EEOC Goes After Merrill in Discrimination Suit

Merrill Lynch is still having discrimination problems, and this time the EEOC filed a complaint on behalf of an employee who claims discrimination based on national origin. According to Registered Rep, the suit claims that he was told “The reason you are not allowed on the trading floor is because you are from a country which has a high risk factor and a threat.” The employee is from Iran.

In an interesting twist, Merrill denies the charges and says he was not allowed on the trading floor because he was a senior programmer, not a trader or analyst.

Under Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act (ADA), and the Age Discrimination in Employment Act (ADEA), it is illegal to discriminate in any aspect of employment, including: hiring and firing; compensation, assignment, or classification of employees; transfer, promotion, layoff, or recall; job advertisements; recruitment; testing; use of company facilities; training and apprenticeship programs; fringe benefits; pay, retirement plans, and disability leave; or other terms and conditions of employment.

Discriminatory practices under these laws also include: harassment on the basis of race, color, religion, sex, national origin, disability, or age; retaliation against an individual for filing a charge of discrimination, participating in an investigation, or opposing discriminatory practices; employment decisions based on stereotypes or assumptions about the abilities, traits, or performance of individuals of a certain sex, race, age, religion, or ethnic group, or individuals with disabilities; and denying employment opportunities to a person because of marriage to, or association with, an individual of a particular race, religion, national origin, or an individual with a disability.

The EEOC is the agency responsible for enforcement of these laws, and employees are generally required to file a complaint with the EEOC before filing a private lawsuit. In rare occasions where the EEOC feels it is necessary, the EEOC will bring the complaint itself. Brokerage firm employees have additional options.

Mutual Fund Arbitrations - the Next Big Thing?

Mutual funds have almost universally been considered to be the haven of the conservative investor. You invest your money in the fund, presumably with an experienced money manager at the helm, and you watch your money grow. Part of the allure of the funds is that there are no commissions charged, or one commission at the time of the investment.

This of course, is not necessarily true. There are any number of fees that are indirectly charged to the mutual fund investor, through charged by the investment company and the manager to the fund itself - charges that the investor never sees.

Further complicating the issues is that many mutual funds have different classes of shares, an A share, a B share and a C share. Each class of shares are charged different fees and expenses, and are appropriate for different types of investors and different investment objectives. Many investors do not understand the difference, and over the course of time could wind up paying significantly more fees and costs if they are in the wrong class of shares.

While the SEC and Congress address these "hidden" fees, and the problems with the disclosure of those fees, the NASD has been investigating brokerage firms for their conduct in the sales of mutual funds. In particular, the NASD has been focusing on what disclosures are made to the investor regarding the share classes.

The NASD announced today that it has imposed fines against MML Investors Services, NYLIFE Securities, and Securities America, Inc for improper sales of Class B and Class C shares. According to the NASD's press release, which is linked above, the cases involve over 10,000 transactions and over 1,000 households.

Brokers who are selling mutual fund shares should review the funds materials and insure that investors are being placed in the appropriate shares for their investment objectives. Investors need to do the same, and insure that they understand the fees and charges that they are incurring as a result of the particular class of shares in which they invest.

Brookstreet Securities Closes on SubPrime Woes

Brookstreet Securities Corporation, an independent broker-dealer in Irvine, Calif., is near death after its bets—on margin—on mortgage backed securities went south. According to published reports, Brookstreet’s capital fell from $16 million to several million below zero after National Financial Services, the firm’s clearing house, demanded payment for the securities bought on margin.

Brookstreet brokers are scrambling for new positions (many are landing at Wexford's new independent arm) and are concerned about customer complaints and requlatory inquiries arising from the collapse of Brookstreet.

See Also, Subprime Surprises at Forbes

NASD/NYSE Propose Email Guidance

As technology changes, so must the regulatory enviorment. The NASD and the NYSE have released proposed joint guidance for members, setting forth proposed principles for members to consider in their supervisory systems and procedures for all forms of electronic communication.

The Joint Guidance provisions encompass all aspects of electronic communications, and while not a rule proposal, the regulators are seeking comment on the guidelines. The comment period ends July 13, 2007.

Supreme Court Grants Investment Banks Immunity From Antitrust Lawsuits

By a 7-1 vote in Credit Suisse Securities v. Billing, the Court gave the banks broad implied immunity from antitrust lawsuits, ruling that antitrust laws do not apply to the syndication and marketing techniques used in initial public offerings. The Court justified its conclusion in part on the grounds that the Securities and Exchange Commission is better qualified than judges and juries in antitrust cases to determine the legality of conduct in the complex field of initial offerings.

The class action was brought by investors who claimed that more than a dozen investment banks and underwriters manipulated the market for IPOs in the dot-com boom period from 1997 to 2000. The claim was that the underwriters banded together to impose requirements on IPO buyers such as "tying" -- in which buyers must buy less desirable offerings along with more popular ones -- and requiring higher commissions to be paid on later offerings. The plaintiffs claimed that these sales techniques artificially increased stock prices and violated antitrust laws.

Aside from the legal theory interest in the case, it was a significant win for the investment banks, since antitrust law provides for treble damages, which are not available under the securities laws.

The firms involved in the case included Credit Suisse; Bear, Stearns; Citigroup; Comerica Inc.; Deutsche Bank Securities Inc.; Fidelity Distributors Corp.; Fidelity Brokerage Services LLC; Fidelity Investments Institutional Services Co. Inc.; Goldman, Sachs & Co.; The Goldman Sachs Group Inc.; Janus Capital Management LLC; Lehman Brothers Inc.; Merrill Lynch, Pierce, Fenner & Smith Inc.; Morgan Stanley & Co. Inc.; Robertson Stephens Inc.; Van Wagoner Capital Management Inc.; and Van Wagoner Funds Inc. Over 900 issues were alleged to have been manipulated.

Trading for Friends

Professor Oesterle has an interesting link at the Business Law Professor Blog. Titled "Another Academic Study That Has Caught the Attention of the SEC" the article discusses a new study which found that mutual fund managers do significantly better when they invest in companies ruled by their old college or graduate school classmates. The interesting question is: is this a hint of insider trading by mutual fund companies?

Small-time Insider Trades Get Punished

I don't know if this is simply an anomaly or a deliberate strategy by the Commission, but according to an article at the White Collar Prof Blog, the SEC has been bringing some very small cases. In one, the defendants are accused of illegal profits of less than $4,000!

Of course, with disgorgement and a three time penalty the fine is relatively significant, although these defendants paid a one-time penalty, plus interest. While we might question the wisdom in the Commission bringing a $4,000 case, the real question is what were these defendants thinking? They trade on inside information, and buy 500 shares. They sell after the announcement and make $4,000. Is that worth the risk? Of course not and since their defense attorney's retainer was undoubtedly more than their profit, they had no choice but to settle.

At least they didn't lie about their trading...

The posting led another blog, Best in Class, to post a contest for the smallest insider trading case. Last time I looked, a reader had identified an insider trading case where the alleged profits were $600.00.

So much for the theory that the trade is so small that the government won't find it...

NASD Seeks Comment on New Rule on Member Stock Offerings

Citing unidentified "problems" with private offerings of their own securities by NASD member firms, the NASD is proposing to adopt Rule 2721 - Private Placements of Securities Issued by Members.

The rule will set standards for a PPM and filing of the PPM with the NASD prior to the offering.

The comment period ends July 20, 2007, the link to the notice is in the headline.

SEC Rejects Broker's Anti-NASD Complaint

Here is an interesting tidbit - not so much for the actual story, but for what appears to be lurking under the surface.

According to the article, Sky Capital, an NASD member firm, filed a complaint with the SEC against the NASD alleging that the NASD staff employed delay tactics in reviewing its membership application and was biased against the firm's chief executive.

The SEC kicked the complaint, but not because it did not have substance, but rather because the firm did not exhaust its administrative remedies - you have to follow the chain of command, and the complaint should have first gone to the National Adjuicatory Council.

So, we may not have seen the last of this dispute. The NASD is in a tough spot, since they obviously need to make sure that the approval of new firms and new ownership is appropriate, but we have all seen the delays that the NASD can cause.

The article blows off the damages, stating that the firm was ultimately approved. That is overly simplistic, given the severe damage that is caused by NASD delays - even when they do not have a bias against anyone. One recent change in control of a BD that I was involved in took 6 months to get approval, with an application that was complete, and owners with clean licenses.

Six months of limbo is damage. I can only imagine what damage was caused by a longer, and more organized delay, if that is truly what happened.

Cox boosts ban on 'soft dollar' deals

It is just a brief piece in InvestmentNews, with very little real information, but its worth keeping an eye on. Chairman Cox is apparently pushing for a ban on soft dollar arrangements.

While a headline which makes it appear that soft dollar arrangements cause higher commissions, the piece leaves out the other side of the equation - soft dollar arrangements also mean free research.