Block & Landsman Wins $5 Million FINRA Arbitration Award for Lehman Structured Notes Investments

A FINRA arbitration panel awarded damages in excess of $5,052,500 against Neuberger Berman and it's broker Brian Hahn in connection with the sale of Lehman Brothers Structured Notes to three customers. The investors were represented by Block & Landsman and The Law Firm of Nicholas P. Iavarone.

In the summer of 2008, Neuberger Berman wealth manager Brian Hahn solicited the customers to invest in the comBATS and XLF Lehman Brothers Structured Notes. The customers were all told that the principle of the structured notes were either fully protected (the comBATS note) or partially protected (the XLF note). The Claimants alleged that neither Neuberger Berman or Brian Hahn adequately disclosed the fact that the investments were actually Lehman Brothers debt instruments and not investments the underlying combats and XLF products. When Lehman Brothers declared bankruptcy, the value of the structured notes became virtually worthless. One of the customers had also invested $1 million in Libertyview Credit Select, a Neuberger Berman fund that hypothecated its assets to Lehman Brothers.


The award represents 100% of the money our clients invested in the Lehman Brothers Structured Notes and in Libertyview Credit Select.

Contact Block & Landsman with any questions about the award or any questions about investments in Lehman Structured Notes.

Defrauded Investors Given Hope of Recovery As Morgan Keegan Parent Settles Regulatory Charges for $210 Million

Nearly 40,000 investors who lost $1.5 billion in fraudulent subprime mortgage-backed mutual funds were given a small boost in their claims for recovery as the parent company of investment banking firm Morgan Keegan & Co., Regions Financial Corp., agreed to pay $210 million to settle regulatory charges targeting its subprime mortgage mutual funds.

The Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA) and several state securities agencies brought charges against Morgan Keegan relating to its management of five fixed-income mutual funds that were loaded with subprime mortgages. The agencies accused the firm of manipulating the price of the funds as the underlying mortgages dropped in value, and then misrepresenting the true values of the securities. According to the director of the SEC's Division of Enforcement, "the falsification of fund values misrepresented critical information exactly when invsetors needed it most -- when the subprime mortgage meltdown was impacting the funds."

The investors who purchased these mutual funds will receive $200 million of the Morgan Keegan settlement. Investors who lost money in these investments, however, still have claims for more than $1 billion in losses, and continue to have the right to seek their own damages in individual arbitration claims they can file with FINRA. By consulting with an experienced investment fraud lawyer, investors can determine whether they have a claim for damages as a result of their investments with Morgan Keegan.

The law firm of Block & Landsman represents investors in arbitration and in lawsuits for fraud and breach of fiduciary duty arising out of investment losses. Contact one of the attorneys at Block & Landsman for a free consultation.

Class Action Lawsuit Filed Against FINRA for Violating Brokers' Constitutional Due Process Rights

Block & Landsman joined other firms in filing a class action lawsuit against the Financial Industry Regulatory Authority (FINRA) seeking injunctive relief to stop the regulatory authority from violating the constitutional due process rights of registered representatives. Specifically, FINRA Rule 3010(b)(2), known as the Taping Rule, requires brokerage firms to establish special supervisory procedures, including the tape recording of broker conversations, when they employ more than a specified percentage of representatives who were previously employed by firms that have been expelled or had their registrations revoked for sales practice rule violations (referred to as "disciplined firms").

FINRA's Rule imposes a "guilt-by-association" standard by tainting brokers who worked for a disciplined firm even though the representatives had no involvement in any activity that led to the firm's expulsion or revocation. Even if the registered representatives worked left the firm before the misconduct occurred, they are nonetheless deemed to be "tainted." The special supervisory procedures required of firms that hire enough of these brokers are burdensome and expensive, and can be avoided only by reducing the number of so-called "tainted" brokers. Subsequent employers can avoid having to implement the procedures by reducing the number of affected brokers below a qualifying number.

As a result, brokers who are "tainted" face termination, or the inability to be hired, on the basis of nothing more than their past association with a prior disciplined firm. And FINRA provides no mechanism for a former broker of a disciplined firm to remove the "taint" arbitrarily imposed by FINRA's rule, thereby violating their due process rights and subjecting them to arbitrary termination.

Supreme Court Widens Gap Between Investor Protection and SEC Enforcement

Is punishment an acceptable replacement for reparation? Is it sufficient fidelity to the securities laws for participants in a fraud to be prosecuted but not held accountable to the victims of their criminal behavior? According to the U.S. Supreme Court, the unfortunate answer is yes.

In a 5-4 decision handed down on June 14, 2011, the Court held that mutual fund investors do not have a right of action under Rule 10b-5 to parties other than the issuer for fraudulent disclosures of risk. The decision does mean that the other participants have not committed securities law violations. Rather, it merely shields them from liability for their conduct. As a result, the victims of the misbehavior by non-issuing parties are foreclosed from seeking compensation for their losses even if the perpetrators admit that they engaged in misconduct.

In Janus Capital Group, Inc. v. First Derivative Traders, the Court narrowed the application of Rule 10b-5, which makes it illegal for "any person, directly or indirectly. . .[t]o make any untrue statement of material fact" in connection with the purchase or sale of a security. In that case, shareholders in a Janus mutual fund sued Janus Capital Management LLC, the management company for the fund, in connection with alleged fraudulent disclosures in the fund's prospectus. The plaintiffs alleged that the management company participated in the preparation of the misleading prospectus, and was liable for their losses resulting from the fraudulent disclosures. In an impressive display of linguistic gymnastics, the Court focused on the meaning of the phrase "make any untrue statement" in Rule 10b-5. Rejecting the arguments of the investors as well as the arguments of the SEC itself, the majority adopted a restrictive definition of the phrase, limiting its reach only to those who had ultimate legal control over the content of the prospectus. Because the management company did not "issue" the prospectus, it cannot be held liable for the investors' resulting damages, even if the management company drafted the misleading disclosure that appeared in the prospectus. While they may be guilty, they are not responsible.

The Court's decision does not exonerate the non-issuing participants, and it does not inhibit the SEC's ability to bring regulatory enforcement actions against them for their misconduct. Instead, the Janus ruling is just the latest in a string of opinions by the Court that impede the securities laws from protecting the very investors for whose benefit the laws were enacted. 

Public Investment Fund Overcharged $1 Million on Dozens of Bond Trades

Brokers at UBS Securities and Morgan Stanley are alleged to have overcharged Harris County more than $1 million in the sale of new bond issues between March and September 2010. According to an investigation by the Houston Chronicle, the brokers charged the County a premium above par value for newly issued bonds of federal agencies.

The size of the Harris County, Texas investment fund, reported to exceed $4 billion, allowed for large bond purchases that generated enormous commissions for the brokers. The typical commissions for such trades range between $250 to $350 per $1 million in bonds, earning a broker a $6,250 commission on a $25 million purchase. In contrast, by charging a premium above par for new bond issues, the UBS and Morgan Stanley brokers would generate a ten-fold commission of $62,500. In and of themselves, premiums above par for bonds are not unusual, for instance when purchasing a bond paying a higher interest rate than new bonds being issued. But paying such premiums on new bond issues is extremely rare.

Public investment funds, whether belonging to municipalities or public pension funds, are responsible for hundreds of billions of dollars of taxpayer money, and can be a prime target for a wide variety of investment fraud opportunities. The attorneys at Block & Landsman are experienced investment fraud lawyers who can investigate misconduct regarding the purchase and sale of securities. 

SEC and FINRA Issue New Warning About Investing in Principal Protected Structured Notes

A type of high risk investment product that imploded with the economic meltdown in the Fall of 2008, leading to investors' losses of hundreds of millions of dollars, continues to concern securities regulators. The Securities and Exchange Commission (SEC) has joined with the Financial Industry Regulatory Authority (FINRA) to issue a joint Investor Alert to warn investors about complex financial products known as "structured notes with principal protection." While the name of this security suggests safety, the structured notes present a variety of extreme risks to uninformed investors.

The notes combine a zero-coupon bond, which pays no interest until the bond matures, with an option or other derivative product whose payoff is linked to an underlying index, benchmark or other asset. These notes are designed to return some of all of an investor's money at a set maturity date (which can be as long as ten years) and offer a potential interest payment linked to a predetermined change in the value of the underlying asset.

There are many risky variations of both components that make up the structured note product. For example, although some notes return the entire amount of an investor's principal at maturity, many return less than 100 percent. Moreover, the principal guarantee -- that investors will receive all or some of their principal at maturity -- is entirely dependent on the creditworthiness of the securities firm that structures and issues the note. If the issuer goes bankrupt -- as was the case with Lehman Brothers, which issued large volumes of these type of notes -- investors have no protection and become unsecured creditors of the defunct firm.

The potential upside benefit of being able to participate in an increase in the underlying assets is similarly subject to signficant risks depending upon how the note is structured. As a result, the issuer can limit the amount of interest it owes investors even if the note reaches maturity. The upside potential is linked to the performance of the underlying assets, which are not limited to common benchmarks such as the S&P 500 or the price of a single commodity. Rather, exotic cominbations of assets such as spreads between interest rates or baskets combining unrelated asset types such as an index, a commodity and a currency, are often chosen as the meaure of interest the bond will ultimately pay above the return of principal. The issuer can select unfavorable formulas to calculate the gains or losses linked the the performance of the underlying asset, so-called "market-linked" returns, which can limit the extent to which investors are allowed to participate in the underlying asset's gains. Additionally, the issuer can determine that only a portion of the underlying asset's gain is credited to the note, which has the effect of restricting the interest paid to the investor at maturity.

The unlimited variations to the structure of these complex financial products makes it difficult for typical investors to assess the true risks and benefits of the notes. For this reason, the SEC and FINRA issued their Investor Alert and provided a series of questions that investors should ask their advisers who recommend structured notes with principal protection, such as: (a) what is the level of principal protection offered, (b) describe any conditions to the principal protection, (c) what are the fees and costs, (d) are there limits to potential gains in the underlying asset, (e) what is the credit risk of the issuer, (f) what other risks are associated with the product, and (g) what alternative investments are available.

Complex risks often hide behind the safe-sounding structured notes, and investors should be wary of recommendations to invest without obtaining direct and clear explanations. Any investor who has lost significant monies in these type of structured notes should consider consulting with an investment fraud lawyer to determine any liability on the part of the financial advisor recommending the security.

FINRA Rules Inch Toward Holding Brokers Fully Accountable to their Customers

Later this year, the Financial Industry Regulatory Authority ("FINRA") will put in effect new rules of conduct that narrow the gap between brokers' duties and investors' expectations of their brokers' responsibility.

Many investors would be surprised to learn that licensed brokers generally do not owe a duty to act in the best interests of their customers. Instead, the duty of a broker to a customer with a non-discretionary account has been much more limited: only to recommend investments that are suitable in light of their client's objectives, financial needs and circumstances. This is true even where customers place exclusive reliance on their brokers and always follow their recommendations.

The Securities and Exchange Commission has approved new FINRA Rule 2111, an updated version of the old NASD Rule 2310 (Suitability) requires brokers and their firms to "have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based o n the information obtained through the reasonable diligence of the member or associated person to ascertain the customer's investment profile."

FINRA's new Rule 2111 expands a broker's responsibility toward the customer. While not reaching the level of requiring brokers to act in their customers' best interests, the new standard is an improvement in the protection of investors because it will explicitly cover situations that industry members have historically opposed. Specifically, the new suitability standard will no longer apply only to recommendations concerning the purchase or sale of a security. Rather, it now applies also to the recommendation of investment strategies. Additionally, the new rule directly applies the suitability standard to a broker's recommendation to hold a security, rather than just to purchase or sell a security. This expansion nullifies years of denials by brokers and their firms that a recommendation to "hold" a security constitutes actionable behavior. It recognizes the reality that investors sometimes refrain from executing a transaction on the advice and recommendation of their adviser.

The rule further explains the three primary suitability obligations of a broker. First, a broker must make a reasonable-basis suitability determination, based on reasonable diligence, that the recommendation is suitable for at least some investors. What constitutes "reasonable diligence," however, is undefined, and depends on a variety of factors such as the complexity, the risks and the rewards associated with the security or the investment strategy. Second, assuming the recommendation is suitable for at least some investors, a broker must then make a customer-specific suitability determination to ensure that the recommendation is suitable for a particular customer based on his or her investment profile. Finally, where brokers exercise actual or de factor control over a customer's account, they must have a reasonable basis for believing that a series of recommended transactions, even if individually suitable, are not collectively unsuitable for the customer. Factors relevant to this determination are turnover ratio, cost-equity ratio and the existence of short-term trading.

The new rule is undoubtedly an improvement over the former suitability rule, and will benefit investors in their interactions with their brokers, and in customer arbitration claims where their brokers have violated the rules. The benefits of the revisions, however, are mitigated by the new rule's limitations. For example, the rule leaves much ambiguity regarding the precise contours of a broker's obligations. Additionally  the duty is only triggered by a "recommendation" of the broker, as opposed to an adviser acting under a fiduciary duty, who in required in all respects to provide guidance in the client's best interests. While the regulatory trends appear to favor protecting investors, much work still needs to be done, and investors must remain vigilant to ensure their advisers are recommending securities and investment strategies that are appropriate for their purposes.

Securities America Fraud Victims Settle for Little More Than 30 Cents on the Dollar

Competing claims by customers of Securities America who lost $400 million in allegedly fraudulent securities in Medical Capital and Provident Royalties have finally been resolved. As followed in this blog, the proponents of a class action lawsuit against Securities America and its parent, Ameriprise Financial, sought to force investors who filed their own arbitration proceedings to abandon their own claims and compel them to participate in the class action settlement. The investors in arbitration successful argued for their right to pursue their own claims, and the judge overseeing the class action rejected the onerous settlement agreement.

This week, Securities America agreed to settle the class action claim and the individual arbitration proceedings for a total of $150 million. While that is certainly a significant settlement amount, it nonetheless still means that investors, who will recover slightly more than 30% of their losses, will have to bear the brunt of the MedCap and Provident losses. Given the fact that an investor won an award of $1.2 million against Securities America earlier this year -- an award that included punitive damages to punish the firm for its conduct -- it seems that Securities America secured a global settlement on favorable terms.

Investors who believe they have been defrauded by an investment advisor, or who believes they have suffered investment losses due to broker misconduct, should contact an investment fraud lawyer to investigate their right to recover damages.

Banco Santander Pays $9 Million to Settle Claims It Improper Sold Reverse Convertibles To Elderly Investors

Hardly a week goes by without a report that yet another financial institution has settled claims of selling improper investments to groups of investors, often including senior citizens. This week, the largest bank in Spain, Banco Santander, is reported to have paid $7 million directly to investors and $2 million to the Financial Industry Regulatory Authority ("FINRA") to settle claims that it improper sold high-risk reverse convertibles to elderly, retired investors.

Reverse convertibles are risky, high yield, short-term bonds that automatically convert to the stock of an underlying company's shares if the company's share price rapidly declines. In 2010, banks sold nearly $7 billion worth of these securities to U.S. investors.

According to the allegations, Banco Santander brokers not only sold reverse convertibles to conservative investors, they sometimes recommended that customers use margin to purchase the securities, which had the effect of increasing the risk of significant losses.  Banco Santander is the most recent in a string of fines against banks for improperly selling reverse convertibles. Last year, a subsidiary of Royal Bank of Canada and a subsidiary of Ameriprise Financial were fined a total of $890,000 for similar practices.

Investors who have reverse convertible securities in their portfolios may want to consult with investment fraud lawyers to investigate whether they have a claim to recoup losses incurred by these investments.

Securities America Seeks to Resolve Arbitration Cases Involving Medical Capital and Provident Royalties

Last week, a federal court rejected Securities America's attempt to force arbitration claimants to abandon their cases and require them to participate in a class action settlement that would allow defrauded investors to recover only one-eighth (1/8) of their $400 million in losses due to investments in Medical Capital Holdings, Inc. and Provident Royalties. Securities America's effort to extinguish investors' arbitration rights came on the heels of a customer's $1.2 million arbitration award, which included punitive damages, against the firm for allegedly fraudulent sales of Med Cap securities.

Yesterday, Investment News reported that Securities America has now proposed a settlement of all of the individual investor arbitration claims by offering the claimants nearly 50% of their losses. This offer represents a significant increase from the last offer Securities America made before the federal court ruled last week.

While Securities America's proposal represents its attempt to manage its exposure by settling for a sum certain, the offer was reportedly extended only to investors with existing arbitration claims, and does not provide for claims that may yet be filed in the future.

Investors who have lost money in Med Cap and Provident investments and who believe they have claims against Securities America and its parent, Ameriprise Financial, should contact an investment fraud lawyer to investigate their claims.

LPL Financial Disciplined For Allowing Broker To Improperly Transfer Customer Funds to His Own Account

Earlier this month, LPL Financial, LLC was fined $100,000 by the Financial Industry Regulatory Authority ("FINRA") for failing to maintain supervisory procedures to catch a representative who was transferring assets from a customer account to the broker's personal account with the firm.

In the face of charges by the regulatory agency, LPL Financial submitted a Letter of Acceptance, Waiver and Consent by which the firm consented to a censure and the fine, while at the same time neither admitting or denying the facts.

According to the FINRA enforcement action, LPL Financial did have a supervisory system that was intended to monitor the transfer of funds or securities from a customer account to third parties. However, the firm's system simply failed to address movement of assets from a customer account to a broker's LPL account. This failure allowed a broker to convert for his own benefit more than $1 million in cash and securities belonging to LPL customers.

This is one of three fines, totaling $220,000, that FINRA assessed against LPL Financial this month for various disciplinary violations in March, 2011.

Any investors who suspect that money or securities have been moved from their accounts without proper authority should immediately investigate the circumstances of the transfers.Investment fraud lawyers can assist with that investigation and seek to recoup embezzled funds.

Charles Schwab Must Pay $18 Million to Investors for Improper Sales Practices Concerning YieldPlus Bond Fund

Earlier this year the regulatory agency that oversees brokerage firms ordered Charles Schwab to reimburse investors in its YieldPlus ultra short-term bond fund a total of $18 million through a fund to be set up by the Securities and Exchange Commission ("SEC").

The Financial Industry Regulatory Authority ("FINRA") determined that Schwab misrepresented the YieldPlus fund as a low risk alternative to money market funds despite the disproportionate impact the upheaval in the mortgage-backed securities market had on the YieldPlus portfolio.

Between September 2006 and February 2008, Schwab sold more than $3.3 billion of YieldPlus shares to its customers, including a significant percentage who were over 65 years of age. At the beginning of this period, Schwab changed the classification of non-agency mortgage-backed securities to allow the fund manager to increase the percentage of these volatile securities to over 50 percent of the fund's assets. According to FINRA, while YieldPlus' NAV declined through 2007, Schwab internal records admitted that YieldPlus was a higher-risk investment than it had been before this change. Despite this understanding, Schwab continued to market the fund to customers "as a cash alternative with minimal risk and price fluctuation."

While neither admitting or denying any wrongdoing, Schwab has now settled FINRA's charges by agreeing to pay $18 million into the SEC's "Fair Fund" to compensate investors with the fees Schwab earned in selling the fund.

Investors who believe they have lost money because of Schwab's improper sale of YieldPlus funds, or any other actions, should contact an investment fraud lawyer to investigate their claims.

Chicago Bulls Star Carlos Boozer Files Investment Fraud Lawsuit

The parade of investment advisors who target professional athletes for fraud has claimed another victim. Carlos Boozer, a starting forward for the Chicago Bulls NBA franchise, has filed a lawsuit alleging that he and his wife were "maliciously" induced to invest $1 million in a Florida company that was marketed as being in the business of constructing affordable housing for disaster victims.

According to Boozer's lawsuit, the owners of the company, InnoVida, represented that investors would receive returns of 1,000% while helping people in need who lost their homes. This combination of benefits proved too attractive for Boozer and others to pass up. Rather than use the investment funds as intended, the lawsuit alleges the owners of the company used the money to fund a lavish lifestyle.

Professional athletes are often targeted for investment fraud because they are young, inexperienced in investment matters, and place a premium on trust. Often, the schemes used to defraud them involve private placement investments that are not liquid and are represented to offer large returns. Whether or not you are a professional athlete, the effects of investment fraud can be devastating. Victims of fraud should consult with experienced investment fraud lawyers to learn their rights and pursue claims to recoup their losses.

UPDATE: Securities America Victims Can Pursue Arbitration Claims for Medical Capital Losses

Investors who accused Securities America and its parent, Ameriprise Financial, of selling fraudulent interests in Medical Capital ("MedCap") and Provident Royalties found themselves odds in a federal court in Dallas, with some investors realigning their interests with the firms they sued.

Attorneys for investors who filed a class action lawsuit against the firms had secured a settlement agreement that would pay nearly $50 million to the thousands of investors victimized by these deals. The catch, however, was that individuals who wanted to pursue their own claims in arbitration against their advisors had to be forced to participate in the class settlement and abandon their individual cases against Securities America and Ameriprise.

This condition was significant to the firms because the individual arbitration claims exposed the broker-dealer to the potential for huge liabilities. In a class action, any settlement would be equitably distributed among all class members who had similar cases but who did not want to pursue claims on their own. Typically, class members have the right to opt-out of any class settlement and file their own lawsuits without regard to any other payments the defendant made. The benefits of class action settlements are greater to a defendant when larger numbers of class members participate in a class settlement.

With the MedCap litigation  the class action settlement was less attractive to many victims because of the possibility of larger awards in favor of investors who decided to forego the class action and instead file their own arbitration claims. In January, 2011, one couple who sued the firm won an arbitration award of $1.2 million. Given the large number of investors who lost an estimated $400 million in MedCap, the likelihood of individual arbitration awards threatened Securities America's very existence.

Accordingly, Securities America and Ameriprise sought to eliminate the greater threat posed by individual cases by insisting that all MedCap and Provident investors be forced to participate in the class settlement. The settlement was submitted to the court, which had to decide on the viability of that structure. As a result, investors who opted out of the class action battled investors who wanted the class action settlement to be approved.

On March 18, 2011, the federal court judge overseeing the class action rejected the settlement, allowing aggrieved investors to continue their individual arbitration cases. The status of the agreement to settle the class action lawsuit remains up in the air.

Investors who have lost money from investments in Medical Capital or Provident Royalties should make sure they consult with experienced investment fraud lawyers to investigate their right to recover their losses.

Targets of Investment Fraud: Professional Athletes

Professional athletes are the targets of relentless efforts of investment advisers who engage in fraudulent financial advice. According to a 2008 survey conducted by Sports Illustrated, 78% of former NFL players have gone bankrupt or are under financial stress by the time they have been retired for two years. The same survey found that 60% of former NBA players are broke within five years of retirement. Major league baseball players are also not immune from fraudsters, and dozens of players have filed lawsuits in the past several years seeking tens of millions of dollars in investment fraud losses.

Laurence Landsman, a partner in the Chicago law firm Block & Landsman, has published an article on the problem of athletes who face the devastating effects of financial fraud. The article, which was published by the National Sports Law Institute at the Marquette University Law School, discusses several examples of athletes being defrauded by trusted advisers, and explores how the scams successfully lure unsuspecting athletes.

Athletes are targeted for financial fraud because of their youth, inexperience in investment matters, and the large sums of money they earn. Last year, players on NFL rosters earned a collective $3.3 billion in salaries, with an average of $1.8 million in earnings per player.

Mr. Landsman's article explains how fraudsters use current or former players, who are often victims themselves, to lure their teammates into investment scams that promise large returns that are, in reality, impossible to be achieved. The article also looks into the ineffective effort by the National Football League Players' Association ("NFLPA") to create a program to deter financial fraud against players.

Budget Cuts Put Illinois Investors At Risk

Illinois investors will soon find themselves a little further out on the limb of self-reliance in the fight against investment fraud. Under the Dodd-Frank Wall Street Reform Act, enacted by Congress last year, state securities regulators are required to assume responsibility to oversee investment advisers who manage between $25 million and $100 million in assets, which previously was in the purview of the Securities and Exchange Commission ("SEC").

Unfortunately, this increase in responsibility is not being supported with an increase in funds to the Illinois Department of Securities ("IDS"), the regulator responsible for protecting investors against fraud in Illinois. To the contrary, according to reports, the current financial challenges facing state governments is causing the the director of the IDS, Tanya Solov, to submit a funding request for the next fiscal year less than the $12.4 million in funding for the present year. The greater responsibilities placed on the department's shoulders requires additional staff, and Ms. Solov plans to add three examiners and one attorney to her team. These staff additions, however, will cause the department to forego new computer equipment and choose other cost-saving measures that may be a drag on the Department's ability to effectively meet the challenges of its expanded responsibilities.

The IDS mandate focuses on regulating financial advisers and bringing enforcement actions to stop those who violate Illinois securities law. In that capacity, the agency is recognized throughout the state as a proactive and effective advocate for Illinois investors. But the pressure facing the regulatory agency of an increasing workload under the serious budget constraints means that investors need to be more diligent than ever in protecting their financial future. This means that investors must research their advisers' background by contacting the Investment Advisor Registration Depository("IARD"), the Financial Industry Regulatory Agency ("FINRA") and the IDS to find out what licenses their adviser holds, if any claims have been made or are pending against the adviser, and whether the adviser has been subject of any regulatory discipline. While important, this type of due diligence is no guarantee against investment fraud, and Investors who suffer losses because of misconduct by their adviser need to consider retaining a securities attorney to review their litigation options.

The IDS remains an important tool in the fight against fraud, but investors would be well-advised to actively join that fight in their own best interests.

Securities Arbitration: Who Shot J.R. Down?

The need for the Financial Industry Regulatory Authority ("FINRA"), which oversees securities arbitration hearings, to revise its arbitrator disclosure procedures is under a spotlight because of a FINRA arbitration case brought by actor Larry Hagman, star of the 1980s program "Dallas," against Citigroup.

On October 6, 2010, Hagman won an $11 million arbitration case against Citigroup Global Markets for the actions of a Smith Barney broker. Hagman and his wife claimed that the broker breached her fiduciary duty by creating an unsuitable portfolio of securities and improperly selling them a life insurance policy that had annual premiums of $168,000. The Hagmans' arbitration victory was thorough. The panel of arbitrators awarded them $1.1 million in compensatory damages, $10 million in punitive damages payable to a charity of the Hagmans' choice, and attorneys' fees of nearly $460,000.

Citigroup filed a petition to vacate the award in a California court. Arbitration awards cannot easily be appealed, and the vast majority of petitions to vacate are denied because the grounds to overturn an award are severely limited.

The Hagmans were not so fortunate. On February 9, 2011, a judge vacated the award because one of the arbitrators did not disclose a potential conflict of interest involving his own lawsuit against a business partner who had allegedly breached his fiduciary duty resulting in substantial losses to the arbitrator's retirement funds. Under FINRA rules, arbitrators must disclose whether they were involved in a dispute involving the same subject matter with the prior five years. Purportedly, the arbitrator's own case did not involve the securities industry, and did not involve asset allocation, which was at the heart of the Hagmans' case. Thus, it appears the arbitrator did not believe his case fell within the FINRA disclosure requirements. The judge disagreed, ruled that the arbitrator should have disclosed his prior dispute, and vacated the award.

This dispute highlights a glaring failure in FINRA's arbitration process. All arbitration parties, both investors and brokerage firms alike, devote significant time, energy and resources in claims that often involve large sums of money. They necessarily rely on FINRA to ensure that the arbitrators selected for their cases are free from any actual or potential conflicts of interest that may color their view of a dispute. FINRA must make more detailed and thoughtful inquiries into potential arbitrators' backgrounds to ensure the absence of disqualifying factors. FINRA must also clearly and fully disclose the arbitrators' backgrounds to avoid a losing party petitioning a court to nullify a hard fought award. Only when FINRA corrects these deficiencies will parties have confidence in the finality of the arbitration process.

Victory for Investors - Securities Arbitration Now Offers All-Public Arbitrators

In a long-sought victory for investors, the Securities and Exchange Commission ("SEC") has approved a proposal by the Financial Industry Regulatory Authority ("FINRA") that arbitration panels, which decide investor claims of broker misconduct, no longer are required to include an arbitrator who is a member of the financial industry. For the first time since the U.S. Supreme Court allowed brokerage firms to require investors to arbitrate disputes, investors will have a choice of selecting an all-public arbitration panel.

For years, investors and their advocates have complained that the presence of an industry arbitrator on panels creates an unfair bias in favor of the industry members who are accused of wrongfully causing investment losses. Brokerage firms have long resisted any changes to the use of the industry, or non-public, arbitrators who, the firms claim, are better able to understand the standards that they are required to follow.

Although some disputes may be appropriate for selection of an industry arbitrator, investors will now be permitted to choose the the make-up of the arbitrators who will decide their cases.

As a result, the playing field is becoming even for investors who pursue arbitration claims for investment fraud.

Ponzi Scheme Victims - All May Not Be Lost

Common wisdom says that victims of Ponzi schemes will never see their investment monies again. In most cases, that is likely true. But not always, and victims should be aware that sometimes they may have viable remedies to recover some or all of their losses.

The problem is enormous. Ever since the $50 billion Ponzi scheme masterminded by Bernard Madoff exploded two years ago, securities regulators have become more vigilant in pursuing these illegal investment scams. All of a sudden, we seem to be inundated with the disclosure of new Ponzi schemes nearly every week. According to a recent analysis conducted by the Associated Press, 150 Ponzi schemes collapsed in 2009, nearly four times the number that fell apart the year before, resulting in losses to victims of more than $16.5 billion. The Securities and Exchange Commission ("SEC") issues 82 percent more restraining orders against Ponzi schemes and similar securities fraud cases in 2009 as compared to 2008, and the FBI has opened more securities fraud investigations than ever before. Once the final statistics for 2010 are available, there is no reason to believe they will show any improvement.

Any victim of securities fraud faces potentially devastating losses. For investors who lose money due to the misconduct at brokerage firms, the opportunity to recover their losses through arbitration exists. Because most Ponzi schemes are run by fraudsters unaffiliated with brokerage firms, the collapse of these schemes often leaves victims with no recourse.

Recovery of losses, however, is not always out of the question. In 2010, the investment fraud lawyers at Block & Landsman were hired by a couple who were victimized by a woman who is now imprisoned in a federal penitentiary for operating a massive Ponzi scheme. The fraudster represented to our clients that her firm was selling interests in a bond yielding 8% interest and that they could pull their money out any time they wanted. The investors believed these promises and wire transferred their investment to a bank where the schemer said the money needed to be deposited. As soon as the transfer was complete, however, the fraudster withdrew the funds and used them for personal expenses. Although the investors soon discovered the fraud, their money was already gone, and they felt all was lost.

Fortunately for our clients, they may find relief. The bank they transferred their money to has an affiliated brokerage firm. The woman now in prison used to be registered as a broker with that brokerage firm, until she lost her securities broker license for stealing money from a customer's account. Despite this background, the affiliated bank allowed her to open numerous accounts on behalf of others in her capacity as a financial adviser, ignoring the many red flags that she was continuing her criminal enterprise.

FINRA Arbitration Statistics - Closing the Book on 2010

The Financial Industry Regulatory Authority ("FINRA"), which provides the arbitration mechanism for resolving securities disputes involving investment fraud, has published its 2010 arbitration statistics. The results show a gradual, very gradual, trend that may be favoring investors.

Investors filed 5,680 arbitration cases in 2010. Although this number is twenty percent less than the number of arbitration cases filed in 2009, it is the second largest annual figure in the past five years, representing a general increase in the number of investors who are claiming losses due to broker misconduct. The majority of cases filed in 2010 involved claims for breach of fiduciary duty and misrepresentations involving common stock and mutual funds, although a significant number of cases involved annuities and bonds as well.

2010 did not just usher in an increased number of new arbitrations. A large number of cases (6,241) were closed during that year as well, which is a result of the increased filings in 2009 following the near collapse of the financial markets in the Fall of 2008. These statistics follow a general pattern regarding an uptick of arbitration activity following major market downswings, although these figures did not quite reach the record number of cases filed on the heels of the tech bubble burst early in the decade.

Of the cases closed in 2010, 22% were resolved by hearing or decided just on the submission of documents, and 62% were settled through mediation or through direct discussions between the parties. This is fairly consistent with method of case resolution seen in prior years.

Notably, 47% of all customer cases decided by arbitration resulted in an award of damages in favor of the investor. This statistic requires a significant asterisk: it includes the award of any dollar amount in favor of the customer, regardless of how little it is compared to the amount of the claimed losses. Even with that qualification, the 2010 results confirm that the percentage of victories for investors is gradually trending upward; in 2007, only 37% of customer claims received an award in favor of the investor. Indications remain, however, that arbitration presents significant undue challenges to investors by failing to provide a level playing field.

Arbitration statistics over the next two years will shed light on the impact of important changes that FINRA is implementing to its arbitration procedures. Among the most significant changes is the elimination of the industry arbitrator for claims involving more than $100,000. Additional improvements, such as making arbitration voluntary rather than mandatory, are likely in the wake of SEC action pursuant to the requirements of the recently enacted Dodd-Frank Act. Whether such changes impact the results of arbitration hearing is a question that investors and industry members will closely watch.

If you believe your investment losses may have been caused by fraud or broker misconduct, call the investment fraud lawyers at Block & Landsman for a confidential consultation. Please visit our website for more information.

Federal Task Force Diagnosis Financial Fraud Epidemic in U.S.

Last month, Attorney General Eric Holder announced the results of Operation Broken Trust, a nationwide operation organized by the Financial Fraud Enforcement Task Force to target investment fraud. According to these results, investment fraud is a virus that has infected our system of finance so thoroughly that no investor is immune from its opportunistic attacks.

The task force is a coordinated effort by the U.S. Department of Justice, the Securities and Exchange Commission, the Internal Revenue Service, the U.S. Postal Inspection Service and the U.S Commodity Futures Trading Commission, to lead an aggressive and proactive effort to investigate and prosecute financial crimes. During its initial three-and-a-half month effort, beginning on August 16, 2010, the task force initiated 211 criminal cases and 60 enforcement actions involving fraud schemes that defrauded more than 120,000 victims. The calculated losses of these victims: $10.5 billion.

The vast scope of financial fraud revealed by the task force's preliminary efforts is shocking, but should not be surprising. Such schemes have flourished for generations in the absence of meaningful efforts to curb their growth. It has been reported, for example, that the FBI slashed its financial fraud work force in the wake of the September 11, 2001 attacks in order to concentrate on terrorism investigations, a necessary focus that had the consequence of leaving victims of fraudsters to fend for themselves. The resulting wild west atmosphere allowed investment schemes to mushroom. Time and again, the task force broke up multi-million dollar scams that had been successfully operating for years without the threat of meaningful criminal or civil liability.

The schemes themselves are wide-ranging, but pursue a singular goal. According to one task force member, "the operators of these schemes often promise high returns to investors, but engage in little to no legitimate investment activity. Such schemes include Ponzi schemes, affinity fraud, prime bank/high-yield investment scams, foreign exchange frauds, business opportunity fraud, and other similar schemes."

Victims of investment fraud should not merely rely on efforts of governmental agencies to seek retribution. Investors who have lost money due to investment fraud can, and should, pursue their own rights. The investment fraud lawyers at Block & Landsman can help evaluate investors' claims of investment fraud and pursue lawsuits or arbitration proceedings that seek to recover their losses. If you would like to consult with the investment fraud lawyers at Block & Landsman, please visit our website for more information.

Leveraged Inverse ETFs Still Pose Risks to Conservative Investors

In 2009, warnings regarding leveraged inverse Exchange Traded Funds ("ETFs") exploded. Both the Financial Industry Regulatory Authority ("FINRA") and the Securities Exchange Commission ("SEC") issued alerts against the use of these "potentially dangerous" investment vehicles. In July 2009, both UBS and Edward Jones & Co. ended the sale of leveraged inverse ETFs, which are intended only for the most sophisticated daily investors, not for long-term holders.

Despite this concerted effort, conservative investors still find that leveraged inverse ETFs have devastated their investment portfolios. In fact, in December 2010, the investment fraud lawyers at Block & Landsman filed a new arbitration claim on behalf of two investors who lost significant amounts of money from leveraged inverse ETFs that were held in their accounts for more than one year. As a result, a new focus on these destructive investments is necessary.

Exchange Traded Funds ("ETFs") are registered investment companies which contain a portfolio of securities that track a particular index (like the S&P 500) or an underlying benchmark. Leveraged ETFs are designed to deliver multiples of the performance of the index they track. Inverse ETFs (also known as "short" funds) are designed to deliver the opposite of the performance of the index they track. Leveraged inverse ETFs (often called "ultra short" funds) are intended to return a multiple of the inverse performance of the underlying index. As an example, with a 2x (two times) leveraged inverse ETF that tracks the S&P 500, if the index increases 2% in a day, the ETF will decrease in value by 4%.

One of the greatest risks to investors is that most leveraged inverse ETFs "reset" daily, meaning that they are designed to achieve their stated objectives on a daily basis. As a result, they are not intended for long-term hold investors because the performance of these ETFs over longer periods of times (weeks or months) can differ significantly from the index they track over the same time period. The effect is potentially devastating to a conservative investor because, as a result of the compounding factor created by the daily reset, the leveraged inverse ETF can experience substantial losses over time even if the underlying index experiences an overall gain. One example given by the SEC involves an index that opens at 100 and closes at 110, and the next day closes at 100. A 2x leveraged inverse ETF will decrease the first day by 20% and will increase the second day by 18%. Thus, over 2 days the index will be flat but the 2x leveraged inverse ETF would have lost nearly 2% of its value. The effects of this type of mathematical compounding can grow significantly over time, resulting in large losses for the 2x leveraged inverse ETF investor. According to the SEC, in a four month period of time, a particular index gained 2%, but the 2x leveraged inverse ETF tracking that index fell by 25%.

If you have lost money through leveraged inverse ETFs, or any other unsuitable investment, the investment fraud lawyers at Block & Landsman can help.

Securities Arbitration Update: Securities America Liable for Medical Capital Ponzi Scheme

The brokerage firm Securities America has been held liable in the first of what is expected to be dozens of securities arbitrations filed by investors who bought fraudulent securities representing interests in medical receivables offered by Medical Capital and other companies. A FINRA arbitration award was recently issued against Securities America for nearly $1.2 million in damages and legal fees in an arbitration case brought by an elderly investor who believed he was investing in safe securities.

Published reports point to dozens of brokerage firms that have sold Medical Capital securities. While Medical Capital is not the only firm alleged to have sold medical receivables under fraudulent circumstances, it was one of the largest, raising $2.2 billion between 2003 and 2008.

Medical Capital is now in bankruptcy. But, as the recent FINRA award shows, investors who purchased fraudulent medical receivable securities have the option to pursue brokers who sold these inappropriate investments. The investment fraud lawyers of Block & Landsman are currently pursuing claims involving fraudulent medical receivable securities. If you would like to consult with an investment fraud lawyer, please visit Block & Landsman's website.

The SEC Is Poised To Add Necessary Investor Protections

In an article recently published, Larry Landsman, partner of Block & Landsman, discusses major reform that is coming to the rules governing the broker-investor relationship. On July 21, 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act in response to the 2008 financial meltdown in the U.S. economy. Among the many challenges the statute is intended to address are long-simmering battles concerning the relationship between brokers, broker-dealers and their customers. After protracted clashes between investor advocates and industry representatives, the Dodd-Frank Act has authorized the SEC to engage in rule-making that will overhaul the securities laws in ways long sought by investors. 

Soon brokers will be held to higher standards of care toward their clients, and investors will have access to greater protections where brokers have breached their standards of care.

This post will address the revised standard of care they brokers may be held to. In a later post, I will explore the changes expected in the arbitration proceedings used when an investor has a claim of wrongdoing against a broker. In both instances, the changes will offer greater protections to the investor against historical abuses that have been hotly disputed for years.

1. Brokers' Owe Limited Standard of Care to Investors

Under current law, brokers are required to adhere to relatively lax standards of care as compared to investment advisors whose conduct is governed by the Investment Advisors Act of 1940. Brokers, who are regulated by the Financial Industry Regulatory Authority ("FINRA") are required only to recommend investments that are "suitable," meaning that a broker need only have a reasonable basis to recommend the security in light of the client's investment objectives and financial circumstances. Investment advisers, on the other hand, must abide by a more stringent fiduciary standard of care which mandates a duty of loyalty and obligates them to act only in the best interests of their clients. The principal distinction is that brokers need not put the clients' interests ahead of their own, while an investment adviser must. The Dodd-Frank Act is poised to eliminate this difference.

From the investor's perspective, it is difficult to discern that the "advice" given by brokers is held to a lesser standard than that given by investment advisers. In a 2008 study commissioned by the SEC, the Rand Corporation found that the roles of brokers and investment advisers are confusing to investors, who are not clear about their respective legal duties. Indeed, a majority of participants erroneously believed that both brokers and investment advisers were required by law to act in the client's best interest and to disclose any conflicts of interest. The study found that investors were confused on key distinctions between investment advisers and brokers -- their duties, the titles they use (brokers often designate themselves as "financial consultants" or "financial advisors") or the services they offer.

2. The SEC Is Poised To Add Necessary Investor Protections

The difference in these standards of care has a significant impact on investors. The obvious effect is in the propriety of the securities in an investor's portfolio -- whether or not thy were selected in the bests interests of the client. Fortunately for the investor, the confusion regarding the scope of a broker's duties may soon be eliminated. The Dodd-Frank Act empowered the SEC to determine the existence of, and correct, any deficiencies in the broker's standard of care as compared to the fiduciary duty governing investment advisers' conduct. Indicates are that the SEC will do just that. The Rand report mentioned above found that current securities laws and regulations are based on distinctions between brokers and investment advisers that date back to the early 20th century, "and that these distinctions appear to be eroding today." 

Additionally, the Chairperson of the SEC, Mary Schapiro, recently recognized that "investors who turn to a financial professional often do not realize there's a difference between a broker and an adviser -- and that the investor can be treated differently based on who they're getting their investment advise from." Ms. Schapiro further advocated that the only duty owed to investors flow "from the perspective of the investor we are seeking to protect" rather than "from the perspective and legal regimes of the adviser or broker." Given this background, Ms. Schapiro has advocated a uniform fiduciary standard and is "pleased" that the new legislation gives the SEC the authority to implement it.

While the SEC Chairperson's position does not constitute an official decision by the Commission, it is apparent that there is clear support to equalize the standards of care of brokers and investment advisers, and rules achieving that goal can be expected to be implemented. Such a result will provide significant protections to investors by making their interests the controlling concern for any financial adviser.

In my next post, I'll discuss the changes we can expect in the arbitration process when investors believe their brokers engage in misconduct.

The investment fraud lawyers at Block & Landsman concentrate their practice in the area of securities arbitration and securities litigation. Please visit their website for additional information.

New Investor Protections Are On The Horizon, Part II

The Dodd-Frank Wall Street Reform and Consumer Protections Act ("Dodd-Frank Act") is intended to spawn regulations that will significant alter the arbitration landscape for investors who are victims of securities fraud. Currently, securities firms uniformly require investors to sign mandatory arbitration agreements when opening a brokerage account, a result of the U.S. Supreme Court's 1987 decision in Shearson/American Express v. McMahon that firms were entitled to mandate that all investor disputes be resolved through arbitration. The vast majority of securities disputes between investors and brokers are arbitrated through the dispute resolution forum maintained by the Financial Industry Regulatory Authority ("FINRA").

1. Securities Arbitrations Involve $1 Billion Per Year in Investment Losses

Securities arbitrations involve, collectively, enormous sums of money. Between 2001 and 2009, aggrieved investors filed, on average, nearly 6,500 arbitration claims per year against brokerage firms. According to an in-depth analysis of investor arbitration proceedings sponsored by the Securities Industry Conference on Arbitration, more than 65 percent of the investor arbitration claims that were studied sought damages in excess of $100,000. Thus, at any given time, FINRA is responsible for ensuring the fair adjudication of claims for alleged investment fraud responsible for losses exceeding one billion dollars. It is, accordingly, no surprise that investors as well as industry participants have a vested interest in the significant changes to the rules governing these disputes that will be ushered in by the Dodd-Frank Act.

2. The Rules Governing Securities Arbitrations Disadvantage Investors

The stated goals of the existing securities arbitration framework are to streamline and make more accessible the dispute resolution process. To be sure, the arbitral forum in its present state offers concrete benefits to investors and industry participants alike. For example, statements of claim need not satisfy the pleading requirements applied to complaints filed in court, and respondents are precluded, with limited exception, from filing motions to dismiss.  Additionally, the rules of evidence which govern courtroom trials do not apply to FINRA arbitrations, thereby allowing the parties greater flexibility to present information they believe relevant to their case. Moreover, arbitration awards constitute a final resolution of the dispute, as the bases to appeal the arbitrators' decision are severely restricted by federal and state statutes.

The benefits, however, come at significant monetary and strategic costs which are disproportionately borne by members of the investing public. For example, the cost of bringing a FINRA arbitration proceeding can be prohibitively expensive to an investor compared to the relatively well-funded brokerage firm. In a claim seeking more than $100,000 in damages, an investor faces fees of thousands of dollars regardless of the outcome -- significantly more than the cost of filing a lawsuit. Investors also face substantial costs of retaining expert witnesses to testify on issues of liability and/or damages, whereas respondent brokerage firms often rely on the testimony of employees rather than outside experts to provide such evidence.

Investors face extremely limited ability to obtain discovery in arbitration, which poses a great disadvantage against brokerage firms that have far superior understanding of their inner workings and have unilateral access to all employees who can explain to respondents' attorneys how and why certain actions were taken.

Perhaps the most controversial aspect of FINRA arbitration procedures is the existence of the "industry" member on the three-arbitrator panels for all cases seeking damages in excess of $25,000. The vast majority of FINRA investor disputes are decided by a panel that includes one arbitrator who has significant ties to the securities industry in addition to two "public" arbitrators. Investor advocates strenuously object to the perceived unfairness of the "industry" arbitrator deciding these claims while securities organizations dispute the presence of any resulting pro-industry bias.

3. The Inequities of the Current Arbitration System Have Advsersely Impacted Investors

The impact of such disparate burdens on investors in arbitration is subject to much debate. It is indisputable, however, that as arbitrations have become more expensive, time consuming and dependent on courtroom-style litigation tactics, the success rate for investors has declined. Between 1997 and 1999, investors won between 56 percent and 59 percent of arbitration claims that proceeded to a hearing. Ten years later, investors are faring far worse; between 2007 and 2009, claimants won between 37 percent and 45 percent of hearings. Even these figures inflate the true success rate for claimants because FINRA records any award in an investors favor, regardless of amount, as a "win." For example, as reflected in the SICA report on securities arbitration, 5.3 percent of the investor "wins" it studied returned an award to the claimant of less than 1 percent of the amount claimed to have been lost.

4. Dodd-Frank Should Level The Playing Field for Investors in Arbitration

The Dodd-Frank Act is poised to level the playing field to litigate disputes with brokers. It gives the SEC broad authority to prohibit or limit the use of mandatory arbitration agreements, and to design a dispute resolution mechanism that satisfies the demands of investors for more fairness as well as the desire of industry participants to arbitrate rather than litigate in court.

The SEC should not prohibit arbitrations. The procedure does provide benefits to all parties that are not available in a court of law. Investors, however, should be given a meaningful and voluntary opportunity to choose arbitration. The arbitration option cannot exist without revisions to the rules in order to assuage investors' legitimate concerns regarding fairness. If substantive reforms addressing such inequities are enacted, investors should be more willing to exercise their choice to arbitrate disputes rather than go to court. Indeed, even though the SEC has yet to act, Dodd-Frank has already ushered in a significant benefit to investors in arbitration. On October 26, 2010, FINRA filed with the SEC a proposed rule change to permit investors with claims of more than $100,000 to select three member arbitration panels that do not include the contentious "industry" arbitrator.

While the elimination of the "industry" arbitrator is a substantive step toward fairness, the SEC will have to consider additional measures to reverse the existing bias against investors to make arbitration a viable alternative. Such changes should allow investors greater access before an arbitration hearing to evidence in the exclusive possession of respondent, should prevent well-documented discovery abuses by brokerage firms in arbitration, and should establish burdens of proof to end the need for expensive expert witnesses who are more appropriate to a courtroom trial than an arbitration hearing.

The investment fraud lawyers at Block & Landsman concentrate their practice in the area of securities arbitration and securities litigation.