Tag Archives: Stockbroker

FINRA Targeting Senior Investors

21 Tuesday Apr 2015

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The Financial Industry Regulatory Authority (“FINRA”) appears to be targeting seniors – – or at least the brokers that provide financial services to them. This may very well create a new waive of enforcement actions as FINRA seeks the spotlight to inform the public it is out to protect this group of investors. Even if that means protect them from themselves.

FINRA member firms, supervisors and brokers should be proactive to ensure their work with senior investors aligns with suitability requirements, FINRA guidelines and various state statutory requirements. When an account for a senior investor is being opened by a broker, the broker must take note of the client’s age as the information is being included in the new account paperwork. Bells should go off with the broker the new client’s time horizon for investments is significantly shorter than most. What that means is the types of investments that are to be offered must be carefully selected. By way of example, a variable annuity that pays out in 20 years may not be the best of selections as an investment vehicle for an 80 year-old investor. Similarly, in-and-out short term trading most likely should not be the recommended strategy. There are, however, always exceptions.

From a supervisory standpoint, the person responsible for authorizing the opening of the account must take note not only of the new client’s age and corresponding trading strategy, but also should ensure the firm is taking steps to educate brokers on how best to deal with financial strategies involving seniors. FINRA has provided Notice to Members and many, if not all states in the country have statutes designed to protect seniors from predatory brokers. Both supervisors and the brokers should take the time to review FINRA’s writings on the topic and ensure that the recommendations to senior investors are in line not only with the investment objectives on the new account documentation, but also in line with the provisions of FINRA guidelines and state statutory guidelines.

If a broker finds himself working with a large group of senior aged clients, the broker must be very careful to not try to take advantage clientele and begin utilizing a self-created title, such as Advisor to Senior Investors. Again, guidelines are in place as to the titles utilized by brokers, and those representing investors in FINRA arbitrations will utilize the fancy, but unearned titled, to impale the broker’s defense of the case. Similarly, if a supervisor sees a broker’s clientele is growing with this group of investors, there should be an aggressive review of the broker’s work. There should not be an assumption of wrongdoing, but an understanding of the broker’s strategy with each senior client and review as to the suitability of the trading in the account.

The beginning and end of the work should be this for brokers and their employing firms: be smart and aggressive in terms of protecting yourself. That does not mean a broker should not provide the client with the investments sought. What it does mean is the broker, with the assistance of the supervisor, should work directly with the senior investor to ensure the investor has a complete understanding as to: (i) the type of investment being recommended; (ii) the risks associated with the investment; and (iii) the fees and/or commissions that will be generated by the investment.

The Law Offices of Barry M. Bordetsky represents customers and industry members and representatives in FINRA arbitrations as well as before state and federal courts. If you have questions regarding the process, please contact Barry Bordetsky by telephone at (800) 998-7705 or email barry@bordetskylaw.com. The information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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.

FINRA Arbitration Requirement Is On Its Deathbed

25 Monday Aug 2014

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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.

Treat Your Brokerage Account Like Your Car? Absolutely.

01 Friday Aug 2014

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Believe it or not, your car provides a perfect analogy of how you should handle your investment account and the broker working with you. Most people have little if any knowledge of cars or how they work. Similar to how you have your broker guide you with your investments, you bring your car to your local mechanic.

Cars receive oil changes every 3,000 miles, and when it is time for your oil change, you bring the car to the service station. When getting the oil changed your mechanic tells you instead of every 3,000 miles, you should get your oil changed every 500 miles.   This just doesn’t make any sense, but you decide to go ahead anyway, because in your mind, the mechanic is the one who does this work for a living, so he must know what he’s talking about.

Stop there. If it doesn’t make sense to you, chances are, you are right on point.  You don’t need to be an expert in the field to know when something is simply off.  First thing you should do: ask to speak to the supervisor.  This should be no different with your stockbroker.

The Financial Industry Regulatory Industry (“FINRA”) recently filed charges against the New York broker-dealer Newport Coast Securities and five of its current and former brokers, charging them of “knowingly engaging in a manipulative and deceptive and fraudulent scheme to churn the accounts of some two dozen customers to boost their commissions.” FINRA alleges rampant churning of customer accounts and other misdeeds that caused significant losses to retirees and other investors.

FINRA is taking action to correct the alleged wrongs of the firm and brokers, and if the firm and brokers are found to have violated both securities law and FINRA rules, there will be be heavy fines issued, as well as the possibility of suspensions and perhaps expulsions from the industry.   This action by FINRA is similar to what the district attorney’s office does with a criminal that steals money from someone.

The present enforcement action by FINRA relating to churning should be a warning to all investors, old and young. Churning is the act of over-trading an account where an exorbitant amount of commissions are generated from the trading.    By way of example, presume an investor has $100,000 in her account. The broker opens the account with a buy of $100,000 of Facebook stock. The broker then repeatedly sells, buys and then sells again the stock twenty times over a one-year period. Each sale is quickly followed by a repurchase.

When one of the sales results in a quick profit, the broker will undoubtedly call and tell you how happy you should be that he made you money on the trade. But did he? Here’s where the churning analysis comes into play. If the broker did not overly trade the position, but rather bought and held, the position would have grown with the market movement of the stock. Instead, the investor’s portfolio has decreased because the broker’s commissions on the buys and sells have actually eaten into the profits in the account, and in many cases simply decrease the portfolio value. The only parties making money on this trading are the broker and his firm.  This type of trading should raise questions – – questions that must be asked before allowing the activity to continue.  And like your mechanic, ask for the broker’s supervisor before things get out of hand with your account.

In addition to enforcement proceedings, FINRA provides investors the ability to bring a civil action against the broker and his employing firm through the arbitration process, a very condensed court-like action. Those who lost money from Newport Coast or any other firm through churning, or other improper acts and omissions, have the opportunity to seek a remedy on their own. Those investors get their proverbial “day in court” in an expedited arbitration process that streamlines both cost and time to have the merits of the claim heard by a panel of arbitrators.

The Law Offices of Barry M. Bordetsky represents parties in arbitrations involving churning, unsuitable trading and other investment related claims. If you have questions relating to investment issues, please contact The Law Offices of Barry M. Bordetsky by calling Barry Bordetsky at (800) 998-7705 or emailing at barry@bordetskylaw.com.

 

 

Is FINRA Hurting Investors?

30 Wednesday Jul 2014

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Negotiating a settlement of any dispute is difficult. Parties often have an emotional attachment to the claim, and when the claim involves the loss of money, emotions run that much higher. This money could have been targeted for retirement, a child’s college education, or simply an account meant to grow in value over time. An arbitration between an investor on the one hand who lost money and the broker on the other hand who was handling the account, is resolved before the Financial Industry Regulatory Authority (“FINRA”).

Because of the very personal nature of the claim, in many cases a mediator is brought in to work with the parties to try to reach a settlement. It is not unheard of during a mediation the parties will not even meet to say hello at the day and place of the mediation.

You have undoubtedly heard the phrase “thinking outside the box”, something which can result in a good settlement in the course of a mediation. One important tool in settlement discussions is to give away something that does not cost anything, but get something of value in return. A good settlement is often one that both sides are unhappy with; and to get to that point the attorneys and the mediator must be able to use all tools necessary to reach a settlement agreeable to all.

In a FINRA setting, when a broker is named in an arbitration, the proceeding is on the broker’s permanent record maintained on FINRA’s central registration depository (“CRD”). This is a record that is generally available to the public. The arbitration can only be removed from the CRD if there is an award of expungement from a FINRA arbitration panel, and that award is subsequently confirmed by a court.

Parties to an arbitration will engage in settlement discussions prior to discovery, during discovery and often times on the day of an arbitration hearing.  For the investor involved in the settlement process, the goal is simple: get back as much of the money that was lost as possible. A tool referred to above for the investor, giving something that is of no value to the broker to get more settlement money, was the expungement tool. Said differently, in exchange for giving the investor money for the settlement, the broker would secure an agreement from the settling investor that he or she would not contest the broker’s expungement request. Keep in mind, this expungement request requires an independent hearing before a panel of FINRA arbitrators.  Simply including language in a settlement agreement was no guarantee the expungement would be granted.

The SEC recently approved FINRA Rule 2081, a rule that summarily removes this critical tool utilized by both sides when settling customer complaints. The rule reads “No member or associated person shall condition or seek to condition settlement of a dispute with a customer on, or to otherwise compensate the customer for, the customer’s agreement to consent to, or not to oppose, the member’s or associated person’s request to expunge such customer dispute information from the CRD system.”

In a word, FINRA Rule 2081 is foolhardy.  To answer the question raised in the title of this article, this rule not only works against the investing public, but hurts  investors trying to settle a claim. The expungement tool was used in the past to put together a good settlement for an investor, trading off the agreement not to oppose an expungement for a higher dollar settlement, or perhaps a settlement payment in a quicker time period.  It was a good trade-off for all the parties involved, and now it has been removed, making it that much more difficult for an investor to procure a better settlement.

If you have questions relating to expungement or investment issues, please contact The Law Offices of Barry M. Bordetsky by calling Barry M. Bordetsky at (800) 998-7705 or emailing at 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.