Securities Lawyer Blog

The Securities and Exchange Commission (SEC) has approved new rules that will enable the Financial Industry Regulatory Association (FINRA) to move promissory note disputes more quickly through arbitration and perhaps provide a reduction in costs for both the brokerage firms and individual brokers.

In Regulatory Notice 09-48, FINRA announced that the new procedures, effective September 14, 2009, allow parties to select a single arbitrator from the roster of those who are approved to hear statutory discrimination claims. FINRA noted that these arbitrators are uniquely qualified to hear such cases, given their expertise in the area of employment law and related disputes. All cases filed after the effective date will be subject to the new rule and amendments.

To accomplish these expedited procedures, FINRA has amended its Rules 13214 and 13600 of the Code of Arbitration Procedure for Industry Disputes and has also adopted new FINRA Rule 13806.

Specifically, these changes enable a streamlining of cases in which there are no allegations by the firms or associated persons other than a promissory note dispute, since these are straightforward contracts with few evidentiary documents.

The new rules will not only expedite these cases, but will also reduce expenses for all parties while ensuring that procedural safeguards remain in place. Depending upon the circumstances, including the amount in controversy, either one arbitrator or a panel will decide the cases.

Briefly summarized, the new rules provide as follows:

• If the associated person does not file an answer, simplified discovery procedures apply and, regardless of the amount in controversy, a single arbitrator will render an award based on the pleadings and other materials submitted by the parties.
• If the associated person files an answer (but does not seek any additional relief or assert any counterclaims or third party claims), regular discovery procedures will apply and, regardless of the amount in controversy, the single arbitrator will hold a hearing.
• If the associated person files a counterclaim or third party claim, then regular discovery procedures will apply and the number of arbitrators will be based on the amount of the counterclaim or third party claim.
• If the counterclaim and/or third party claim is not more than $100,000, exclusive of interest and expenses, the Director will appoint a single public arbitrator from the roster of arbitrators approved to hear statutory discrimination claims.
• If the counterclaim and/or third party claim is more than $100,000, then the Director will appoint a three-arbitrator panel comprised of one public arbitrator from the roster of arbitrators approved to hear statutory discrimination claims who would serve as chairperson, one arbitrator from the public roster and one arbitrator from the non-public roster.
• If the counterclaim or third party claim is filed after the single arbitrator is appointed, and a three-arbitrator panel is required, the Director will retain the appointed arbitrator as chair and appoint two additional arbitrators (one public and one non-public arbitrator) to the panel.

Related Web Resources

To learn more about FINRA and the many services and resources provided for brokers and investors visit www.finra.org.

Continue reading "Quick Steps -- FINRA Streamlines Dispute Resolution on Promissory Notes" »

The Financial Industry Regulatory Authority (FINRA) wants investors to be smarter about how they decide to save for their kids' college years. They are making the point with some tough talk to brokers.

Recently, FINRA announced that Ameritas Investment Corp. located in Lincoln, Nebraska was fined $100,000, and one of its brokers fined $60,000 and suspended for nine months, for inducing investors to "take on additional mortgage and/or equity debt in order to purchase variable universal life insurance policies (VULs)" and in turn use those policies to fund retirement and college expenses. The policies have large annual premium payments and were unsuitable for many investors.

Where did Ameritas go wrong? FINRA alleged that Ameritas not only failed to adequately supervise one of its brokers, but also allowed advertising violations related to the broker's financial plans. Specifically, FINRA claimed the broker's financial plans were misleading to customers and often her recommendations that they purchase VUL's were unsuitable.

FINRA's Executive Vice President and Chief of Enforcement, Susan L. Merrill, has a solid lesson plan for firms and brokers. "Brokerage firms must exercise vigilance when their brokers recommend that customers use mortgage proceeds to purchase securities." She warns that "FINRA will aggressively pursue firms and individuals who use misleading financial plans to induce customers to purchase securities, particularly when those plans propose that customers refinance their homes or take out home equity loans to pay for the purchase of securities."

This seems obvious really. But unfortunately the Ameritas broker in question used misleading financial plans with over 220 customers that she had recruited in a separate college planning business. The plans were very complicated and to be successful, investors would have had to follow strict details for 20 years.

Investors were urged to buy a VUL from Ameritas and it was also recommended that investors refinance their home mortgages or take out home equity loans to pay for the VULs. This recommendation was targeted at those customers who had the means to pay this expense and those who were already having difficulties paying their expenses.

Don't bet the ranch. FINRA is particularly concerned about investors placing their homes at risk in the process of investing for college plans. They urge that college fund investing requires a bit more study on the part of investors seeking to save for their kids' tuitions. They suggest investors learn more about college savings plans by reviewing on-line materials on this subject as well as the risks of buying securities with the use of home equity mortgages. These materials can be found at www.finra.org.

Related Web Resources

Click here to see the FINRA press release on the college school plan fines against Ameritas and its broker.

Continue reading "School Daze - Ameritas Investment Corp. fined $100,000 & Broker Suspended in College Fund Planning Scheme" »

The Wall Street Journal reported recently that the Securities and Exchange Commission (SEC) has filed suit against four individuals for alleged fraud in the real estate mortgage arena.

The four principals of the firm, Radical Bunny, LLC which is located in Phoenix, Arizona, are alleged to have defrauded about 900 investors nationwide who invested a total of $197 million that was then funneled to Mortgages, Ltd.

After the funds were raised, Mortgages, Ltd. used the funds to make short-term loans at high rates of interest to commercial real estate developers in the building of malls, condo projects, office complexes and various other developments. Mortgages, Ltd. sought bankruptcy protection in June 2008 and in a tragic turn the following month, its chief executive took his own life.

The four individuals involved also invested in the venture and sustained losses. According to their attorney, the principals did not mislead investors. He noted the fact that the principals made their own investments and subsequently suffered losses along with their investors, evidences their good faith.

However, the SEC doesn't agree.

The SEC's suit claims that investors were misled by the principals of Radical Bunny through material misrepresentations not only about the safety of their investments, but also the risks involved and the nature of the underlying investments.

The SEC suit also claims that the defendants' received legal advice that the investments were subject to securities laws, but investors were told otherwise.

As in the case of many of the Madoff investors, funds were raised through word-of-mouth through the defendants' friends and family.

In its press release issued July 31, 2009, the SEC claimed that in this scheme the "promoters promised investors more than they could possibly deliver." Rosalind Tyson, Director of the SEC's Los Angeles Regional Office noted that "Even to friends and family, they repeatedly overstated the safety of the investment and their knowledge of the underlying business to which they lent investor funds. Unbeknownst to investors, more and more of their money was being shifted into fewer and riskier loans."

According to the SEC, the defendants invested over time in fewer and more risky loans while the investors were kept in the dark as to the underlying investments. The suit seeks financial penalties against the principals, as well as injunctive relief. Radical Bunny is currently in bankruptcy proceedings.

At this point, we don't need to be reminded that investors must be diligent in their knowledge of the principals of any venture and the underlying investments being made. Seeking an independent legal opinion is always a good idea.

Related Web Resources

The complaint against Radical Bunny, LLC can be read in full on the SEC's website.

Are we there yet?

The impact of the big bonuses continues to make headlines as last week the Securities and Exchange Commission (SEC) announced simultaneously that it had filed suit and settled with the Bank of America (BofA) for hefty bonuses paid out to Merrill Lynch executives. BofA, which is headquartered in Charlotte, North Carolina, neither admitted nor denied the allegations on settlement.

The claim against BofA arose from the bank's plan to pay some $5.8 billion in bonuses for the fiscal year 2008.

So what's the problem with that? Seems to be business as usual.

The SEC claimed BofA allegedly failed to disclose the bonuses in its proxy statement, which misled investors after the acquisition of the brokerage. Regulators claimed that the bank informed its shareholders that it did not intend to pay year-end bonuses when in fact this was not the case.

The SEC's Director of the division of enforcement, Robert Khuzami, noted that this failure to disclose violated the bank's duties to its shareholders and therefore warranted the significant penalty imposed.

The settlement is subject to court approval and at this point, approval is not forthcoming.

The $33 million penalty which would put the issue to rest with the federal regulators, was not warmly received by Judge Jed Rakoff at the court hearing yesterday. He has ordered more briefing from the parties as he questions the adequacy of the settlement and the lack of transparency about what was known, when and by whom about the bonuses. In heated proceedings yesterday, the Judge voiced anger over the situation and wants to know more from all parties before approving the settlement as it is fashioned now.

Unfortunately for BofA, according to CNNMoney.com, Congress may not be quite so ready to close this issue. The House Committee on Oversight and Government Reform has suggested through ranking member Rep. Darrell Issa, R-Calif., that the SEC matter served as validation of their concerns that had been swirling in an investigation concerning the Merrill acquisition as well.

But wait, there's more.

New York Attorney General Andrew Cuomo also suggested that the BofA / Merrill bonus issue may not be closed for the state either as state securities laws may also have been violated.

Related Web Resources

BofA to pay $33M fine over Merrill bonuses -- SEC charged Bank of America with failing to alert shareholders about bonus payments to Merrill Lynch, bank settles and agrees to pay fine, CNNMoney.com, August 3, 2009