Third Party Bene is Not a Customer for Arbitration Purposes

A FINRA arbitration panel has dismissed a $32 million claim because the claimant was not a customer of the brokerage firms, and did not have an account with the Respondents.

The Claimant had alleged that he was an undisclosed third-party beneficiary to the investment contract at issue, and was therefore entitled to arbitrate the claims. Without a written agreement, and an admission that he had no dealings with the Respondent, the claim was dismissed.

See, FINRA Arbitration Award 13-02741 

The Need for Narrow SEC Subpoenas

Two common criticisms of investigations by the Securities and Exchange Commission have been the length of time investigations take and the enormous costs they impose on private parties. The issues raised by those criticisms have grown in significance in recent years as the SEC staff has used vague and overbroad subpoenas and requests for documents in the age of email and electronically stored information. Unduly broad requests for electronic documents slow the production process, extend investigations, and significantly increase the associated costs.

Andrew Vollmer, the former Deputy Counsel of the SEC has an article in the New York Law Journal expressing his concerns on this point. It is well worth reading, and not simply because it quotes me and my article on Responding to an SEC Subpoena. We can only hope that the Staff, the Commission and the Court take notice.

For more information - Need for Narrower Subpoenas in SEC Investigations | New York Law Journal

--- The attorneys at Sallah Astarita & Cox include veteran securities litigators and former SEC Enforcement Attorneys. We have decades of experience in securities litigation matters, including the defense of enforcement actions and representation of investors, financial professionals and investment firms, nationwide. For more information call 212-509-6544 or send an email.

New Computer Programs to Detect Insider Trading

When you are accused of insider trading, it is not the time to try out a new attorney, or to contact your sister's divorce attorney for help. The SEC is serious about insider trading, and if they are looking at your innocent trades, you need to be able to respond in an intelligent, well thought out manner.

This week the chief of the market abuse unit at the SEC acknowledged that the Commission is taking a trader-based approach to surveillance. “The way is to turn the approach upside down in a way that would reveal relationships,” Hawke said, adding that they look at the relationships and investments of traders.

He said new database software has helped the agency find connections between people. While that is all well and good, the farther out that software takes relationships, the more false positives it is going to find. When it starts linking your trades to Kevin Bacon's trades it will have gone too far. However,  at the 3rd and 4th degree of separation, we are going to see more innocent investors caught up in insider trading investigations.

For more information - SEC turning insider trading fight ‘upside down"

--- The attorneys at Sallah Astarita & Cox include veteran securities litigators and former SEC Enforcement Attorneys. We have decades of experience in securities litigation matters, including the defense of insider trading investigations and trials. Call us before you speak to the SEC investigator or the FBI agent. Do not wait for the Wells Notice, since that is when they have decided to charge you with a violation.  For more information call 212-509-6544 or send an email.

Risk Alert for BDs Selling Unregistered Securities for Customers

The SEC has published an important alert for brokerage firm who are selling unregistered securities for their customers.

The Risk Alert summarizes deficiencies that were discovered by OCIE during a sweep of 22 broker-dealers frequently involved in the sale of microcap securities.  The sweep uncovered widespread deficiencies including:

• Insufficient policies and procedures to monitor for and identify potential red flags in customer-initiated sales.

• Inadequate controls to evaluate how customers acquired the securities and whether they could be lawfully resold without registration.

• Failure to file suspicious activity reports, as required by the Bank Secrecy Act, when encountering unusual or suspicious activity in connection with customers’ sales of microcap securities.

 

“Broker-dealers are key gatekeepers in addressing potential violations of the securities laws by customers,” said Kevin Goodman, National Associate Director of OCIE’s broker-dealer examination program.  “We will continue to assess the controls that firms in this business have in place to monitor for and report any suspicious activities.”

For more information visit SEC.gov | SEC Staff Issue Risk Alert and FAQs on Customer Sales of Securities

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The attorneys at Sallah Astarita & Cox include veteran securities litigators and former SEC Enforcement Attorneys. We have decades of experience in securities regulatory, compliance and litigation matters, including the defense of enforcement actions. We represent investors, financial professionals and investment firms, nationwide. For more information call 212-509-6544 or send an email.

SEC Loses Laptops with Confidential Information

You can't read the whole article without a subscription, but Law360 is reporting that SEC employees and contractors may have lost (or had stolen) HUNDREDS of laptops.

The article states that the information on the computers could be used for insider trading. While I suppose that is possible, given the fact that the SEC investigates events after they happen, not before, that is doubtful. The real concern is the personal financial information that is undoubtedly on those computers as part of pending investigations. Brokerage account statements, new account forms, tax returns, you name it, they have it.

Keep this in mind when you think about FINRA and the SEC seeking permission to collect, in nearly real time, trading and holdings information from the accounts of individual customers, without their permission.

Do you trust FINRA and the SEC to keep everyone's personal financial information confidential?

And another question - how do you "lose" hundreds of computers?

For more information visit Hundreds Of SEC Laptops May Be Missing, Watchdog Says - Law360

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The attorneys at Sallah Astarita & Cox include veteran securities litigators and former SEC Enforcement Attorneys. We have decades of experience in securities litigation matters, including the defense of enforcement actions. We represent investors, financial professionals and investment firms, nationwide. For more information call 212-509-6544 or send an email.

NY Attorney General Going too Far?

New York Attorney General Eric Schneiderman filed a lawsuit in June against Barclays PLC accusing the bank of giving an unfair edge to high-frequency traders and lying to other customers about it.
Barclays has now moved to dismiss the complaint, and it said in its court filing that Schneiderman was trying to dramatically expand the powers of the Martin Act, the New York securities statute. According to Reuters, Barclays is arguing that the Martin Act is designed to protect investors in connection with the purchase or sale of a security, and since Schneiderman had conceded in an earlier filing that the lawsuit was based on claims that Barclays had misrepresented how it operated its dark pool rather than about any particular security transaction, the lawsuit cannot be maintained and is beyond the scope of the Martin Act.

"The NYAG's reading of the Martin Act would render the Act virtually unlimited in scope," Barclays said in the filing, a response to Schneiderman's Sept. 16 filing disputing an earlier motion to dismiss the case.

I am not involved in the case, but have been involved in numerous cases brought under the Martin Act. I agree with the legal argument -  allegations that the workings of a "dark pool" were misrepresented is NOT a fraud "engaged in to induce or promote the issuance, distribution, exchange, sale, negotiation or purchase of securities" which is the requirement for a claim under the Martin Act.
However, we faced the same issue years ago with the misappropriation theory of insider trading. Rule 10b-5 requires a fraud "in connection with the purchase or sale of a security." In the 1980s the SEC started bringing claims where the fraud had nothing to do with the actual purchase or sale of a security. The accused did not commit any fraud in connection with the transaction, in those cases the SEC alleged that the defendant committed a fraud in obtaining information and used that information to purchase a security.
My partner and I made that argument at trial, and at the Second Circuit, and in our petition to the United States Supreme Court, to no avail. SEC vs. Materia, 745 F. 2d 197 (2d Cir. 1984) The courts completely re-wrote the statute and figuratively removed the phrase "in connection with the purchase or sale of a security." Years later the Supreme Court adopted this misreading, in United States v. O'Hagan, 521 U.S. 642 (1997)
Barclays has a chance to make law here, but given broad interpretation given to 10b-5, that is going to be a long shot.
For those who are interested:
Section 352-c.

The Martin Act contains both misdemeanor and felony criminal provisions. N.Y. Gen Bus. Law §352-c (McKinney 1996). Subsections one and two of Section 352-c delineate misdemeanor offenses. Id. at §352-c(1) & (2). Subsections five and six define related applicable felony offenses. Id. at §352-c(5) & (6).
Section 352-c(1) makes the following actions misdemeanors when engaged in to induce or promote the issuance, distribution, exchange, sale, negotiation or purchase of securities:

(a) Any fraud, deception, concealment, suppression, false pretense or fictitious or pretended purchase or sale;

(b) Any promise or representation as to the future which is beyond reasonable expectation or unwarranted by existing circumstances;

(c) Any representation or statement which is false, where the person who made such representation or statement:

(i) knew the truth; or

(ii) with reasonable effort could have known the truth; or

(iii) made no reasonable effort to ascertain the truth; or

(iv) did not have knowledge concerning the representation or statement made;

N.Y. Gen Bus. Law §352-c(1) (McKinney 1996).
For more information - Barclays says New York 'dark pool' suit oversteps legal bounds

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--- The attorneys at Sallah Astarita & Cox include veteran securities litigators and former SEC Enforcement Attorneys. We have decades of experience in securities litigation matters, including the defense of enforcement actions and representation of investors, financial professionals and investment firms, nationwide. For more information call 212-509-6544 or send an email.

What Does It Take to be an SEC Whistleblower?

With an increase in calls regarding the SEC Whistleblower, it is time to bump up our earlier report on the program. This article is an overview of the program, and is not legal advice whistleblower claims. If you are interested in discussing a potential claim, or if you have been the subject of a claim and are seeking legal representation, please call our office at 212-509-6544 so that we can discuss establishing an attorney-client relationship to deal with the issues.

For more information - SEC Whistleblower Program - Securities Attorneys - Florida, New York, New Jersey

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--- The attorneys at Sallah Astarita & Cox include veteran securities litigators and former SEC Enforcement Attorneys. We have decades of experience in securities litigation matters, including the defense of enforcement actions and representation of investors, financial professionals and investment firms, nationwide. For more information call 212-509-6544 or send an email.

FINRA Arbitrator Selection Under Scrutiny by SEC

FINRA' proposal to remove arbitrators with even the slightest connection with the industry from its "public" panels is apparently causing some concern at the SEC. The Commission, which must approve any FINRA rule changes, has extended its review of a plan to restrict industry veterans from serving as arbitrators in many legal disputes between investors and brokerages, citing questions about whether the proposal complies with securities laws.

The plan to revamp how arbitrators are selected was filed by FINRA. The plan "raises questions" about whether it is in line with laws that require FINRA rules to protect investors, among other things, the SEC said in a notice published on Wednesday seeking additional input from the public.

For more information visit U.S. SEC to take deeper look at Wall St arbitration reform plan | Reuters

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The attorneys at Sallah Astarita & Cox include veteran securities litigators and former SEC Enforcement Attorneys. We have decades of experience in securities litigation matters, and have represented parties in well over 700 securities arbitrations. We represent investors, financial professionals and investment firms, nationwide. For more information call 212-509-6544 or send an email.

Insurance Agents Charged with Fraud Targeting Elderly Investors

The SEC announced charges against four insurance agents for unlawfully selling securities in what turned out to be a multi-million dollar offering fraud targeting elderly investors.

The SEC previously charged a Colorado man who allegedly orchestrated the scheme and recruited active insurance agents to help him solicit investors in Colorado and several other states.  The scheme raised approximately $4.3 million during a nearly 18-month period.  The SEC’s investigation further found that the four insurance agents charged today solicited funds without registering with the SEC as a broker-dealer as required under the federal securities laws.

"When individuals act as a broker and sell securities to the public, they must comply with registration, supervision, and compliance requirements that exist to protect investors,” said Julie K. Lutz, Director of the SEC’s Denver Regional Office.  “These insurance agents improperly operated outside of that regulatory framework and thereby placed their clients at risk.”

Read more here.

Virtual Concierge Receivership News Story

Jim Sallah is featured in this news story about the Virtual Concierge receivership.
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