Will the Curse of the Dirty U5 Be Lifted? Judges Skeptical of Absolute Privilege

The concept of giving brokerage firms an absolute privilege for U-5 filings has always troubled me. I represent firms and brokers, and am fairly confident that when if an absolute privilege was the rule, some BOMs and Regional Directors would have an absolute field day with reps they do not like, or wish to harm for their own personal or financial benefit.

There is some conflicting caselaw in NY, with some courts saying that U-5 statements are absolutely privileged, and others saying there is only a qualified privilege. The New York Court of Appeals will decide which standard is the law in New York in a very short time. Oral arguments were held last week in the case of Rosenberg vs. MetLife.

The reality is that firms do not need an absolute privilege. The overwhelming majority of firms, executives, compliance personnel and others who are deciding U-5 disclosures are honest, hardworking, and understand the importance of U-5 disclosure. That disclosure is important to the industry and regulators, and it is important to the registered person. The industry and regulators need to have accurate U-5s for supervisory and registration purposes. Financial professionals need accurate U-5s, and a methodology to correct false U-5s as well as defamatory ones, since a bad U-5 can put a registered person out of work...forever.

Firms will not be impacted by the lack of an absolute privilege...at least not the reputable firms. They will not be filing false or malicious U-5s, and will do their best to insure that the U-5 is accurate. On the other hand, managers, directors, whomever, who are not reputable, who wish to harm a departing broker, will be impacted by the lack of an absolute privilege - they will be sued for defamation, and will pay damages to the reps that they harmed.

The financial impact on a broker of a malicious U-5 is immeasurable. At a minimum it means a regulatory investigation, an investigation by one or ten states, and if it is bad enough, an inability to become employed until the matter is cleared.

I have been doing this too long to believe that there is any need for an absolute privilege. While a defamation suit certainly costs brokerage firms money, that is not a reason to prevent injured representatives from suing. We balance this sort of issue all of the time, and the harm to the firms for being sued is vastly outweighed by the damage that is done to a rep who is the subject of a false or defamatory U-5.

The reality is that the times that the issue comes up, that a rep feels that the U-5 is malicious or false, is minuscule. In most cases that I have handled where a rep believes that his U-5 is false or defamatory, there is a conversation between the firm and the rep's attorney, and most times the language is worked out so that the phrasing is true, the firm is comporting with its obligations, and the rep is not being defamed.

The problem is when the firm fabricates information on a U-5 and the devastating impact that has on the rep. Or when a firm refuses to discuss the issue, and simply allows fabrications to be filed by branch or regional managers. If the rep can't sue over it, he has lost his livelihood. Period.

Apparently none of this has been lost on the New York State Court of Appeals. Oral argument was held last week in the Rosenberg and according to press reports, the judges were skeptical.

Some have called the NY lower court case finding an absolute privilege "wrongly decided" and have blamed it for a system which is now plagued by “distorted and false filings for tactical, competitive business reasons.”

A bit of an overstatement perhaps, but there is certainly some truth to that statement. Fortunately, there is an easy fix - let reps sue when they believe their U-5 is false or defamatory, and hold a hearing on the issue.

An SEC Filing Fee Reduction Designed to Benefit Shareholders?

The SEC has announced drastic reductions in the filing fees. The fee cuts that will go into effect next week and are significant: fees to register securities with the Commission will be reduced by 71.3 percent, and fees on securities transactions will be reduced by 50.2 percent.

OK, that is nice, and I suppose it is good to see the government reducing fees. But I am puzzled by this quotation, and the headline of the press release, as above:

"The investors who bear the burden of these SEC fees deserve this relief," said SEC Chairman Christopher Cox. "It will mean that more of their hard earned savings will be available for important needs such as education, health care, and retirement — and less will be diverted to Washington."

At first I thought this was a joke, but it's not. Investors are going to keep more of their hard earned savings because the SEC has cut filing fees for public companies? I usually support the Commission, and always support reduced government fees, but does anyone seriously believe that a reduction in corporate filing fees is going to go to shareholders? The savings are going to remain in the corporate coffers, is going to be used to pay salary, bonuses, back-dated options, whatever. That money is not going to the shareholders.

Now, I understand that part of the reduced fee is in the Section 31 fee, what we commonly call the "SEC Fee" on a securities transaction. You have seen it on your confirmation slips. It is actually a pass through - the SEC charges the exchanges a fee to recoup costs, the exchange charges the brokerage firms, and the firms charge the customers. Those fees are annually adjusted, and as volume goes up, the fee goes down.

Part of the reduction is in the Section 31 fees; about 15 million of the $700 million, and I suppose one could argue that the 15 million is going back to investors. Great. How many securities transactions are conducted in the United States? Of those millions and millions of transactions how many are made by individual investors? Tell me again how this is helping investors? The reduction is 15 million dollars in fees, divided by....how many Americans purchase securities? Here sir, here is 5 cents, please use it to pay for your education, health insurance and retirement.

On the other side of the coin, since when is the SEC so flush with money that it can reduce its fees by 70%? I am by no means intimately familiar with where the SEC's budget comes from, but at the end of the day, the money comes from us - me, and you and those shareholders that Chairman Cox is talking about.

But the SEC answers that question - "The adjusted fee rates will not affect the amount of funding available to the Commission." OK, let me see. We are going to reduce SEC fees by $700 million dollars, and the SEC's funding is going to remain the same.

Alrighty then, I give up. Who is going to pay the $700 million that those fees are now adding to the funding, and where is it going to come from?

I smell a tax increase.

The SEC does not have enough money to do its job. It can't keep up with its function, and is falling behind. Is the government also reducing its budget to keep up with the loss in income? Or are we just going to continue to underfund the Commission?

Or are we going to raise taxes to cover the filing fee shortfall?

Someone explain this to me.

BigLaw Too Big?

I have made some passing comments to the recent round of first year attorney salary hikes. It's not that I begrudge my young colleagues the top dollars that they are being offered. With BigLaw rates now hitting $700 and $800 an hour for top partners, with a base salary of $160,000, one has to wonder about the impact on clients.

BigLaw certainly has its place, and can in fact provide superior services for clients who need a particular speciality, or who have transactions or litigation that will require 10 attorneys and paralegals. But is BigLaw pricing itself out of the market?

Commentators are taking notice. Larry Bodine predicts that the economic realities are starting to show, and opines that the huge salary increases have

created a huge opportunity for mid-size and boutique law firms. Not only can they
offer better rates but also more specialized expertise.

Marketing Opportunity: Megafirms overpay $160,000 for First-year Associates.

Carolyn Elefant's analysis published at Inside Opinions provides additional analysis. After discussing the commentary and Bodine's comments, she concludes with

...but it leaves me wondering how long this large-firm business model can survive. Already, as he points out, associates are leaving firms in droves; higher salaries seem to matter little in that regard. And how long will even high-paid lawyers tolerate employee status? At the same time, as Bodine points out, there's a limit to how high firms can go with salary, before clients start to depart. And that's where Bodine and MacEwen seem to be most in agreement: that the ability of large law firms to continue to retain their existing business model is very much in doubt.

Liars Liars Everywhere?

I will confess to not following the Libby trial closely - it does not involve the securities laws. However, it does involve an unfortunately related topic - perjury and obstruction of justice.

I do pay attention to some of the commentary on the trial, and came across a posting from the White Collar Crime Prof Blog on the trial. This part of the analysis was particularly striking:

The problem Fitzgerald faces -- not one of his own making -- is that just about everyone seems to be a liar. In an approach that looks to be all-too-typical of Washington today, the various witnesses appear to have viewed their initial interviews with the FBI (or grand jury) as an opportunity to spin the investigation in a way that made themselves and others look good, apparently on the belief that if the statements were later contradicted they would just move on to a different story. Pretty much standard procedure in a campaign, so why not try it with the investigators?

If true, this is a very troubling commentary on our government - and the media, since Russert and Miller are two of the witnesses whose testimony is troubling according to the article.

Read the full post here.

NASD Fines BDs for Parking Registrations

$3.75 million for improperly maintaining NASD registrations for 1,100 individuals, failing to assign registered supervisors to 1,000 individuals, failing to retain the email of 1,900 registered individuals, and other electronic recordkeeping failures.

You can't register individuals if they are not working for you. Period.

Pentagon official resigns over lawyer attack

Charles "Cully" Stimson, deputy assistant secretary for detainee affairs, who last month attacked attorneys who are representing Guantanamo detainees, and implied that they were taking money from terrorists for their services, has officially resigned due to the backlash over his remarks.

Firms Sued For Naked Shorts

Continuing Patrick Byrne's self-described crusade against naked short sellers, Overstock.com filed a $3.5 billion lawsuit in California state court Friday accusing 10 of the largest U.S. securities firms of participating in a 'massive, illegal stock market manipulation scheme' to distort the price of its stock.

The suit names Morgan Stanley, Goldman Sachs, Bear Stearns, Bank of America, Bank of New York, Citigroup, Credit Suisse, Deutsche Bank, Merrill Lynch, and UBS (nyse: UBS - news - people ) as defendants. According to Forbes, the suit accused the firms of permitting hedge funds and other investors to short securities without actually borrowing the securities as required by law, and in other instances, of loaning the same securities to more than one hedge fund.

Naked short selling has been a complaint of issuers and investors since before I was an attorney. Byrne, and others before him, complain that the outstanding short position in Overstock has been larger than the entire float, a situation which is virtually impossible without cheating, since short sellers have to borrow the stock from a shareholder.

It will be interesting to watch this case develop. Does Byrne have the desire, motivation and money to pursue Wall Street's biggest firms in what might be another huge trading scandal?