Articles Posted in Employment Law

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Courts call a lifetime bar “the securities industry equivalent of capital punishment.”  PAZ Sec. Inc. v. SEC, 494 F.3d 1059, 1065 (D.C. Cir. 2007).  It is a draconian measure which not only permanently removes you from the securities industry but also subjects you to “statutory disqualification” under Section 3(a)(39)(A) of the Securities Exchange Act of 1934 and all the collateral consequences that come with it.

Given the seriousness of a lifetime bar, a recently released AWC presents an alarming fact pattern in which a supervisor was barred due to the transgressions of an FA he failed to properly supervise.  Let’s consider the case of Michael Leahy, FINRA Case No. 2019063631802.  The question is, why did FINRA go after the supervisor with guns blazing?

The Applicable Rule:  FINRA Rule 3110

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This blog post looks at an interesting FINRA arbitration award issued on January 7, 2020:  Daniel Paul Motherway v. UBS Financial Services, Inc., FINRA Arbitration No. 17-02799.  This case seems to prove the old adage:  a man who is his own lawyer has a fool for a client.  Here we have an FA who proved, quite literally, that UBS defamed him, but was nonetheless ordered to stroke a check to UBS for more than $1 million.

Background Facts

On June 28, 2017, UBS fired Motherway and offered the following termination explanation on BrokerCheck:  “Financial Advisor’s employment was terminated after review concluded that he made false claims of merchant fraud on his personal credit and debit cards to an affiliate of the firm and made conflicting statement during the review.”

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FINRA published an interesting arbitration award on December 27, 2019.  In Raymond James & Associates, Inc. v. Gregory D. Clark (FINRA Case Number 18-04011), Raymond James claimed that Mr. Clark breached a settlement agreement related to the repayment of a promissory note.  Raymond James requested, and was awarded, compensatory damages of $206,000 plus interest pursuant to Florida Statutes § 55.03.  You can access the Award by clicking here.

Things get interesting when analyzing the procedural rulings of this case.

Motion to Bar Presentation of Defenses and Facts

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On December 11, 2019, a Chicago-based FINRA arbitration panel body-slammed UBS in a Form U5 defamation case (FINRA Case No. 18-02179 – Munizzi vs. UBS Financial Services Inc.).  UBS will need to cough up compensatory damages of $3,149,656, punitive damages of $7.5 million, and almost $500,000 in attorneys’ fees.  The bean counters in Zurich can’t be happy.  This case should serve as a warning to brokerage firms who play games with Form U5 disclosures.

 

The issues surrounding Form U5 disclosures are well known.  Firms are required to state a reason for an individual’s termination as either “discharged,” “other,’ permitted to resign,” “deceased,” or voluntary.”  If the reason for termination is designated as discharged, permitted to resign or other, the firm is required to provide a written explanation.  This is where things get funky, particularly where the individual contests the explanation offered-up by the firm.

 

Lawyers tend to squabble over whether a firm can be successfully sued for defamatory statements on a registration termination form (Form U5).  Brokerage firm’s argue that FINRA requires them to provide timely, complete and accurate information on Form U5 concerning the individual’s termination.  Firm’s will often cite to FINRA Regulatory Notice 10-39 [a copy can be viewed here] to support this proposition.  Thus, many firms will claim to enjoy “absolute immunity” for statements made on a Form U5 and rely upon Rosenberg v. Metlife, 8 N.Y.3d 359 (2007) (where New York’s highest court ruled that defamatory statements on a Form U5 are subject to an absolute privilege).  However, as set forth in the tables below, New York’s position on Form U5 immunity is clearly the minority view, since most states that have considered this issue provide brokerage firm’s with only qualified immunity (meaning, immunity for statements made in “good faith”):

 

MAJORITY POSITION:  QUALIFIED IMMUNITY
State Case
Arizona Wietecha v. Ameritas Life Ins. Corp., No. CIV 05-0324-PHX-SMM,  2006 WL 2772838 (D. Ariz. Sep. 27, 2006)
Connecticut Dickinson v. Merrill Lynch, 431 F. Supp. 2d 247 (D. Conn. 2006)
Florida Smith-Johnson v. Thrivent, No. 803CV2551T30EAJ, 2005 WL 1705471 (M.D. Fla. July 20, 2005)
Illinois Bavarati v. Josephthal, Lyon & Ross, 28 F.3d 704 (7th Cir. 1994)
Michigan Andrews v. Prudential, 160 F. 3d 304 (6th Cir. 1998)
Oklahoma Prudential Sec. Inc. v. Dalton, 929 F. Supp. 1411 (1996)
Tennessee Glennon v. Dean Witter, 83 F.3d 132 (6th Cir. 1996)
Texas In re Wakefield, 293 B.R. 372 (N.D. Tex. 2003)

 

 

In addition, a number of states have enacted Section 507 of the Uniform Securities Act, which specifically provides for qualified immunity (the firm can be liable for defamation if the firm knew or should have known that the statement was false, or acted in reckless disregard of the statement’s truth or falsity.

 

 

MAJORITY POSITION:  QUALIFIED IMMUNITY
State Statute
Hawaii HAW. REV. STAT. ANN. § 485A-507 (2006)
Idaho IDAHO CODE ANN. § 30-14-507 (2004)
Kansas KAN. STAT. ANN. § 17-21a507 (2005)
Maine ME. REV. STAT. ANN. 32, § 16507 (2005)
Minnesota MINN. STAT. ANN. § 80A.74 (2007)
Missouri MO. REV. STAT. § 409.5-507 (2003)
Oklahoma OKLA. STAT. ANN. 71, § 1-507 (2004)
South Carolina S.C. CODE ANN. § 35-1-507 (2006)
South Dakota S.D. CODIFIED LAWS § 47-31B-507 (2002)
U.S. Virgin Islands V.I. CODE ANN. 9, § 657 (2004)
Vermont VT. STAT. ANN. 9, § 5507 (2006)

 

In addition, the regulatory community has historically supported the proposition of qualified immunity instead of absolute immunity.  In 1997, FINRA (then NASD) even proposed a rule specifically provided only qualified immunity for Form U5 disclosure [click here to read the Notice to Members].  Additionally, in 1996, then SEC Commissioner, Isaac C. Hunt, Jr., forcefully advocated for qualified immunity [click here to read his remarks].

 

Herskovits PLLC has a nationwide practice representing individuals in the securities industry in employment and compensation disputes, including Form U5 defamation cases and Form U5 reformation cases.  Feel free to view our practice area page or call us at 212-897-5410.

Ever since it was implemented, brokers have relied on the Protocol for Broker Recruiting to be able to take some of their clients with them when they leave a firm, but a recent ruling by a state court in Georgia might jeopardize the Protocol’s protections.

The Appeals court’s ruling concluded the case against four former Aprio brokers, who failed to give 60 or 90 days’ notice before moving to Morgan Stanley, as it was established in their employment agreements.

Instead of giving Avrio a heads up, they announced they were leaving and quit on the same day. As soon as they had a foot out the door, they reached out to all their clients, in an attempt to bring them over to Morgan Stanley. Naturally, many followed, and Aprio lost a significant amount of business.

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As Merrill Lynch brokers appear to lag behind their competitors at Morgan Stanley, some FAs at the firm are probably not looking forward to seeing their paychecks this summer season.

Based on Merrill’s new compensation program, FAs who do not hit specific targets are going to endure punishment in the shape of a pay cut, compliments of the firm’s parent company, Bank of America.

There is much controversy about the management’s plans, mainly because it rewards practices like cross-selling. The fact that they are going to apply the new compensation program retroactively is not sitting well with brokers either. Actually, the FAs have referred to this particular element as a “clawback” tactic.

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In a complex and shifting global scenario, the financial industry faces numerous challenges relating to anti-money laundering (AML) compliance. In a rapidly changing regulatory environment, within an unstable geopolitical context, financial institutions have to adapt to new technologies and innovative operating models.

As regulators worldwide coordinate to increase transparency and target wrongdoers, AML has taken center stage when it comes to compliance programs.

The 2017 Global Anti-Money Laundering and Sanctions Compliance Survey by AlixPartners shed light on many observable industry trends. A survey of 361 financial institutions, the report is a valuable tool for anyone trying to understand the industry’s current perceptions and expectations.

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FINRA has fined Aegis Capital Corp. $550,000 for failing to implement required anti-money laundering (AML) and supervisory programs designed to prevent fraudulent activity.

The violations specifically affected low-priced securities transactions involving DVP (delivery versus payment) accounts. According to the outcome of FINRA’s investigation, the supervisory system Aegis used “was not reasonably designed to satisfy its obligation to monitor and investigate trading.”

There are certain aspects of DVP accounts that make them vulnerable to money laundering schemes if they are not appropriately supervised.

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FINRA recently announced monetary sanctions against Wedbush Securities in the amount of. $1.5 million for SEC rule violations and associated compliance failures.

According to FINRA, Wedbush violated the SEC Customer Protection Rule, which requires broker-dealers to maintain a certain degree of physical possession and control over customer securities.

The object of the rule is to facilitate recovery of customer assets if the broker-dealer becomes insolvent. Firms are also required to keep these securities in what is called a control location, free of any liens.

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A new proposed SEC regulation vows to “enhance the quality and transparency of investors’ relationships with investment advisers and broker-dealers.”

If “Regulation Best Interest” is finally implemented, broker-dealers will be required to “act in the best interest” of their retail customers whenever they recommend any securities transactions or investments.

Following numerous penalties in cases where broker-dealers recommended investments to their retail customers for the sake of personal gain, the proposed regulation is designed to deter financial advisers from this type of behavior, in the SEC’s words, “to make it clear that a broker-dealer may not put its financial interests ahead of the interests of a retail customer in making recommendations.”

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