Securities Law Prof Blog

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

Monday, October 31, 2011

Seond Circuit Again Addresses "Customer" Definition in CDS Dispute

There has been considerable litigation in the Second Circuit over the issue of arbitrability in connection with credit default swap agreements.  Specifically, the issue presented is whether there is a customer/broker-dealer relationship that permits the disappointed party to require arbitration of claims against the financial services firm involved in the transaction.  In Wachovia Bank, N.A. v. VCG Special Opportunities Master Fund, Ltd. (No. 10-1648-cv, Oct. 28, 2011Download Wachovia.102811[1]), the Second Circuit, reversing the district court, held that the hedge fund was not a "customer" of the Wachovia broker-dealer within the scope of FINRA Rule 12200, even though employees of the broker-dealer negotiated part of the CDS agreement.  The court emphasized that all the agreements were between the hedge fund and Wachovia Bank, and the agreement contained a non-reliance clause in which the hedge fund acknowledged that the counter-party was not its broker or advisor in any respect.  In these circumstances, "there is no need to grapple with the precise boundaries of the FINRA meaning of 'customer.'"  The court distinguished the facts from those in two recently decided Second Circuit opinions where the broker-dealer provided brokerage services, Citigroup Global Markets, Inc. v. VCG, 598 F.3d 30 (2d Cir. 2010) and UBS Financial Services Inc. v. West Virginia University Hospitals, Inc. (2d Cir. Sept. 22, 2011).

October 31, 2011 in Judicial Opinions, Securities Arbitration | Permalink | Comments (0) | TrackBack (0)

Thursday, October 27, 2011

Investor in Madoff Feeder Fund Wins $7 Million Arbitration Award

An investor in a Madoff-feeder fund managed by J. Ezra Merkin recently won a $7 million arbitration award in a AAA proceeding (Straus v. Merkin, 13-148-Y-001800-10 Oct. 12, 2011DownloadARBITRAL AWARD V EZRA MERKIN) and seeks to confirm the award in New York Supreme Court.  In a reasoned award, the majority of the panel found that Merkin was liable for material misstatements and omissions under the New Jersey Securities Act.  Specifically, Merkin did not disclose to this investor (although he did to many others) that the fund was nothing more than a feeder fund for Madoff.  Instead, the documentation at the time of the investment represented that Merkin determined the investment strategy.  In addition, the panel found that, over their nine-year association,  Straus and Merkin had no discussions about the true nature of the investment and that Straus did not learn of other information that should have alerted him to the extent of Madoff's involvement.

What is particularly interesting about the award is that the majority addresses a Sept. 23, 2011 decision from the S.D.N.Y. (In Re Merkin and BDO Seidman Securities Litig.) that found no violation of Rule 10b-5 on similar allegations.  Judge Batts determined that there had been insufficient allegations of a material misstatement or omission in the context of the broad discretion in the agreement to use other fund managers.  "The answer to Respondent's assertion that Judge Batts' determination warrants a dismissal of the claim before this Panel is that the majority disagrees with Judge Batts' conclusions."  While the arbitration award was based on state securities law, "where [the issues] coincide, the majority respectfully disagrees with her conclusion."

Another good example where arbitration can result in a decision that is more pro-investor than would be achieved in court. 

October 27, 2011 in Securities Arbitration, State Securities Law | Permalink | Comments (0) | TrackBack (0)

Friday, September 23, 2011

ARS Issuer Can Arbitrate Claims Against Broker-Dealer Related to Auction Services

The Second Circuit recently held that an issuer of auction rate securities (ARS) could arbitrate claims against the financial services firm that advised the issuer on the offerings and acted as the lead underwriter and the main broker-dealer responsible for facilitating the auctions that set the interest rates.  UBS Financial Services, Inc. v. West Virginia University Hospitals (No. 11-235-cv, 9/22/11).  There was no arbitration agreement between the parties, but a majority of the panel held that the issuer was a "customer" under the FINRA arbitration rules with respect to the services provided by the firm in its capacity as a broker-dealer and therefore could compel arbitration.  While the district court had concluded that the issuer was a customer with respect to the underwriting services, the majority of judges declined to address that issue, although they made a point of stating that they disagreed with the dissenting judge's assertion that issuers can never be customers of underwriters.

This litigation thus offers another illustration of broker-dealers resisting arbitration when requested by the customer.  Indeed, while the definition of "customer" is largely undefined at the borders and, in particular, whether the issuer is a customer of the underwriter that provides it underwriting services is unresolved, some of the arguments made by UBS's attorneys against arbitration were frivolous.  Thus, they argued that FINRA rules do not contemplate arbitration for sophisticated parties, that FINRA has a narrow "investor-protection" mandate, and that a customer relationship requires a fiduciary relationship and cannot be founded on arm's length transactions.  None of these arguments has ny basis in the FINRA rules, practice or policy.

Thus, we have another example of a situation where the securities industry believes that they will achieve a more favorable result in the law-oriented judicial forum than in the equity-based arbitration forum.   

September 23, 2011 in Judicial Opinions, Securities Arbitration | Permalink | Comments (0) | TrackBack (0)

Thursday, September 15, 2011

SEC Commissioner Walter on Mandatory Arbitration

In a Sept. 12 speech at the North American Securities Administrators Association 2011 Annual Conference that addressed a wide range of issues, SEC Commissioner Elisse B. Walter touched on the subject of mandatory arbitration and stated that the SEC would be taking up the issue soon (although Dodd-Frank does not mandate the SEC to do so),  Specifically:

Mandatory Arbitration

Regardless of changes in the relationship between investors and the professionals to whom they turn for advice, disagreements will arise that need to be resolved quickly and fairly. Following the dictates of Dodd-Frank, the SEC intends to thoroughly review the mandatory arbitration provisions that are written into most brokerage contracts. (emphasis added)

I believe that in recent years FINRA has provided a relatively cost-effective way to fairly resolve disputes. Nonetheless, I also completely understand the frustration of investors who are denied their opportunity for a day in court and find themselves forced to make their case in front of an arbitration forum.


September 15, 2011 in SEC Action, Securities Arbitration | Permalink | Comments (0) | TrackBack (0)

Thursday, July 7, 2011

Merrill Has to Pay Hedge Fund $63.7 Million for Unexpected Margin Calls

A FINRA arbitration panel in California awarded a hedge fund, Rosen Capital Management, $63.7 million in its dispute with Merrill Lynch.  The fund asserted that Merrill's Professional Clearing Units, which handled hedge fund accounts, made unexpected margin calls in October 2008 that the firm could not meet.  The firm had to sell off its positions and went out of business.  The award is one of the largest awarded to investors by a FiNRA panel.

Interestingly, courts rarely find for investors when they allege unexpected margin calls.  The broker-dealer has broad discretion under the brokerage contract to protect itself from losses resulting from market changes.  Unfortunately for Merrill, grounds for vacating arbitration awards are very narrow.  WSJ, Merrill Loses Crisis-Era Arbitration Case, to Tune of $63.7 Million

July 7, 2011 in Securities Arbitration | Permalink | Comments (0) | TrackBack (0)

Monday, May 9, 2011

New FINRA Arbitration Motion Practice Rule Effective June 6

FINRA Dispute Resolution announced that effective June 6, 2011, a moving party (the party that makes the original motion in an arbitration) will have a five-day period to reply to a response to a motion. This five-day period gives parties an opportunity to brief fully the issues in dispute, and ensure that arbitrators deciding a motion have all the motion papers before issuing a final decision.

May 9, 2011 in Securities Arbitration | Permalink | Comments (0) | TrackBack (0)

Wednesday, April 13, 2011

Securities America Settlement -- On or Off?

Yesterday it was reported that enough investors had accepted the $180 million settlement offer by Securities America and its parent Ameriprise to make it happen.  The settlement involves claims of investors who purchased private placements in Medical Capital and Provident Royalties that have been filed in arbitration and in a federal class action.  Investors would receive approximately 45 cents on the dollar, up from the 10 cents offered in a previous settlement that a federal district court judge in Dallas refused to approve.  Dealbook (Susanne Craig), Securities America Said to Reach $180 Million Settlement.

    However, Investment News reports that the deal is still iffy -- specifically, if investors who collectively have $5 million in arbitration claims do not accept the terms.  It is also subject to court approval.  Securities America deal poised on a knife's edge

April 13, 2011 in News Stories, Securities Arbitration | Permalink | Comments (0) | TrackBack (0)

SEC Approves FINRA Arb Rule Providing Time Period to Reply to Responses to Motions

On April 12, 2011 the SEC approved a FINRA proposed rule change to amend the Code of Arbitration Procedure (for both Customer and Industry Disputes) to provide moving parties with a five-day period to reply to responses to motions. The proposed rule change was published for comment in the Federal Register on February 22, 2011.  The relatively uncontroversial proposal received only three comments.

April 13, 2011 in Securities Arbitration | Permalink | Comments (0) | TrackBack (0)

Tuesday, April 12, 2011

FINRA Arb Panel Orders Citigroup to Pay $51 Million to Investors in Municipal Bond Hedge Funds

A FINRA arbitration panel issued an award ordering Citigroup to pay more than $51 million (including $17 million in punitive damages) to a group of investors in its MAT and ASTA municipal bond hedge funds.  It is reportedly the third largest award at FINRA since 1988.  Citigroup previously disclosed that the SEC is conducting an inquiry as to whether brokers misled investors about the risks involved with these funds.  Inv News, Finra orders Citigroup to pay $51M to muni-fund investors

April 12, 2011 in Securities Arbitration | Permalink | Comments (0) | TrackBack (0)

Wednesday, April 6, 2011

SEC Approves Changes to FINRA Discovery Guide

The SEC approved a proposed rule change filed by FINRA making amendments to the Discovery Guide and Rules 12506 and 12508 of the Code of Arbitration Procedure for Customer Disputes.  Publication is expected in the Federal Register during the week of April 4, 2011.

April 6, 2011 in SEC Action, Securities Arbitration | Permalink | Comments (0) | TrackBack (0)

Sunday, April 3, 2011

Securities America Proposes to Settle Arbitration Claims

Readers of this blog know that I have been following the Securities America litigation that involves complicated questions about the relationship between litigation and arbitration claims when numerous investors are pursuing claims against a brokerage firm with limited assets (but a wealthy parent Ameriprise in the background).  Previously a federal district court judge exercised his power under the All Writs Act to enjoin ongoing arbitrations to allow the parties in a class action involving similar claims to negotiate a settlement.  About a week ago, the judge rejected the settlement and lifted the injunction, thus sending all parties into mediation.  Meanwhile, Ameriprise sent out mixed messages about its willingness to provide financial assistance to its subsidiary.

On March 30, 2011 Reuters reported that Securities America had reached a preliminary settlement that would offer claimants in arbitrations as much as 48% of their claims.  The settlement rejected by the judge would have offered class members about 20% of their claims.  The negotiators of the proposed settlement are now polling claimants and attorneys to see if there is support for the settlement.

If anyone out there has additional information, I'd appreciate hearing it.

April 3, 2011 in Securities Arbitration | Permalink | Comments (0) | TrackBack (0)

Wednesday, March 30, 2011

FINRA Arb Panel Orders Broker to Pay $1 Million to Madoff Investors

The Wall St. Journal reports that a FINRA arbitration panel ordered Robert M. Jaffe, a part-owner of Cohmad Securities Corp., to pay $1.1 million plus interest to a group of investors formed to invest in Bernie Madoff's ponzi scheme.  Jaffe and Cohmad previously settled SEC charges that they received millions of dollars from Madoff for steering investors to him.  WSJ, Broker Tied to Madoff Ordered to Pay $1.1 Million

March 30, 2011 in Securities Arbitration | Permalink | Comments (0) | TrackBack (0)

Monday, March 21, 2011

Judge Refuses to Approve Securities America Settlement

Securities America (as readers of this blog know) faces class actions and arbitrations brought by customers who suffered losses from private placement sold by its brokers.  SA and plaintiffs' attorneys in one class action negotiated a $21 million settlement and previously obtained a temporary stay of arbitrations that SA said would otherwise deplete its assets.  SA said that unless the settlement was approved, it would be out of business.  On March 18, however, a federal district court judge refused to approve the settlement and refused to continue the stay of the arbitrations.  See Judge rejects Securities America class settlement.)  Observers have wondered whether SA's parent, Ameriprise Financial, would bail it out.  Reuters reported earlier today that Ameriprise refused to commit itself, but Investment News reports that it has announced it would be willing to contribute cash to its subsidiary.  Details were not provided. 

March 21, 2011 in News Stories, Securities Arbitration | Permalink | Comments (0) | TrackBack (0)

Friday, February 11, 2011

Court Throws Out JR's $11.6 Million Award

Vacatur of a securities arbitration award is rare, but a California state court threw out a $11.6 million award ($10 million punitive damages) that actor Larry Hagman (J.R. in Dallas) obtained against Citigroup.  The judge ruled that the chairman of the arbitration panel should have disclosed that he and his wife brought a similar claim involving losses in their retirement account against a different respondent.  WSJ, Court Ruling Favors Citi Against Larry Hagman

February 11, 2011 in Securities Arbitration | Permalink | Comments (0) | TrackBack (0)

Tuesday, February 1, 2011

SEC Approves FINRA Rule Allowing Customers the Option of All-Public Panel

The SEC approved FINRA's proposed rule change to provide customers in all FINRA arbitrations the option of having an all public panel. Historically, in cases with three arbitrators, the panels have been comprised of two public arbitrators and one arbitrator with a nexus to the securities industry. The amended rules will apply to all customer cases in which a list of potential arbitrators has not yet been sent to the parties. 

FINRA sought the SEC's approval for the rule change in October after results of a 27-month pilot program showed that investors presented with this option chose the new method of arbitrator selection nearly 60 percent of the time. Participation in FINRA's Public Arbitrator Pilot Program was voluntary and ultimately included the participation of 14 firms.

Here is NASAA's statement on the approval:

“State securities regulators have long advocated providing investors with greater choice in FINRA arbitrations. Providing investors with the option to have an all-public panel of arbitrators is a positive development toward increasing the fairness of the securities arbitration process. Another step in enhancing investor confidence would be to allow investors to choose between arbitration and litigation in an independent judicial forum.”

February 1, 2011 in Other Regulatory Action, SEC Action, Securities Arbitration | Permalink | Comments (0) | TrackBack (0)

Tuesday, January 18, 2011

Jill Gross's Take on Gretchen Morgenson's Take on Securities Arbitration

Jill Gross has an interesting blog at the Indisputably blog site critiquing Gretchen Morgenson's column in Sunday's New York Times, in which Morgenson details the efforts of a brokerage firm to complicate an arbitration proceeding by bringing a judicial action to pursue a counterclaim against a nonparty to the arbitration agreement.  Jill wonders if Morgenson, a longtime critic of securities arbitration, has seen the light.  Both the blog and the column are worth reading.

January 18, 2011 in Securities Arbitration | Permalink | Comments (0) | TrackBack (0)

Tuesday, December 14, 2010

FINRA Releases Updated Information on Pilot Program Results

FINRA recently posted at its website an update on the results of its Pilot Program that allows eligible customers that have instituted arbitration proceedings against 14 firms to opt for an all-public arbitrator panel.  On Oct. 26, FINRA filed a rule proposal with the SEC that would allow all investors the option of an all-public panel.  The proposed rule would apply to all investor disputes against any firm and any individual broker.  FINRA reports that:

As of December 1, 2010, fifty-six percent of investors eligible to participate have opted in, resulting in 583 out of 1,035 cases that were eligible for the Pilot Program. Investors have chosen to rank one or more non-public arbitrators on the list in 50 percent of the cases (255 of the 506 cases) in which parties have completed the ranking process.

From the above, FINRA concludes that in 74 percent of cases eligible for the Pilot Program, investors have opted for a non-public arbitrator either by choosing not to participate in the Pilot Program or by participating in the pilot but ranking one or more non-public arbitrators.

FINRA also reports that:

Parties involved in Pilot Program cases have resolved cases via settlement more often than non-Pilot Program cases involving three arbitrators. Fewer Pilot Program cases result in awards than non-Pilot Program cases with three arbitrators.

Preliminary award outcomes show that all-public panels in Pilot Program cases award damages to investors more often compared to awards issued by majority public panels in Pilot Program and non-Pilot Program cases; however, there is not yet sufficient award data to draw meaningful conclusions.

December 14, 2010 in Securities Arbitration | Permalink | Comments (0) | TrackBack (0)

Thursday, August 26, 2010

Raymond James Pays $3.5 Million to ARS Purchasers in Arbitrations

Since July 2010, FINRA arbitrators have ordered brokerage units of Raymond James Financial to buy back from customers auction rate securities (ARSs) totalling $3.5 million (3 separate proceedings).  By way of contrast, ARS purchasers have not generally been successful in judicial proceedings.  See, e.g., Defer LP v. Raymond James Financial, Inc.,654 F. Supp.2d 204 (S.D.N.Y. 2009).

Unlike many other firms, thus far securities regulators have not brought enforcement actions against Raymond James.  When the market for ARSs froze in February 2008, Raymond James customers held $1.9 billion in ARSs; today that amount has been reduced to about $600 million, according to a Raymond James spokesperson.  InvNews, Raymond James pays more auction rate claims.

August 26, 2010 in Securities Arbitration | Permalink | Comments (0) | TrackBack (0)

Monday, August 16, 2010

What is the Future of Securities Arbitration Post Dodd-Frank?

On August 11 I was a panelist at the PLI-Securities Arbitration 2010 program held in New York City, an annual event that reviews recent developments in FINRA's arbitration rules and practice, as well as updates on judicial developments.  The concluding panel, in particular, was of great interest, as it dealt with the Future of Securities Arbitration.  The various panelists offered their predictions on the future of mandatory securities arbitration since the SEC now has explicit authority, under section 921 of Dodd-Frank, to prohibit predispute arbitration agreements with respect to federal securities claims and claims based on SRO rules.  Linda Fienberg, the head of FINRA Dispute Resolution, stated that FINRA will fight to maintain FINRA Rule 12200, which gives customers the right to demand arbitration of their claims (even in the absence of a PDAA), because of the protection it provides investors.  She also expressed the following concerns if the SEC bans mandatory securities arbitration:

  • years of litigation if the SEC takes action
  • higher costs and long delays for investors if the FINRA forum does not remain an option for them
  • viability of small claims if FINRA arbitration is not an option
  • the impact on investors' ability to collect arbitration awards (FINRA requires broker-dealers and RRs to pay awards as a condition of remaining in the industry)
  • bifurcation of claims, if some investors' claims go to court and others to arbitration

August 16, 2010 in Securities Arbitration | Permalink | Comments (0) | TrackBack (0)

Thursday, August 5, 2010

FINRA Arbitration Panel Awards ARS Purchaser $81 Million in Consequential Damages

Purchasers of auction rate securities that have sued for consequential damages resulting from the illiquidity of their investments have not fared well in court; for example, Aimis Art Corp. v. Northern Trust Securities, Inc., 641 F. Supp.2d 314 (S.D.N.Y. 2009), held these damages claims to be "speculative" and violative of section 28(a) of the Exchange Act.  There is some evidence that purchasers may get better outcomes in arbitration.  A FINRA arbitration panel, set up as part of a special arbitration program for ARS purchasers from firms that settled SEC charges, awarded an investor $81 million in consequential damages against UBS Financial Services.  UBS says that it will seek to vacate the award, although the grounds for vacating are very narrow.  Inv. News, UBS will seek to have $81M Finra ruling overturned.

August 5, 2010 in Securities Arbitration | Permalink | Comments (0) | TrackBack (0)