firm’s officers and directors were involved in the misallocation of approximately $1 billion in customer funds that lead to the firm’s collapse. The criminal investigation has transpired for nearly 10 months, and it has been reported that investigators will most likely conclude that internal chaos and inadequate risk controls lead to the disappearance of customer funds, not fraud. Department of Justice investigators invited Jon S. Corzine, former chief executive officer of MF Global, to a voluntary interview which is expected to take place next month. Reportedly, when prosecutors have sufficient evidence to support criminal charges, they typically do not extend an offer for a voluntary interview, as was done here. Since Mr. Corzine was invited to a voluntary interview, it is not expected that criminal charges will be filed against him. Although Mr. Corzine may not face criminal charges, he has suffered irreparable damage to his reputation on Wall Street. It is suspected, however, that criminal investigators are focusing their attention on MF Global lower level employees, including, but not limited to, Edith O’Brien, the firm’s “keeper of the books.” Ms. O’Brien was tasked with overseeing the transfer of customer funds during the time MF Global customer funds could not be accounted for. Notably, Ms. O’Brien refuses to cooperate with the authorities without receiving immunity from criminal prosecution. Although distributions have been made to former MF Global customers by the SIPC Trustee, none of the customers are expected to recuperate 100% of the value of their account. As such, many customers want justice to prevail and see that the wrongdoers are held accountable for their involvement in the loss of the customer funds and the collapse of MF Global. It will be interesting to see how the Justice Department concludes its investigation, and which officers and directors, if any, will be criminally charged.
Lax & Neville Win $263,219 FINRA Arbitration Award Brought By Current Morgan Stanley Smith Barney Employees For Payment Of Their Back-End Bonuses
On August 22, 2012, Lax & Neville LLP, a leading national securities arbitration law firm, won a FINRA arbitration award against Morgan Stanley Smith Barney for failing to pay two of its current employees/financial advisors their earned back-end bonuses. In the case won by our firm, FINRA Case No. 11-02261, the Panel awarded the Claimants, Richard M. Schwartz and Alan Jacobson, the entire amount of compensatory damages they were seeking, $263,219, plus 9% interest from October 5, 2010 until the Award is paid in full. This equitable result is a win for these two financial advisors who were not paid their earned compensation.
WJB Capital Group Inc. Hid Firm’s Financial Distress
WJB Capital Group Inc. (“WJB Capital”), a privately-held broker-dealer, stopped trading in its New York, Boston, Denver and San Francisco offices when it ceased operations in January 2012. Recently, WJB Capital, and two of its executives, settled allegations raised by the Financial Industry Regulatory Authority, Inc. (“FINRA”) that the firm traded securities without adequate capital and hid its financial problems for the two years prior to its collapse. FINRA alleged that WJB Capital, as well as its Chief Executive Officer, Craig Rothfield, and Chief Financial Officer, Gregory Maleski, misrepresented the firm’s balance sheet, net-capital calculations and other records. Brad Bennett, FINRA’S chief of enforcement stated, “Both WJB’s CEO and CFO hid the precarious financial condition of the firm, misstating the FOCUS reports and net-capital calculations by as much as $4.4 million per month over a two-year period . . . The firm’s supervision and accounting were seriously flawed.” Specifically, WJB Capital misclassified items as allowable for net-capital purposes, including $1.6 million in funds from providing “non-deal roadshows” and third-party research, and a $1.5 million loan the firm received from its clearing firm. Moreover, WJB Capital improperly treated approximately $10 million in compensation that was to be paid to 28 employees as “forgivable loans.” The FINRA settlement expelled WJB Capital from membership, barred Mr. Rothfield from the securities industry and barred Mr. Maleski from acting in a principal capacity. Lax & Neville LLP can effectively assist investors, on both a regional and national level, that may have suffered losses as a result of their financial advisor’s misrepresentations and/or disregard for their investment interests. Please contact our team of securities fraud attorneys for a consultation at (212) 696-1999.
Investors Win Arbitration Award Against First Legacy Securities, LLC and The Legacy Financial Group, Inc.
Recently, on July 30, 2012, a Financial Industry Regulatory Authority, Inc. (“FINRA”) arbitration panel in Birmingham, Alabama rendered a FINRA arbitration award against a brokerage firm and an investment advisor firm, respectively known as First Legacy Securities, LLC and The Legacy Financial Group, Inc. (collectively referred to as “Legacy”), based upon Claimants’ allegations that Legacy manifestly disregarded Claimants’ investment by mismanaging their brokerage account and by providing Claimants with unsuitable investment recommendations. On or about January 7, 2011, Claimants filed a Statement of Claim against Legacy, alleging the following causes of action: (1) misrepresentations, omissions and violations of the Alabama Securities Act; (2) unsuitability; (3) fraud; (4) breach of fiduciary duty; (5) negligence and wantonness; (6) breach of contract; (7) unjust enrichment; (8) vicarious liability/respondeat superior; (9) controlling person liability; (10) failure to supervise; (11) conspiracy; (12) egregiousness of conduct; and (13) infliction of emotional distress. Legacy denied all claims in its Statement of Answer. After eight days of testimony, the arbitration panel rendered an award which held that Legacy was liable to Claimants for its sales practice abuses. The arbitration panel awarded Claimants $585,000.00 in compensatory damages, which included an interest rate of 6% per annum. Additionally, the panel awarded punitive damages to Claimants in the amount of $250,000.00 pursuant to Mastrobuono v. Shearson Lehman Hutton, Inc. et al., 514 U.S. 52, 115 S.Ct. 1212, 131 L.Ed.2d 76 (1995), based on an application of the standard of reckless disregard for others. If you have suffered losses from investments, and believe that you are a victim of sales practice abuses, please call Lax & Neville LLP for a free consultation at (212) 696 – 1999.
New FINRA Suitability Rule Imposes An Obligation To Conduct A Suitability Determination For Sophisticated and Wealthy Investors
The new FINRA Suitability Rule – FINRA Rule 2111 – requires that broker-dealers and associated persons make recommendations to customers for securities that the firm and broker reasonably believe are suitable for the customer. This new rule imposes an obligation to conduct a customer specific suitability analysis for all customers, even those investors who are sophisticated and wealthy. The Securities and Exchange Commission (“SEC”) has held that a broker must still consider the customer’s investment objectives and risk tolerance when making securities recommendations to a sophisticated customer. See In the matter of Dale E. Frey, Roger A. Rawlings, and William C. Piontek, Initial Decision Release No. 221, 2003 WL 245560 (February 5, 2003). Furthermore, the SEC has held that being a wealthy customer does not provide a basis for recommending risky investments. See Arthur Joseph Lewis, 50 S.E.C. 747, 749 (1991); see also David Joseph Dambro, 51 S.E.C. 513, 517 (1993) (“Suitability is determined by the appropriateness of the investment for the investor, not simply by whether the salesman believes that the investor can afford to lose money.”). By relying solely on the sophistication or wealth of a customer, broker-dealers and/or associated persons would not adhere to FINRA Rule 2111 as they would not be considering the totality of the customer’s investment profile, which also includes, but is not limited to, the customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs and risk tolerance. See FINRA Rule 2111(a). If you believe that your firm and/or broker invested in securities, or implemented an investment strategy involving a security that violated the FINRA Suitability Rule, please contact Lax & Neville LLP for a free consultation.