Tag Archives: Compliance

When The Consequences Outweigh the Risk

19 Monday Jan 2015

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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.

The Importance of The Activity Letter

23 Wednesday Jul 2014

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You have a brokerage account. One day you open up your mail (you are responsible for opening the mail) and find a letter from your brokerage firm. The letter thanks you for being a customer of the firm.  The letter then begins the process of reiterating the trading objectives you selected when you opened the account or when the account information was updated. The letter may contain additional information such as the amount of trades in your account over a three-month period of time or the commissions generated from the account (the money the broker and firm is making from the trading in your account). Most likely the letter ends with a request that you countersign the letter to confirm your objectives have not changed, that you authorized and approve of the trading in your account. In some instances the letter will end with a statement indicating the firm will presume all is okay with the trading in the account unless the firm hears anything to the contrary from you. If written correctly, the letter invites you to call with any questions.

Gee, isn’t this nice, you’re thinking. The brokerage firm is checking in on me.

Actually, the brokerage firm is checking in on your broker. The firm is utilizing a very important tool to determine whether the activity in the account is what you have directed and is suitable for you. The letter is aptly called an Activity Letter.

The Activity Letter seeks to determine, for instance, if you are controlling the account or if the broker is controlling the account. To be clear, while there is such a thing as de facto control, if your broker is calling you and recommending a buy or sell, you are demonstrating a manner of control over your account when you agree or disagree with the recommendation. Unless your account is discretionary (meaning your broker trades without the need to speak to you) the broker must discuss, on the day of a trade, the particular recommendation to buy or sell.

The Activity Letter also allows the firm to confirm, independently from the broker, whether it is your intention to trade your account aggressively, conservatively, or somewhere in the middle. The Activity Letter confirms you are not only aware of the trading in the account, but approve of it as it takes place.

The Activity Letter is an important tool not only for the firm, but also you. In most instances the letter is from a compliance officer, branch manager or supervisor at the brokerage firm. If you have any questions relating to your account, take the opportunity to call and ask the questions. The benefit of the Activity Letter from someone other than your broker is you should not feel uncomfortable with the call, but rather emboldened to make sure your investments are being handled as you have instructed.

When you sign and return the Activity Letter to the firm, the firm is relying upon that information in terms of supervising both the account and the broker. Do not sign something that is not accurate. As I have written in the past, you are responsible for reading a document, knowing its content and will be bound by the terms of the document that bears your acknowledgement signature. An informed investor is a smart investor. If you have questions, whether to the broker or supervisor, take the time to ask them. Do not assume. We all know what happens then.

If you have questions relating to this topic or other investment matters, please contact The Law Offices of Barry M. Bordetsky by calling Barry M. Bordetsky at (800) 998-7705 or emailing at barry@bordetskylaw.com.

Help Your Attorney Help You

10 Monday Mar 2014

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All too often a party retaining a law firm moves forward with the belief the litigation costs will be minimal because the issues, from the client’s standpoint, are simple, straightforward and should not require a lot of work.  Except all too often simplicity is a mirage of a complicated and often times very expensive litigation.

Clients that provide the attorney with a clear road map of what did or did not happen do themselves, their attorneys and their case a great favor.  This process is done with the client preparing a written description of the facts as he or she sees the situation.  For every point supported by documents, provide those documents.  Don’t take this the wrong way, but it is our jobs as attorneys, playing devil’s advocate, to test your story, try to poke holes to test the points raised if for no other reason than to determine the viability and/or liability potentials of your case.  We will use your description and supporting documents to do that; don’t let us learn the case from the other side’s attorney.

This process begins before the first meeting with your attorney.  Take the time to go through your files and prepare for the meeting just as you would prepare for any other meeting where tens of thousands of your dollars are at stake.  And to be clear, this is the money that you could spend on your attorney to gather and review documents in the course of your case if you do not take care of the initial due diligence.

The lesson here:  avoid or minimize this cost by doing the necessary legwork.  Go through your files and copy (keep a copy of everything) all documents relating to the matter, putting the documents in chronological order to provide to the attorney.  Take the time to review your emails, utilizing relevant keyword searches that relate to all aspects of the issue and keep a log of the keyword searches.  Put the emails in chronological order and include the complete email string together with any attachments that were included in the message.  A key point: it is not your job to decide what is or is not important to a matter.  Give the attorney everything, tell the attorney everything.

What will this work do for you?  By providing an organized package of documents to your attorney (don’t write on the documents!) with a corresponding description of the facts and circumstances relating to your matter, explaining how the documents relate to the issue at hand, you provide a road map for your attorney to follow and understand your case at a much more cost efficient basis for you.  Give your attorney as much ammunition as possible to fight for you.

Prepare The Defense On Day One

08 Saturday Mar 2014

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In today’s environment an informal customer complaint must be taken as seriously as a formal filing with FINRA.   Upon receipt, a swift and comprehensive investigation of the alleged wrongdoing should be commenced.  Lay the groundwork for any third party’s review of your files.  Whether it’s FINRA’s or claimant’s counsel reviewing your files, the firm should demonstrate that it takes the claims seriously and is/was working both with the broker and the customer to: (i) resolve the issue; and (ii) ensure the complaining acts to do not repeat themselves.

When the formal statement of claim does arrive from FINRA, the clock starts to run on the time to submit an answer and prepare for an upcoming arbitration hearing.   FINRA is putting  pressure on arbitrators to expedite the proceedings.  The days of pushing back hearings a year and a half after the initial pre-hearing conference are a thing of the past.

Firms must be smart, and by doing so, they will save money and perhaps more importantly, avoid grief and liability.  Upon receipt of a statement of claim, a full profit and loss should be completed.  Provide your counsel with: (i) account statements; (ii) new account documents; (iii) client and broker files; and (iv) an analysis of net out-of-pocket losses and turnover rate.  As knowledge is power, providing defense counsel this information will permit a comprehensive response to the claims.  Additionally, the broker must have a “tell all” with counsel, explaining the relationship with the client,  leaving no stone unturned.  Let the attorney make the decision as to what is and what is not important to the case.  Remember, prior to the arbitration hearing, two out of the three arbitrators will have no contact with the parties outside of the pleadings.  The statement “you don’t get a second chance to make a first impression” lies true with the submission of the answer and you must give your attorney all the ammunition to submit a strong defense on your behalf.