Raymond James Forced to Buy Back Securities

Raymond James & Associates Inc. and one of its brokers must buy back $925,000 in auction-rate securities from a Texas-based couple, a securities arbitration panel has ruled.

Rex and Sherese Glendenning, of the Celina area in Texas, originally sought $1.4 million in the case they filed in February 2009, against Raymond James & Associates, a unit of Raymond James Financial Inc. and Larry Milton, a broker associated with the firm in Fort Worth, Texas. They alleged breach of fiduciary duty, misrepresentation and civil fraud, among other things, according to a ruling by a Financial Industry Regulatory Authority arbitration panel.

The Finra panel ordered Raymond James and Mr. Milton to pay the Glendennings $925,000 in a ruling dated Aug. 20. The Glendennings must then sign the securities over to Raymond James, according to the ruling.

One of the three arbitrators on that panel that heard the case disagreed with the size of the award. “I believe the award to the Glendennings should be $1,400,000 instead of $925,000,” he wrote. Arbitration rulings, however, are generally still effective, as long as two of the three arbitrators agree.

The panel found both Raymond James and Mr. Milton liable for the couple’s damages, but didn’t include a reason for the decision—a practice that is typical of arbitration rulings.

“We’re glad that the panel found Raymond James and Mr. Milton liable, but wish the majority would have agreed with the dissenting arbitrator in terms of the money awarded,” says Howard Klatsky, a Dallas-based lawyer who represented the Glendennings. The couple, he says, opened a Raymond James account to consolidate funds in numerous certificates of deposit. An estate planner suggested the strategy to make their finances easier to manage, he said.

Mr. Milton, the broker, purchased the auction-rate securities, consisting of sewer revenue bonds, on behalf of the Glendennings in January, 2008, according to Mr. Klatsky. The couple never discussed auction-rate securities or sewer bonds with the broker and spoke only about their preference to invest their money in CDs, he says.

A Raymond James spokeswoman declined comment. Mr. Milton didn’t immediately return a call requesting comment.

The auction-rate-securities market froze in February, 2008, leaving many investors stuck with illiquid investments that they initially thought were cash-like.

Dissents in which arbitrators object to not awarding investors 100% of the amount they claimed happen “from time to time,” says Philip Aidikoff, a Los Angeles-based broker who represents investors.

It is unusual, however, to find a broker liable in an auction-rate case, says Mr. Aidikoff. His firm typically doesn’t name brokers in auction-rate cases, he says, because many didn’t know the full story behind what they were selling, he says. The ruling against Mr. Milton could reflect possible actions that were revealed through testimony, he says.

The case marks the second time in slightly more than a month that Raymond James was ordered to buy back auction-rate securities. A Finra arbitration panel on July 19 ordered the firm to buy back $2.5 million in auction-rate securities from a customer who was acting as trustee for a revocable trust.

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Finra Requests Extension For Discovery-Proposal Comment Period

The Financial Industry Regulatory Authority has requested to extend the public-comment period for a rule proposal that would redefine the type of information that parties typically exchange during securities arbitration proceedings.

Finra filed a regulatory notice with the Securities and Exchange Commission on Tuesday to extend the comment period for proposed changes to its arbitration discovery guide by 45 days until Oct. 8. The comment period was set to expire on Aug. 24.

The extension is subject to SEC approval.

Finra’s proposal aims, in part, to address concerns raised by investor advocates and the securities industry about an earlier version of the proposal that Finra submitted to the SEC in 2008 and later withdrew.

A Finra spokeswoman said the regulator requested the extension “to allow for a full opportunity for an expected robust comment response.”

Investor advocates said the 2008 proposal would have obliged customers to turn over too much personal information, such as years of tax returns, and could discourage claims. Some industry advocates said the terms were too broad and would require them to provide irrelevant information.

The new proposal would still require investors to submit certain in-depth information about their financial histories, such as tax returns and loan histories, among other papers. Some requirements are scaled back, however: For example, investors wouldn’t have to provide transaction confirmations or documents that illustrate steps that may have taken to limit losses.

Brokerages could also face expanded scrutiny. They would have to turn over documents related to commissions and compensation when customers allege churning, and certain internal reports in cases that allege a brokerage’s failure to supervise its adviser, according to Finra’s regulatory filing.

An SEC spokesman declined to comment.

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Goldman Told to Pay Bayou Fund Creditors

Goldman Sachs Group Inc. was ordered to pay $20.6 million, the largest arbitration award levied against the securities firm, to unsecured creditors of Bayou Group LLC who accused Goldman of ignoring signs of fraud at the hedge-fund firm.

Bayou collapsed in 2005, and the firm’s former chief executive, Samuel Israel III, is serving a 20-year prison term for fraud. He pleaded guilty to misrepresenting the value of Bayou’s funds and defrauding clients out of more than $400 million.

Goldman cleared trades for the Connecticut hedge-fund firm before it collapsed. In 2008, Bayou’s unsecured creditors’ committee filed an arbitration claim against two Goldman units.

“Through either gross negligence or a willful choice to ignore the signs of fraud, [Goldman] failed to diligently investigate the red flags it was made aware of, to contact Bayou’s auditors to request additional information, or to alert the appropriate authorities of what it had learned,” lawyers for the committee alleged in the claim.

A three-person Financial Industry Regulatory Authority arbitration panel didn’t provide an explanation for its ruling, issued Thursday. A Goldman spokesman said the panel didn’t conclude that the firm committed any wrongdoing or violated any rules.
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UPDATE: Investor Awarded $400,000 in Private Placement Case

An investor has won a $400,000 securities arbitration case against a former broker dealer involving notes that are the subject of a Securities and Exchange Commission civil fraud action.

The award, against Peak Securities Corp., a former independent broker dealer in Largo, Fla. that sold the investments, may be the first related to notes offered by Medical Provider Funding Corp. VI, say lawyers. The notes were the subject of a civil fraud complaint filed by the SEC in August, 2009 against Medical Capital Holdings Inc., the parent company of the issuer, and two other entities.

A California federal court issued an emergency order in the case at the time, halting an alleged $77 million offering fraud. The SEC had alleged that Medical Capital defrauded investors by misappropriating about $18.5 million of investor funds and by misrepresenting that no prior offerings had defaulted, among other issues.

Numerous independent broker dealers sold the notes, which are now the subject of a flood of securities arbitration claims filed by investors.

The award, entered by a Finra arbitrator on May 10, was reported by Investment News late Tuesday.

Marilyn Hazell, the investor, filed the case in April, accusing Peak Financial of negligence, fraud, as well as breaching its fiduciary duty and contract, according to the award. She sought $400,000 as compensation for her losses, plus $100,000 in punitive damages, according to the award. Peak Securities didn’t respond in the case, according to the award. Arbitrators may enter awards on a “default” basis in cases where parties don’t respond to claims, which can mean awarding the full amount sought by an investor.

Peak Securities Corp. stopped doing business as a broker dealer in November, 2009, and is no longer Finra-registered according to regulatory filings. Medical Capital Holdings is currently being liquidated.

“It’s a hollow victory,” said Andrew Stoltmann, a Chicago-based lawyer who represents investors in other cases involving Medical Capital notes. Chances of collecting on the award are highly unlikely, he said, since the broker dealer is no longer doing business.

Nicholas Thomas, a lawyer in Vero Beach, Fla., who represented the investor, said he intends to pursue “a measured amount” of collection activity. No other investors have presently obtained awards against the broker dealer, he said, which he describes as a “reason to be encouraged.”

Thomas said he’s representing the same investor in a separate arbitration case against the broker who sold the notes. He is in the process, he said, of amending that case to add a claim against David W. Dube, who is listed in regulatory filings as the president and chief compliance officer of Peak Securities.

Dube didn’t immediately return a call requesting comment.

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Arbitration Panel Throws Out $840,000 Claim By Investor

A securities arbitration panel threw out an $840,000 claim by an investor against Morgan Keegan & Co. and refused to take into account civil fraud charges recently filed against the investment bank by federal and state regulators.

In its decision, the Financial Industry Regulatory Authority panel on Tuesday ruled against Clifford G. Lee of Sarasota, Fla., who suffered steep losses from investments in a family of Morgan Keegan bond funds tied to risky mortgage-backed securities. The funds declined as much as 82% in value between 2007 and 2008.

The panel ruled that civil-fraud complaints made by regulators against Memphis-based Morgan Keegan and some of its employees had “no value as proof” as evidence.

The Securities and Exchange Commission, on April 7, accused Memphis-based Morgan Keegan, a unit of Regions Financial Corp. (RF), and two employees of, among other things, manipulating prices of the funds. The Financial Industry Regulatory Authority, or Finra, and regulators in Mississippi, Alabama, Kentucky and South Carolina also announced actions against the company. Read the rest of this entry »

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Former Morgan Stanley Broker Must Pay $1.6M In Bonus Case

A former broker for Morgan Stanley & Co. (MS) must pay $1.6 million to the firm in a case involving a signing bonus he received when he joined in 2006, according to a securities arbitration-panel award.

A Financial Industry Regulatory Authority panel ordered Thomas G. Hicks III, a former broker in Salt Lake City, Utah, to pay back the bonuses, which were secured by three promissory notes, according to the award dated April 6.

The bonuses that were handed out to brokers joining the top firms a few years ago are now becoming a point of contention as those who leave the firms face legal challenges. Because of the financial crisis, many advisers can’t afford to repay the money they owe.

Signing bonuses for brokers typically come in the form of loans that are forgiven in installments annually, until they are completely forgiven after about 10 years. The forgivable loans are secured by promissory notes, so that if brokers leave, voluntarily or involuntarily, before the term is up, they have to repay the remainder of the bonus.

About two years ago, Hicks was ordered to pay $1.7 million to UBS Financial Services, in a similar case involving bonuses. Hicks was given a $1.2 million signing bonus in the form of a 10-year forgivable loan when he joined UBS in 2000 at the Salt Lake City branch office, according to court documents.

Hicks left UBS for Morgan Stanley in 2006. A Morgan Stanley spokeswoman confirmed at the time that he produced $1.7 million in commissions and fees during his previous 12 months at UBS, and had around $200 million in client assets.

In 2008, a Finra arbitration panel ordered Hicks to pay UBS more than $1.7 million for the remainder of his forgivable loan. Hicks argued the brokerage didn’t pay his commissions for referring two companies that ultimately cut deals with UBS. The panel awarded Hicks $161,000.

Hicks then filed a proceeding in a Utah state court to overturn the $1.7 million award in the UBS case.

A Utah trial court sided with Hicks in July, 2008, overturning the arbitration panel’s award. But in February, an appeals court reinstated the original $1.7 million award that Hicks had been ordered to pay to UBS.

Morgan Stanley filed its case against Hicks in 2008, alleging breach of three separate promissory notes for the signing bonuses he received. Morgan Stanley originally sought more than $2 million, including interest on the notes, but was awarded $1.6 million, which includes Morgan Stanley’s legal fees, costs, and $196,000 in interest.

Hicks left Morgan Stanley in fall 2007, less than two years after he joined, according to the arbitration claim. He is not currently registered with another firm.

Sometimes, advisers leave shortly after joining a firm because they don’t meet production hurdles and are pushed out by management. Other times, they leave when promises made by management during the recruitment process aren’t fulfilled.

Spokespeople for Morgan Stanley and UBS declined to comment on the cases.

Efforts to reach Hicks were unsuccessful. Hicks’ former lawyers didn’t respond to telephone calls and emails requesting comment.

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Schwab Must Pay $1.5M In Punitive Damages To Former Employee

Charles Schwab & Co., Inc. (SCHW) must pay nearly $1.8 million–including $1.5 million in punitive damages–to a former employee, according to a securities arbitration award.

A Financial Industry Regulatory Authority, or Finra, arbitration panel also recommended expungement of a comment it says was made by Schwab on the employee’s Form U5, which brokerages typically file with regulators when an employee leaves a firm. The Finra panel found that Schwab had “specific intent” to harm the claimant, Timothy Leahy, former cashiering director of a Schwab office in Orlando, Fla.

Leahy wasn’t a broker for Schwab but was a registered representative, whose termination required disclosure on a Form U5. Brokerages typically file Form U5 with regulators when a registered employee leaves the firm.

The Finra panel’s award included $279,184 plus interest for lost wages and $1.5 million in punitive damages under a Florida statute. The punitive-damages award was intended to compensate Leahy for conduct by Schwab’s human-resources department that the panel said constituted “gross negligence.” Leahy was also awarded $6,100 in costs.
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Fleischer on Regulatory Arbitrage

Regulatory Arbitrage, by Victor Fleischer, University of Colorado Law School, was recently posted on SSRN.  Here is the abstract:

Most of us share a vague intuition that the rich, sophisticated, well-advised, and politically connected somehow game the system to avoid regulatory burdens the rest of us comply with. The intuition is correct; this Article explains how it’s done.

Regulatory gamesmanship typically relies on a planning technique known as regulatory arbitrage, which occurs when parties take advantage of a gap between the economics of a deal and its regulatory treatment, restructuring the deal to reduce or avoid regulatory costs without unduly altering the underlying economics of the deal. This Article provides the first comprehensive theory of regulatory arbitrage, identifying the conditions under which arbitrage takes place and the various legal, business, professional, ethical, and political constraints on arbitrage. This theoretical framework reveals how regulatory arbitrage distorts regulatory competition, shifts the incidence of regulatory costs, and fosters a lack of transparency and accountability that undermines the rule of law.

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Raymond James Ordered To Pay $12M

A securities arbitration panel has ordered Raymond James Associates Inc. to pay $12.1 million to Wells Fargo Advisors LLC for alleged raiding.

The case involves 20 advisors who moved to Raymond James from four branches of A.G. Edwards & Sons Inc. in 2007. The moves, from two A.G. Edwards branches in Indiana and two others in Illinois and Arkansas, occurred after Wachovia Securities LLC announced it was purchasing A.G. Edwards in May 2007, said Anthea Penrose, a Raymond James spokeswoman.

Wachovia Securities allegedly lost $5.3 million in production from the departures of these advisors, according to Teresa Dougherty, a spokeswoman for Wells Fargo Advisors.

Wachovia Securities was acquired by Wells Fargo & Co., which filed the arbitration claim, at the end of 2008. The combined brokerage force became Wells Fargo Advisors in May 2009.

“The arbitrators clearly recognized the distinction between legitimate, permissible recruiting conduct versus raiding,” Dougherty said.

Matthew Farley, a New York securities lawyer who represents brokerages, says determining whether raiding occurred often depends on circumstances such as the size of the firm, and whether a disproportionate amount of hurt is inflicted on the business. There is no bright-line legal test, he said.

“It is one thing to hire a rep and something else to hire a team, but going after an entire branch office can look abusive,” Farley said.

The A.G. Edwards branches that were the subject of the claim had $5.94 million in revenue and managed $853 million in assets, Raymond James’s Penrose said.

“Raymond James considers the award a miscarriage of justice and not based on the facts presented at the hearing, the applicable law, [or] standards in the industry,” Penrose said in a statement.

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Customers’ Arbitration Claims Up 43% in 2009

FINRA reports 7137 arbitration claims were filed in 2009, up 43% from 2008.  Not surprisingly, the most common complaints against brokers were breach of fiduciary duty, misrepresentations, negligence, breach of contract, failure to supervise, omissions and unsuitability.

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