Tag Archives: Brokerage Firm

When The Consequences Outweigh the Risk

19 Monday Jan 2015

Posted by in Uncategorized

≈ Leave a comment

Tags

, , , , , , , , , , , , ,

It is not difficult, doing the right thing. There are rules regardless of what game in life you’re playing. Ignorance is no defense.

Unfortunately, just as the simplicities of the day, the “Pleases” and “Thank Yous” have fallen by the wayside, so too has the mindset “I will work hard and succeed.” Instead, today is about the quick fix, the shortcuts and unfortunately, the cheating and the breaking of the law.

For those who are taking the shortcuts, who are cheating others to get ahead, chances are you’re going to be caught, and it will cost you more than you gained. For those stockbrokers who are trying to cheat the system, by making the unauthorized trades in a client’s account, trading the account for the purpose of generating commissions or making an unsuitable recommendation to a client, there are consequences.

These consequences come in many forms, one of which is an arbitration claim. Stockbrokers are registered with the Financial Industry Regulatory Authority (“FINRA”). When a customer opens a trading account, there is an arbitration requirement that mandates any claims relating to the trading in the account to be filed before FINRA’s dispute resolution. Depending upon the dollar amount of the losses, FINRA will provide (at a fee) one or three arbitrators to hear the case. The filing fee for the complaining investor is relatively small and in most instances the attorney handling the cases take the matters on a contingency basis (attorney does not charge on an hourly rate, but takes a percentage of any money recovered).

Pursuant to FINRA rules, an investor has six years from the date of the trade to file a claim against the broker. Once an arbitration claim has been filed, FINRA has streamlined discovery, a process in which the parties exchange documents prior to the actual arbitration. Pursuant to FINRA rules, there are certain categories of documents deemed “presumptively discoverable” and must be produced if they exist. While the burden of proof is always on the person bringing the claim, FINRA appears to do all it can to assist the investors in bringing their claims to a hearing.

For the broker who is looking to make a quick dollar, say a $500 commission on an unauthorized trade, and then another, and then another, the legal fees associated with the defense of the claim can be up to ten times the original commission. And this does not account for any award assessed by the arbitrators, the FINRA hearing fees assessed by the arbitrators or the possibility of punitive (punishment) damages.  An arbitration award is regularly converted into a judgment by the courts, and if not paid, the investor can go after your income or assets to collect on the judgment.

The stockbroker who thinks no one will notice the cheating is shortsighted. On a daily basis the trading is reviewed by a supervisor and often times a person in the firm’s compliance office. From the investor standpoint, not only does the investor see the trading from confirmations and account statements, but most likely the investor’s accountant is reviewing the trading for the tax purposes.

While it’s a lost art, hard work really does pay in the long run. The consequences simply are not worth the risks.

The Law Offices of Barry M. Bordetsky represents customers and industry representatives in FINRA securities and employment arbitrations as well as litigants before state and federal courts. If you have questions about an issue you are involved with, please contact Barry at (800) 998-7705 or email barry@bordetskylaw.com.

FINRA Arbitration Requirement Is On Its Deathbed

25 Monday Aug 2014

Posted by in Uncategorized

≈ Leave a comment

Tags

, , , , , , , , , , , ,

What a difference a couple of years can make.

When a stockbroker joins a firm the broker is required to register with the Financial Industry Regulatory Authority (“FINRA”). To do so he must complete and sign a Uniform Application for Securities Industry Registration or Transfer Form U-4 (“Form U-4”). The document contains an arbitration clause, in which the broker agrees to “arbitrate any dispute, claim or controversy that may arise between me and my firm, or a customer, or any other person . . .”

Often times when a broker joins a firm the broker receives a bonus in the form of a forgivable loan. This loan is documented by a promissory note or loan agreement which identifies the repayment terms. Disputes arising from defaults of such loans must be arbitrated. Indeed, the arbitration requirement, in addition to the language in the Form U-4, is mandated and codified by FINRA’s Code of Arbitration (“FINRA Code”) that requires “a dispute must be arbitrated under the [FINRA Arbitration] Code if the dispute arises out of the business activities of a member or an associated person and is between or among: Members; Members and Associated Persons; or Associated Persons.” FINRA Code Rule 13200. FINRA’s interpretive material deems it a violation of its rules and “conduct inconsistent with just and equitable principals of trade” for a member firm to require brokers to waive the arbitration requirement. FINRA IM 13000.

This arbitration requirement was recently enforced in 2012, when Merrill Lynch was fined $1,000,000. The firm attempted to skirt the arbitration requirement by utilizing a third party non-FINRA entity to issue the bonus checks, or forgivable loans to Merrill Lynch’s brokers. Merrill Lynch tried to circumvent the arbitration requirement by having the non-FINRA entity include a forum selection clause requiring any and all disputes relating to the loan to be filed before the New York Supreme Court, New York County.

By its fine to Merrill Lynch, FINRA was letting member firms know it would not tolerate firms failing to comply with the mandated arbitration requirement (and avoid paying FINRA the member charges for the arbitration). It was a shot heard around the securities industry world.

The recent decision of the United States Supreme Court of Appeals for the Second Circuit (“Second Circuit”) in Goldman Sachs & Co. v. Golden Empire Sch. Fin. Auth., No. 13-797-cv (2d Cir. Aug. 21, 2014) and Citigroup Global Mkts. Inc. v. N.C. E. Mun. Power Agency, No. 13-2247-cv (2d Cir. Aug. 21, 2014), which confirmed two lower court federal decisions, has now muted that shot. The decision has far reaching implications with FINRA and will test the regulatory entity’s wherewithal. The Second Circuit’s ruling that member firms may utilize forum selection clauses that supersede FINRA’s arbitration requirements opens a gateway of opportunities for firms to sidestep arbitration as it relates to loan agreements with brokers. By way of example, had the decision been in effect in 2012, it appears all Merrill Lynch needed to do to avoid mandatory arbitration was include a forum selection clause in its promissory notes or loan agreements requiring any and all disputes for any actions or proceedings regarding the note to be filed before the New York Supreme Court, New York County. What a difference two years makes!

It will be interesting to see if FINRA utilizes its enforcement authority to fine Goldman and Citibank for avoiding the arbitration requirement, and counter the ruling in one way or another. Will FINRA take the position that the Second Circuit (and corresponding Ninth Circuit) decision does not apply to the internal rules of the entity? If FINRA does not act, it will confirm to firms that the longstanding arbitration requirement in the FINRA Code is on its deathbed.

The Law Offices of Barry M. Bordetsky represents customers and industry representatives in FINRA arbitrations as well as before state and federal courts. If you have questions regarding the process, please contact The Law Offices of Barry M. Bordetsky by calling Barry Bordetsky at (800) 998-7705 or email barry@bordetskylaw.com.