Sunday, February 20, 2011

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.

Wednesday, February 16, 2011

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.

Monday, February 14, 2011

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.

Wednesday, February 2, 2011

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.