Securities Law Blog

Nine state regulators are investigating the collapse of the auction-rate securities market and are coordinating their efforts through a task force, the North American Securities Administrators Association said. Regulators in Florida, Georgia, Illinois, Massachusetts, Missouri, New Hampshire, New Jersey, Texas and Washington are probing whether brokers misrepresented the auction-rate securities they sold to individual investors, according to the Washington- based group. ``If the product was represented as a cash equivalent going in, it must be treated as a cash equivalent coming out,'' said Karen Tyler, the president of the group and the securities commissioner in North Dakota. Massachusetts Secretary of State William Galvin on March 28 said his office is investigating the sale of auction-rate securities by UBS AG, Merrill Lynch & Co. and Bank of America Corp. after investors complained they were unable to liquidate bonds that the firms told them were equivalent to cash. A number of individual investors have also filed lawsuits against the Wall Street banks that sold auction-rate bonds. Investors and dealers began to abandon the $330 billion market in February on concern that creditworthiness of companies insuring the bonds was deteriorating because of losses they took guaranteeing debt backed by subprime mortgages. Thousands of auctions have failed, data compiled by Bloomberg show. When an auction fails because of lack of demand, rates are set at a ``penalty'' level determined at the initial bond offering and holders are stuck with the securities.

For more information on this subject contact securities attorneys, Michaels, Ward & Rabinovitz, LLP.

FINRA has published the first 2008 issue of its arbitrator newsletter, The Neutral Corner. As always, it contains a number of interesting articles for the broker/dealer practitioner. One is these; entitled "Arbitrability of Sarbanes-Oxley Whistleblower Claims" is the first article that I know of addressing this important topic. The authors rightfully center their discussion on whether SOX whistleblower claims are "employment discrimination" claims, and thus exempt from mandatory arbitration under Rule 13201 of the Code of Arbitration Procedure for Industry Disputes. After examining the issue at some length, the authors conclude that SOX claims are not "employment discrimination" claims-in part relying on two arbitration panel decisions on the subject. As a result, the SOX whistleblower claims could be heard in arbitration and not court. Another important part of this edition of Neutral Corner reviews deferred variable annuities and directs arbitrators to FINRA Regulatory Notice 07-53. In so doing, the Neutral Corner points out that arbitrators "when in doubt about an issue, legal or otherwise, should request briefs from the parties", citing The Arbitrator’s Manual. Lastly, there is a terrific discussion of the use of electronic discovery in arbitration, and how the Federal Rules of Civil Procedure deal with the issue, and what lessons can be applied to arbitrations. The full is issue of Neutral Corner is available here.

For more information on this subject contact securities attorneys, Michaels, Ward & Rabinovitz, LLP.

Ameriprise Financial Inc. agreed to pay more than $3.8 million to New Hampshire securities regulators last week to settle allegations it failed to report at least 96 forgeries by some of its brokers. Mark Connolly, director of New Hampshire's bureau of securities regulation, said Ameriprise failed to report the forgeries and other "significant issues" regarding securities violations, as required under a 2005 settlement with the state. That $7.4 million settlement involved an alleged failure to disclose some conflicts of interest to investors. The latest settlement includes a $3.25 million fine, $250,000 to cover investigation and legal costs, and $333,948 to be reimbursed to investors. Ameriprise also agreed to improve its procedures and report on its progress by year end. The company did not admit wrongdoing, according to the signed consent order. New Hampshire found that Ameriprise did not report its investigation of alleged forgeries by six financial advisers at its Portsmouth office. "Agents would state that they were 'taking a 10-minute trip to Kennebunkport' as code that they were going to forge the documents rather than travel to or wait for the client," according to the consent order. Ameriprise fired two of the advisers and disciplined three others, while the sixth resigned, the state said.

For more information on this subject contact securities attorneys, Michaels, Ward & Rabinovitz, LLP.

On March 31, 2008 Treasury Secretary Henry Paulson outlined the details of a broad blueprint to significantly change the financial regulatory landscape. The Proposal would, among other things, shift many regulatory powers to the Federal Reserve from other agencies. Initial reaction from state securities regulators has been negative with Massachusetts Secretary of the Commonwealth William F. Galvin calling the Proposal a “disastrous backward step that would put the investor in jeopardy.” You will find various important links concerning this historic overhaul plan below. These are provided courtesy of SIFMA.

Link to Treasury’s fact sheet on the plan
http://www.treas.gov/press/releases/reports/Fact_Sheet_03.31.08.pdf

Link to the Blueprint’s executive summary
http://www.sifma.org/regulatory/pdf/Paulson-BlueprintExec-summary.pdf

Link to the Blueprint
http://www.sifma.org/regulatory/pdf/Modernized-Financial-Reg-Structure-Blueprint.pdf

Link to Secretary Paulson’s speech
http://www.treas.gov/press/releases/hp897.htm

For more information on this subject contact securities attorneys, Michaels, Ward & Rabinovitz, LLP.

The New York Times reported Sunday that Mary Schapiro, the chief executive of the Financial Industry Regulatory Authority ("FINRA"), would like to see more protections for individual investors included in the planned overhaul of the regulation of the securities markets. Ms. Schapiro would like to ensure that consumers do not fall between the cracks in the current system. She expressed concern that consumers who buy annuities for retirement do not understand that these investments are regulated by the S.E.C., FINRA, state insurance regulators, or "some combination thereof." "We shouldn't leave it to the investor to figure it out," she adds. "We've left them in this never-never land of dramatically different protections, and that's one of the real shortcomings of the regulatory system." Ms. Schapiro also called for more regulatory oversight of mortgage brokers. "The amount of regulation required to offer someone a $500,000 mortgage," she says, "pales in comparison to what's needed to sell a $100 mutual fund." To addrss this, Ms. Schapiro says, mortgage brokers should be added to the groups that are more closely regulated, like stockbrokers and sellers of retirement products, like mutual funds, life insurance policies and annuities. Four important safeguards should be in place she says. "First, the person who sells the product should be licensed. Second, sales materials and advertising should not be misleading. Third, products can only be sold to a suitable investor in terms of objectives and risk tolerance. Fourth, disclosures should be complete and cover everything from risk to cost." None of these safeguards were in effect in the years leading up to the current mortgage crisis.

For more information on this subject contact securities attorneys, Michaels, Ward & Rabinovitz, LLP.