Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Friday, May 17, 2013

Schwab Eliminate Class Action Waiver in Customers' Agreements -- At Least For Now

As regular readers of this Blog know, Charles Schwab includes in its brokerage agreements with its customer a provision that purports to prohibit customers from bringing class actions against the firm.  This class action waiver violates FINRA rules, but recently a FINRA hearing officer ruled that FINRA could not enforce its rule because of the Federal Arbitration Act, as interpreted by the Supreme Court in AT&T Mobility v. Concepcion.  That decision is currently on appeal before the FINRA appellate body.  Yesterday, Charles Schwab issued a statement that it was modifying its account agreements to eliminate the class action waiver until the issue is resolved:

Effective immediately, Schwab is modifying its account agreements to eliminate the existing class action lawsuit waiver for disputes related to events occurring on or after May 15, 2013 and for the foreseeable future.

While the company believes that dispute resolution is best handled via FINRA arbitration, we have chosen to voluntarily remove the waiver going forward until the issue is resolved by the appropriate regulatory and/or court decisions.  Given that the process will likely take considerable time to resolve, and may leave clients with a degree of uncertainty about their dispute resolution options in the meantime, we have elected to remove that uncertainty until the legal and regulatory process is completed.

To help ensure that small investors have access to pursue any claims they consider appropriate within the arbitration forum available to them, we will continue our existing policy of paying for the arbitration fees of any investor electing to pursue an arbitration claim under $25,000 against Schwab.


May 17, 2013 in Securities Arbitration | Permalink | Comments (0) | TrackBack (0)

Thursday, May 16, 2013

SEC Chair White Testifies on Oversight of the SEC before House Committee

SEC Chair White testified today on Oversight of the SEC before the U.S. House of Representatives Committee on Financial Services.

May 16, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Charges Chicago Investment Advisers with Cherry-Picking Trades

The SEC charged Charles J. Dushek and his son Charles S. Dushek and their Chicago-area investment advisory firm with defrauding clients through a cherry-picking scheme that garnered them nearly $2 million in illicit profits, which they spent on luxury homes, vehicles, and vacations.  According to the SEC, the Dusheks placed millions of dollars in securities trades without designating in advance whether they were trading personal funds or client funds. They delayed allocating the trades so they could cherry pick winning trades for their personal accounts and dump losing trades on the accounts of unwitting clients at Capital Management Associates (CMA). CMA misrepresented the firm’s proprietary trading activities to clients, many of whom were senior citizens.

According to the SEC’s complaint filed in federal court in Chicago, the scheme lasted from 2008 to 2012. During that period, the Dusheks made more than 13,500 purchases of securities totaling more than $350 million. The Dusheks typically waited to allocate the trades for at least one trading day – and often several days – by which time they knew whether the trades were profitable. The Dusheks ultimately kept most of the winning trades and assigned most of the losses to clients. At the time of the trading, they did not keep any written record of whether they were trading client funds or personal funds.

The SEC’s complaint charges the Dusheks and CMA with fraud and seeks final judgments that would require them to return ill-gotten gains with interest and pay financial penalties.

May 16, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Maryland Court Upholds Arbitration Bylaw in Publicly Traded REIT

Last month Steven Davidoff (the New York Times' Deal Professor) wrote a column on the hostile takeover bid for CommonWealth REIT by two hedge funds:  What’s at Stake in the Fight Over a REIT (Apr. 18, 2013).  He highlighted the fact that CommonWealth has a bylaw provision that requires arbitration of any shareholders' disputes.   Apparently when the REIT filed its registration statement for its public offering with the SEC, the agency, consistent with its longstanding position that such arbitration provisions in public corporations violate the antiwaiver provisions in federal securities laws, required the REIT to delete the provision.  But not to be thwarted, after the offering, the CommonWealth board amended the bylaws and reinstated the arbitration clause.  As Davidoff nicely frames the issue:

"If the Maryland court upholds CommonWealth's arbitration provision, more companies like Commonwealth can simply adopt these bylaws.  They can then take aggressive positions to resist a takeover, and the results will be sent to the black hole of an arbitration conducted in secret and with no timeline for an outcome."

At least as of now, CommonWealth is victorious.  On May 8, 2013, the Circuit Court for Baltimore City held that the arbitration bylaw is enforceable.  In a case of first impression for the Maryland courts, the court emphasized that arbitration is strongly favored as a matter of public policy and applied contract law principles to determine that there was both mutual assent and consideration to make the arbitration bylaw enforceable as a contract term.  Although the court's language is broad and states that constructive knowledge is sufficient, the court also found that the plaintiffs -- who, the court noted, were "two very sophisticated parties" -- had actual knowledge of the arbitration bylaw and assented to it by their stock purchases. The court also rejected plaintiffs' arguments that defendants' unilateral power to amend the bylaws made the agreement unfairly one-sided, citing case law that courts should not look beyond the "four corners" of the arbitration agreement in determining whether it is valid and enforceable.  "Because the Trustees' power to amend or revoke the Arbitration Bylaws springs from legitimate, legal sources, outside the "four corners" of the Arbitration Agreement -- namely, the company's Declaration of Trust and Maryland REIT law -- Plaintiffs' argument must fail."

So, to quote Professor Davidoff again, we now have our first ruling on this critical issue, "with real consequences for the takeover market."  I suspect that an appeal is under serious consideration.

Corvex Management LP v. CommonWealth REIT (Baltimore City Circuit Court 5/8/13)

May 16, 2013 in Judicial Opinions, Securities Arbitration | Permalink | Comments (0) | TrackBack (0)

GAO Releases Testimony on Elder Fraud

The GAO released recent testimony on Federal Government Has Taken Some Steps but Could Do More to Combat Elder Financial Exploitation (GAO-13-626T, May 16, 2013).  Here is what the GAO found:

Older adults are being financially exploited by strangers who inundate them with mail, telephone, or Internet scams; unscrupulous financial services professionals; and untrustworthy in-home caregivers. Local law enforcement authorities in the four states GAO visited indicated that investigating and prosecuting the growing number of cases involving interstate and international mass marketing fraud--such as "grandparent scams," which persuade victims to wire money to bail "grandchildren" out of jail or pay their expenses--is particularly difficult. In addition, older adults, like other consumers, may lack the information needed to make sound decisions when choosing a financial services provider. As a result, they can unknowingly risk financial exploitation by those who use questionable tactics to market unsuitable or illegal financial products. Local officials also noted that it is difficult to prevent exploitation by in-home caregivers, such as home health or personal care aides, individuals older adults must rely on.

The GAO goes on to identify ways that federal agencies could support state and local efforts to combat elder fraud.

May 16, 2013 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Wednesday, May 15, 2013

Executives of China-Based Company Settle SEC Charges of Using Offering Proceeds to Buy House

The SEC charged China-based RINO International Corporation’s chief executive officer Dejun “David” Zou and chairman of the board Jianping “Amy” Qiu with engaging in a scheme to overstate the company’s revenues and divert proceeds from a securities offering for their personal use.

The SEC alleges that Zou and Qiu (who are husband and wife) diverted $3.5 million in company money to purchase a luxury home in Orange County, Calif., without disclosing it to investors. Conflicting information was provided to RINO’s outside auditor when questions were raised about the expenditure. Zou and Qiu also used offering proceeds to pay for automobiles as well as designer clothing and accessories without recording them as personal expenses or otherwise disclosing them in RINO’s public filings.

The SEC issued a trading suspension in 2011 against RINO, which is a holding company for subsidiaries that manufacture, install, and service equipment for the Chinese steel industry. The company became a China-based U.S. issuer through a reverse merger in 2007. The trading suspension was based on questions raised about RINO’s public filings — signed and certified by Zou and Qiu — overstating company revenues by including false sales contracts.

Zou and Qiu agreed to settle the SEC’s charges by paying penalties and consenting to decade-long bars from serving as officers or directors of any company publicly traded in the U.S.

May 15, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Sen. Warren Asks Fed, DOJ & SEC for Analysis on Settling without Admission of Guilt

Senator Elizabeth Warren (D-Mass.) posed this question to Ben Bernanke, Eric Holder and Mary Jo White in a May 14 letter: 

Have you conducted any internal research or analysis on trade-offs to the public between settling an enforcement action without admission of guilt and going forward with litigation as necessary to obtain such admission and, if so, can you provide that analysis to my office?

She previously asked the same question to Thomas J. Curry, Comptroller of OCC, at a hearing.  The OCC subsequently stated it did not have any such internal research or analysis.

In her letter Senator Warren stated that "I believe strongly that if a regulator reveals itself to be unwilling to take large financial institutions all the way to trial -- either because it is too timid or because it lacks resources -- the regulator has a lot less leverage in settlement negotiations and will be forced to settle on terms that are much more favorable to the wrongdoer."

Download Warren.LtrtoRegulatorsre2-14-13hrg[1]

May 15, 2013 in News Stories | Permalink | Comments (0) | TrackBack (0)

Tuesday, May 14, 2013

Senator Franken Introduces Arbitration Fairness Act

Once again an Arbitration Fairness Act (S. 878) has been introduced into Congress to prohibit mandatory arbitration clauses in disputes involving antitrust claims, civil rights claims, consumer claims (including services related to securities and other investments), and employment claims.  While similar measures introduced in recent years have gone nowhere, some Congressional representatives, including Senator Franken, who introduced this bill, have been energized by the Supreme Court's endorsement of class waivers in consumer arbitration contracts in Concepcion and the recent inclusion of a class action waiver by Charles Schwab in its brokerage agreements (which was upheld by a FINRA hearing panel and is now on appeal to FINRA's appellate body).

Download S.878

May 14, 2013 in News Stories | Permalink | Comments (0) | TrackBack (0)