SECLaw.com - The Securities Law Blog

The SEC's new "investor Advisory Committee" is getting ready to become a functioning entity. The committee was created to advise the SEC on matters of concern to investors, and to provide the Commission with investor perspective on regulatory issues. My view on the Committee is in this month's On Wall Street Magazine, in an article titled "The SEC's 'Feel Good' Committee".

While his brethren at the claimant's bar shout for the end of mandatory arbitration in securities disputes, Seth Lipner, a well known and respected customer attorney,former PIABA President, and law professor, has entered the "mandatory" arbitration fray, and hit the nail on the head in his column at Forbes.com.

In his column, Should Securities Arbitration be Mandatory? Seth is correct, and not just because he agrees with me. I have sung the praises of securities arbitration for decades, and have blogged about the recent move to end securities arbitration and problems with the process as FINRA tinkers with it. The posts here, here, here, here and here. Or just click on the "Arbitration" category in the right hand margin for all of the posts.

Mandatory arbitration in the securities industry did not start with Shearson vs. McMahon. It started with an NASD rule, approved by the SEC and Congress, that required all registered persons and firms to arbitrate disputes among themselves, and with their customers. The use of arbitration agreements in customer agreements was a direct result of the one sided (and short sighted) government mandate. Customers could force brokers to arbitrate, but brokers did not have the same right. Enter the pre-dispute arbitration agreement in customer agreements to level the playing field.

In the world of "mandatory" arbitration, there is virtually no case as mandatory as the situation in which stock brokers find themselves. They aren't forced to arbitrate their disputes because they didn't read a contract. Stock brokers are forced to arbitrate their disputes because the US Goverment says they have to arbitrate their disputes.

Stock brokers are forced to arbitration if they want to have a job. All of the arguments against mandatory arbitration apply with equal force for stock brokers. They have absolutely no choice; except to give up their careers.

So, should Congress end mandatory arbitration, it will also end mandatory arbitration for stock brokers. Brokers will be free to sue in court, and will be free to be sued in court. So will their employers, the brokerage firms.

As Seth points out, securities arbitration is a different animal, and in many ways, given the government oversight and the fact that it is in large part paid for by the securities industry, a significant advantage to the investor, and the employee.

Removing the requirement that brokers must arbitrate means that all of the costs and delays of court litigation are back in play. Firms will decide which cases they want to go to court, and the tough ones will go to court, where the party with more money has a significant advantage.

Remove arbitration and everyone goes to court; along with motions to dismiss, depositions, interrogatories, formal discovery motions, interlocutory appeals, motions for summary judgment, and more appeals from final judgments. Plus a three or four year wait to be heard.

For what? So that customers get a jury? Let's be realistic; no one gets a jury trial in this country except for criminals and personal injury plaintiffs. Everone else, including burned investors and employees, settles or is thrown out before a trial. Less than 5% of all non-personal injury suits actually go to a trial, and a smaller percentage go to a jury.

Congress needs to carefully consider what it is doing. Removing pre-dispute arbitration agreements will harm thousands of investors every year. Right now investors with claims for less than $100,000 are virtually locked out of meaningful arbitration,because they can't afford an attorney.

Remove arbitration, and investors with claims for less than $200,000 will not find an attorney willing to foot the bill for a contingency fee.

I have been at this for over 25 years. So has Seth. Read Seth's column, and let me know where we are wrong.

Work place computers, privacy and the attorney client privilege are starting to create a legal stir, which can have an impact on the brokerage community.

FINRA rules and SEC regulations require brokerage firms to store and preserve all incoming and outgoing emails. The rule has obvious merit, and while implementation was initially an issue, it no longer is, as technology caught up with the rules. Every firm can capture and store emails today.

Underlying the rule is the premise that all information on a company computer belongs to the company. The rule did not have to concern itself with violation of individual privacy rights of the firm's employees; they have none when they use the company computer.

But a recent New Jersey case may change that. In a recent decision, the NJ Appellate Division ruled that employees do have a rights to the personal information on their computer, and more importantly, that the attorney-client privilege protects emails on an employees computer, even if the use of the computer was prohibited by work place rules.

New Jersey attorney Paul Kostro has an excellent analysis of the decision at his NJ Family Law Blog and the analysis applies in all employment situations - including the financial industry.

The case is Stengart v. Loving Care Agency Inc., App. Div. (Fisher, J.A.D.) (A-3506-08T1; APPROVED FOR PUBLICATION; Decided June 26, 2009):

Bernard Madoff was sentenced to 150 years in prison Monday. Judge Chin issued the maximum sentence that was permissible under the sentencing rules for the fraud.

The controversy over Senator Durbin's stock transactions has put the spotlight back on stock market transactions by our elected officials. While Senator Durbin appears to have bought and sold stocks after the public announcement of the information he allegedly received, other odd trades are beginning to surface.

There are a number of reports of senators and representatives buying and selling stock at the time of important and significant announcements surrounding the government bailout programs last year. There are certainly problems with the claims of insider trading as I pointed out in my recent post on Senator Durbin's trades, which appear to be perfectly legitimate. The stories ignore the fact that many of these representatives have brokers or money managers who actually pick the positions that are bought or sold, and there are some who are actually in blind trusts.

But in a time when the American public is thoroughly disgusted with the conduct of our elected officials, and with the financial sector, isn't it time to address those perceptions and do something about the ability of elected officials to purchase or sell securities. Or to at least prevent them from doing so in industries that they have the ability to dramatically impact through legislation or other actions?

Blind trusts would appease some of the concerns without an outright prohibition, and is something that should be considered. Then again, it is these senators and representatives who would have to enact such a rule upon themselves. We will undoubtedly see term limits before we see a rule requiring blind trusts.

Facing 150 years in prison, Madoff will be sentenced today by US District Judge Denny Chin. The sentencing comes on the heels of an announcement on Friday that all of Madoff's property had been seized as part of an effort to obtain compensation for his victims. The property is said to be worth nearly 80 million dollars.

The details are at CNN.com

The UBS tax fraud case is expanding. An accountant who hid money with UBS pleaded guilty to filing a false tax return. According to press reports, prosecutors based their charges on UBS records that they obtained as part of a defferred compensation agreement.

So much for customer protection and Swiss banking secrecy.

http://www.miamiherald.com/business/story/1114689.html

He references the erosion of investor confidence after the market collapse and the arrest of Madoff, causing some to wonder, "given his status as a respected veteran of the securities industry, many investors were left to wonder if he was truly an outlier, or emblematic of how the industry operates."

Interesting comment from a long term FINRA insider and the now-CEO of one of the requlators who let that fraud go on under their noses for decades.

Does Mr. Ketchum fall on his sword and resign? No. Incredibly he calls for more regulation, and pushes again to gain regulatory control over investment advisors.

FINRA - Remarks by Chairman and CEO Rick Ketchum From the Exchequer Club

The government's financial reform plan has been released, and is available online at the link.

This might be the start of the end of arbitration agreements in brokerage accounts, as the report recommends that the SEC "study" the issue. The underlying argument is that pre-dispute arbitration agreements are not fair to the individual, because his is giving up his right to go to court of any dispute he might have, and he is giving it up before the dispute arises.

That position is debatable, but this proposal raises a significant question. If you accept the unfairness premise as begin true, why aren't we discussing the fact that the SEC (through its underling, FINRA) forces individuals to arbitrate their claims, by use of a rule that requires every employee of the brokerage industry to arbitrate disputes with his employer, and every customer.

Why isn't anyone talking about government mandated arbitration by employees and individuals in the brokerage industry?

Is there any other industry where the government mandates that its employees arbitrate every dispute they might have?