New York Securities Lawyer Blog

Published on: October 11, 2018

Former Credit Suisse Adviser Represented By Lax & Neville LLP Wins First FINRA Arbitration Award Against Credit Suisse Securities (USA) LLC in the Deferred Compensation Arbitrations

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.

Published on: November 1, 2016

New Department of Labor Fiduciary Rule Has Huge Ramifications for Wealth Management Bonus Structuring

By Lax & Neville LLP

On April 6, 2016, the Department of Labor (“DOL”) issued its final rule expanding the “investment advice fiduciary” definition under the Employee Retirement Income Security Act of 1974 (“ERISA”). The rule, which is effective April 10, 2017, has already had significant impact on the wealth management business and advisers should be particularly aware of changes to recruitment and compensation.

The rule modifies the Best Interest Contract Exemption (“BIC”), under which the DOL permits financial advisers and their firms to engage in otherwise prohibited transactions. When the rule was issued last year, many firms were concerned that the revised BIC would create unacceptable liability risk on commission-based retirement accounts and prohibit back-end performance-based incentives altogether. The DOL has now confirmed that the back-end incentives, such as bonuses for meeting asset or sales targets, will no longer be exempted under the BIC.

On October 27, the Department issued a FAQ regarding the new rule. Question 12 addressed recruitment incentives:

Published on: July 22, 2016

FINRA REGULATORY NOTICE INVALIDATES CREDIT SUISSE’S EMPLOYMENT DISPUTE RESOLUTION PROGRAM

By Lax & Neville LLP

On March 7, 2016, Lax & Neville LLP, together with a number of other concerned law firms, submitted a letter to Financial Industry Regulatory Authority (“FINRA”) urging it to take action in light of Credit Suisse’s repeated violations. In particular, the letter sought to address Credit Suisse’s current Employment Dispute Resolution Program (EDRP), which prevents employees from exercising their right to resolve disputes through FINRA arbitrations. A second letter was sent to FINRA on July 19, 2016.

On July 22, 2016, FINRA released a Regulatory Notice addressing “Forum Selection Provisions Involving Customers, Associated Persons and Member Firms.” Therein, FINRA stated that it “considers actions by member firms that require associated persons to waive their right under the Industry Code to arbitration of disputes at FINRA in a predispute agreement as a violation of FINRA Rule 13200 and as conduct inconsistent with just and equitable principles of trade and a violation of FINRA Rule 2010 (Standards of Commercial Honor and Principles of Trade).” FINRA further noted, “a member firm cannot use an existing non-compliant agreement as a basis to deny an associated person the right to FINRA arbitration as specified in FINRA rules, without violating FINRA rules.” Accordingly, FINRA has determined that the EDRP, which Credit Suisse has insisted its employees follow, violates FINRA rules and cannot be relied upon in resolving disputes with Credit Suisse.

The Regulatory Notice further noted that FINRA has a statutory obligation to enforce compliance by member firms and warned that “[m]ember firms with provisions in predispute agreements that do not comply with FINRA rules may be subject to disciplinary action.” Specifically, “FINRA may sanction its members or associated persons for violating any of its rules by ‘expulsion, suspension, limitation of activities, functions, and operations, fine, ensure, being suspended or barred from being associated with a member, or any other fitting sanction.’” In light of this, FINRA recommends that member firms review their predispute agreements to ensure compliance.

Published on: May 23, 2016

SEC Files Order Against Santos, Postal & Co and Joseph A. Scolaro for Filing False Forms ADV-E Relating to SFX and Brian J. Ourand’s Misappropriation of Client Funds

By Lax & Neville LLP

On April 29, 2016, the Securities and Exchange Commission (“SEC”) filed an Order Instituting Administrative and Cease-and-Desist Proceedings Pursuant to Section 4C of The Securities Exchange Act of 1934, Section 203(k) of The Investment Advisers Act of 1940, and Rule 102(e) of The Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions and A Cease-and-Desist Order (the “Order”) against Santos, Postal & Company, P.C. (“Santos, Postal & Co.”), an accounting firm, and Joseph A. Scolaro, CPA (“Scolaro”), a Santos, Postal & Co. partner since 2004 (collectively the “Respondents”). The Order involves improper examinations by Santos, Postal & Co. of its clients’ funds, of which it had custody. Further, Santos, Postal & Co. and Scolaro filed two (2) Forms ADV-E with materially false statements relating to the examinations. Santos, Postal & Co. has been registered with the SEC’s Public Company Accounting Oversight Board since 2010, and Scolaro regularly conducted public accounting services before the SEC.

The Respondents’ improper examinations relate to the misappropriation of client funds by SFX Financial Advisory Management Enterprises, Inc.’s (“SFX”) Vice President, Brian J. Ourand (“Ourand”). SFX first engaged Santos, Postal & Co. to perform its examinations in 2004 and continued to engage them until 2012 when SFX withdrew its registration with the SEC.

Santos, Postal & Co. is a certified public accounting and management consulting firm based in Rockville, Maryland, that provides accounting, tax, and auditing services. Scolaro was one of five partners and owned 25% of Santos, Postal & Co. He was the only engagement partner for services for SFX.

Published on: July 1, 2015

FINRA Suspends And Fines Cambridge Investment Research, Inc. Broker Mark F. Leone For Making Unauthorized Trades In Customer Accounts

By Lax & Neville LLP

On June 29, 2015, Mark F. Leone (“Leone”) submitted a Letter of Acceptance, Waiver, and Consent (“AWC”) to settle allegations made by the Financial Industry Regulatory Authority, Inc. (“FINRA”). Currently, Leone is registered with Cambridge Investment Research, Inc.; however, FINRA alleged that while Leone was registered with Morgan Stanley, he exercised discretion in customer accounts without written authorization to do so. To settle the FINRA allegations, Leone submitted to censure, a fine of $5,000 and suspension for fifteen (15) business days. A copy of the FINRA AWC is available here.

Specifically, FINRA alleged that on March 10, 2014, Leone, effected five (5) discretionary transactions on customer accounts without first obtaining written authorization from the customers, or having the accounts accepted as discretionary at Morgan Stanley. According to Leone’s BrokerCheck Report, on April 3, 2014, Morgan Stanley terminated Leone for allegations regarding discretionary trading without written authorization. In response to those allegations, Leone stated, “five clients owned a stock and had a gain in the stock. The market was about to close and I was going out of town. I quickly entered sell orders to close the positions in the account. This generated a bunching report to Morgan Stanley.”

Bunching, or aggregating multiple executions into a single tape report, is prohibited under FINRA Rules Rules 6282(f), 6380A(f) and 6380B(h). Similarly, NASD Conduct Rule 2510(b), FINRA Rule 2010, and Morgan Stanley firm policies all prohibit registered representatives from exercising discretionary control over customer accounts without written authorization from that customer and firm approval. FINRA alleged that Leone lacked any authorization to make transactions in these customer accounts outside of one account where he was given insufficient verbal authorization. As such, Leone violated NASD Conduct Rule 2510(b) and FINRA Rule 2010.

Published on: July 1, 2015

FINRA Fines And Suspends Former Wells Fargo Broker, Jeffrey D. Daggett For Unsuitable Recommendations Of Exchange Traded Notes, Triple-Leveraged ETFs, And Triple Inverse ETFs

By Lax & Neville LLP

On June 29, 2015, Jeffrey D. Daggett (“Daggett”) submitted a Letter of Acceptance, Waiver, and Consent (“AWC”) to settle allegations made by the Financial Industry Regulatory Authority, Inc. (“FINRA”) The FINRA AWC alleged that Daggett, while registered with Wells Fargo Advisors, LLC made numerous unsuitable recommendations of exchange traded products to his customers in violation of FINRA rules. To settle the FINRA allegations, Daggett submitted to censure, a fine of $20,000 and a suspension for four (4) months. A copy of the FINRA AWC is available here.

Specifically, FINRA alleged that from March 2010 through September 2011, Daggett recommended and traded in a volatile and speculative exchange traded note (“ETN”), an inverse triple leveraged exchange traded fund (“ETF”), and a triple leveraged ETF in customer accounts that were inconsistent with the customer’s investment objectives of moderate growth and income. The ETN was tied to long positions in futures contracts on the Chicago Board Options Exchange Volatility Index, and stated in the prospectus that it was intended for short-term trading and may not be appropriate for intermediate or long-term investment time horizons. Similarly, the ETF prospectuses also stated that they were intended for short-term trading. Nevertheless, the ETN and ETF positions were held in the customer account for periods ranging from one (1) month, to two (2) years. FINRA alleged that Daggett lacked a reasonable basis for believing that the ETN and ETF purchases were suitable for his customer, and as such, violated NASD Conduct Rules 2310 and IM-2310-2, as well as FINRA Rule 2010.

ETFs, ETNs and other exchange traded products are very popular among investment advisers who seek to expose their customers to a particular index or sector of the economy. However, these complex products and the trading strategies utilizing them are difficult for retail investors to fully grasp, and therefore, understand the risk accompanying them. Many investment advisers utilize intraday trading strategies regarding these products, including complex hedging strategies whereby they hedge them against futures contracts regarding the basket of underlying securities or contracts that the ETF tracks. Additionally, many of these products have a “resetting” function that makes them unsuitable for many investors as part of a buy-and-hold strategy. Recently, we covered the Securities and Exchange Commission’s request for public comment on ETFs and ETNs.

Published on: June 30, 2015

Lax & Neville LLP Wins A $16.6 Million Award In A FINRA Arbitration On Behalf Of Two Retail Investors, Through Ontonimo (OMO) Limited, Against BNP Paribas Securities Corp.

By Lax & Neville LLP

On June 26, 2015, Lax & Neville LLP, a leading national securities arbitration law firm, won a FINRA arbitration award on behalf of two retail investors (the “Retail Investors”), through Ontonimo (OMO) Limited (“Ontonimo”), against BNP Paribas Securities Corp. (“BNPP”) for the sale and marketing of an unsuitable security to the Retail Investors. A highly sophisticated and experienced three (3) person Arbitration Panel rendered the arbitration award after a ninety-five (95) day arbitration hearing (186 hearing sessions), which is the longest customer FINRA arbitration hearing in the last twenty (20) years and the second longest ever. The Arbitration Panel awarded the Retail Investors, through Ontonimo, $16.1 million in compensatory damages, inclusive of interest. This award of compensatory damages represents 100% of the net out-of-pocket loss plus interest and is one of the largest FINRA arbitration awards of compensatory damages in a customer dispute. Significantly, in addition to that relief, after winning six (6) Motions For Sanctions and five (5) Motions To Compel, the Arbitration Panel awarded $500,000 in sanctions for attorneys’ fees for BNPP’s failure to comply with the Arbitration Panel’s various discovery orders. This is the largest amount of sanctions awarded in a customer FINRA Arbitration in at least the last ten (10) years. To view this Award, Ontonimo (OMO) Limited vs. BNP Paribas Securities Corp. – FINRA Case No. 10-04744, click here.

The single investment at issue was a Resetable Strike Equity Option Transaction, which is a highly speculative and leveraged derivative call option. BNPP recommended that the Retail Investors invest approximately $14.3 million, which is more than 60% of their investable assets, into this one unsuitable security. Because BNPP had a policy that prohibited the sale of this product to retail customers, BNPP required the Retail Investors to form a corporate entity, Ontonimo, through which the Retail Investors would purchase the investment in order to circumvent BNPP’s own compliance rules. Further, BNPP required one of the Retail Investors to become a so-called “investment advisor” for Ontonimo by mandating that he execute a sham investment advisory agreement, even though he had no prior professional financial services experience and no securities licenses. In less than one and one-half years, the Resetable Strike Equity Option Transaction became worthless and the Retail Investors lost their entire $14.3 million investment. The Retail Investors paid BNPP in excess of $2.3 million in fees and costs for this investment. BNPP further retained approximately $700,000 of the value of the Resetable Strike Equity Option Transaction after its expiration.

The Arbitration Panel’s message was clear: The Retail Investors should never have been marketed and sold this unsuitable security.

Published on: June 26, 2015

J.P. Morgan Challenges Its Limited Participation Under The Protocol For Broker Recruiting By Seeking A Preliminary Injunction Against A Six-Broker Team Transitioning To Morgan Stanley

By Lax & Neville LLP

In May 29, 2015, J.P. Morgan Chase Bank, N.A. and J.P. Morgan Securities LLC (collectively “JPMorgan”) moved to renew a motion, before the United States District Court for the District of New Jersey, seeking a preliminary injunction (the “Motion”) against six (6) former registered representatives (the “Brokers”), who left JPMorgan to join Morgan Stanley. According to court documents, the Brokers managed $2 Billion of client assets derived from four-hundred (400) families’ accounts that produce approximately $15 million in revenue per year. The purpose of the preliminary injunction was the preserve the status quo ante by enjoining certain client solicitation activities by the Brokers, while JPMorgan and the Brokers resolved issues related to the Brokers’ transition to Morgan Stanley through arbitration.

In its Motion, JPMorgan alleged, inter alia, that since transitioning from JPMorgan to Morgan Stanley, the Brokers illegally solicited JPMorgan clients and converted JPMorgan’s confidential and proprietary client information. JPMorgan’s Motion argued that a preliminary injunction preventing the Brokers from continuing to solicit JPMorgan clients is necessary because the resulting financial harm and loss of customers’ confidence is unascertainable and as such, no other adequate remedy at law exists.

On June 8, 2015, the Brokers filed a forty-page Memorandum of Law in Opposition to Motion for Injunctive Relief (“Opposition”). Generally, the Brokers’ Opposition argued that the District Court should deny JPMorgan’s Motion because JPMorgan is a signatory to the Protocol for Broker Recruiting (the “Protocol”) and all of the Brokers’ activities were permitted under the Protocol. Briefly, the Protocol is an agreement between many of the major securities firms that is designed to give clients the opportunity to choose their financial advisory on the merits of their relationships, rather than though the court system. Under the Protocol, a registered representative who transitions from one Protocol signatory firm to another is permitted to solicit his or her clients once they join the new firm and is permitted to retain certain limited client information.

Published on: June 25, 2015

FINRA Fines E1 Asset Management $25,000 And Suspends Ron Itin and Ahsan Shaikah For Supervisory Failures

By Lax & Neville LLP

On June 5, 2015, E1 Asset Management, Inc. (“E1 Asset Management”), Ron Y. itin (“Itin”), and Ahsan R. Shaikh (“Shaikh”) submitted a Letter of Acceptance Waiver and Consent (“AWC”) to settle allegations by the Financial Industry Regulatory Authority (“FINRA”) that they collectively failed to maintain a reasonable supervisory system at E1 Asset Management. Both Itin and Shakih are employed by E1 Asset Management in supervisory capacities. A copy of the FINRA AWC may be found here.

FINRA alleged that E1 Asset Management, Itin, and Shaikah violated NASD Rules 3010, 2110 and FINRA Rule 2010 by failing to establish and maintain E1 Asset Management’s supervisory systems. According to the AWC, from July 2008 to April 2012, Itin and Shaikh failed to establish a supervisory system reasonably designed to: 1) review registered representatives’ communications with the public; 2) review trading to detect and monitor potential churning activity; 3) review the new account opening process to ensure customer suitability profiles were properly established; 4) perform adequate suitability review for leveraged exchange traded funds (“ETFs”) in customer accounts; and 5) supervise the activities of registered representatives subject to E1 Asset Management’s heightened supervision program.

The FINRA allegations of supervisory failures came after numerous customers commenced FINRA arbitrations alleging sales practice abuses by E1 Asset Management registered representatives. According to FINRA, many of these arbitrations concluded in settlements. However, the form release agreements that E1 Asset Management utilized during this time contained ambiguous language that could have been interpreted by the customers as prohibiting them from cooperating with regulatory investigations. Specifically, those agreements stated that customers must not “[c]ommence or prosecute, or assist in the filing, commencement or prosecution in any government agency, arbitral tribunal, self-regulatory body or court in any claim or charge against E1 Asset Management.” FINRA alleged that E1 Asset Management, Itin, and Shaikah violated NASD Rule 2111 and FINRA Rule 2010 for including impermissible confidentiality provisions in its form settlement and release agreements.

Published on: June 25, 2015

SEC Publishes Its Requests for Industry Comment Regarding Its Regulation of Exchange Traded Products

By Lax & Neville LLP

On June 12, 2015, the Securities and Exchange Commission (“SEC”) solicited public comment on its approval and regulation of exchange traded products (“ETPs”). ETPs are similar to open-ended mutual funds, but can be bought and sold throughout the day at market prices, rather than net-asset value. ETPs include, but are not limited to, exchange-traded funds, pooled investments, and exchange-traded notes. The SEC’s request for comment asked fifty-three (53) sets of questions touching on subjects such as arbitrage mechanisms, pricing, listing standards, legal exemptions, suitability requirements, and broker-dealer marketing and sales practices with respect to ETPs among other subjects.

According to the SEC, the number of ETPs available to retail customers rose dramatically from 2006-2013. As of 2014, the SEC estimates there are approximately 1,664 ETPs listed on U.S. exchanges, with a market value surpassing $2 trillion. Some financial firms design complex ETPs and market them to retail clients in an effort to outperform the market. In a press release accompanying the SEC’s request for industry comment, SEC Chairwoman Mary Jo White stated, “[a]s new products are developed and their complexity grows, it is critical that we have broad public input to inform our evaluation of how they should be listed, traded and marketed to investors, especially retail investors.”

In line with the SEC’s concern for retail investors, the SEC solicited industry comment regarding broker-dealer sales practices and investors’ understanding and use of ETPs that generally focused on: