Securities Law Blog

The Securities and Exchange Commission today announced that it has obtained an asset freeze and other emergency relief to protect investors whose funds were at risk due to fraudulent misconduct at North American Clearing, Inc., a Longwood, Fla., based general securities and clearing brokerage firm. The SEC's complaint alleges that the defendants' fraud began earlier this year, when North American Clearing began experiencing severe financial problems. To ease its financial difficulties, North American Clearing secured a bank loan using customer securities as collateral. To comply with the federal securities laws and remain in operation, North American Clearing increased its reserves in an account it maintained for the benefit of customers, which limited funds available to North American Clearing to meet its daily operating expenses. According to the SEC's complaint, on several occasions in March and April 2008, North American Clearing improperly sold customer money market funds as a means of temporarily freeing up funds that it then used to pay for daily operating expenses. The SEC's complaint also alleges that on May 13, 2008, the defendants manipulated North American Clearing's processing system to overstate net customer money market purchases. This enabled North American Clearing to illegally withdraw more than $3 million from the reserves it was required to maintain for the benefit of customers.

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.

A Colorado grand jury, on March 11, 2008, indicted a Fort Collins man in connection with an alleged investment fraud that netted more than $2.9 million from 26 investors, Attorney General John Suthers announced (Colorado v. Van Vleet). Specifically, prosecutors said, defendant Rick Van Vleet was charged with five counts of securities fraud and two counts of theft over $15,000. If convicted on all charges, Van Vleet could face 84 years in prison and more than $5 million in fines. The indictment alleged that between February 2003 and June 2005, Van Vleet promised investors a high rate of return through an initial investment in music kiosks. The “TouchStand” kiosks, for which investors were charged $10,000 per unit, allowed users to play and download MP3 files for a fee and displayed ads when not on use. Van Vleet allegedly solicited investments ranging from $10,000 to $400,000 while failing to disclose required information to his clients, including the fact he had been enjoined in 1988 from securities violations. Prosecutors also said that while some investor funds were forwarded to Synergy Media Group for kiosk production, Van Vleet deposited a significant portion of the $2.9 million into his personal accounts. All of the money invested remains past due and unpaid, Suthers said. Van Vleet is being held in jail in lieu of $500,000 bond.

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

A Massachusetts man was arrested March 12, 2008 on charges he represented himself as a stockbroker and stole money from a neighbor who entrusted him to invest more than $187, (Massachusetts v. Gruber). Jeffrey Gruber, of Hull, Mass. was indicted in January and charged with larceny over $250 (five counts) and securities fraud. He pleaded not guilty during his arraignment March 12, 2008 in Brockton Superior Court. The Massachusetts Attorney General’s Office said it began investigating Gruber’s activities in July 2006 after it received a copy of a complaint against him by the Secretary of State’s Securities Division. The complaint alleged that from mid-October 2005 through late March 2006, Gruber misrepresented himself to the victim as a certified financial planner and stockbroker. Gruber allegedly advised the victim to invest funds in certain bonds and stocks, a real estate loan, and deposited the money into accounts in the name of Gruber Financial Services Inc. The Complaint further alleged that Gruber did not invest the victim’s funds, but instead spent the funds for his personal use. The victim and her lawyer contacted the Securities Division after Gruber allegedly failed to comply with the victim’s demand for an accounting of her investment and the return of her money.

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

On February 7, 2008, The New York Court of Appeals rejected efforts by the Financial Industry Regulatory Authority (“FINRA”) to collect a $1 million penalty imposed on a brokerage firm and its owner, ruling that the state courts did not have jurisdiction over the FINRA lawsuit (Financial Industry Regulatory Authority Inc. v. Fiero). FINRA “is not seeking to adjudicate a state law claim,” Judge Susan P. Read explained, but rather, rules and regulations under the 1934 Securities Exchange Act. Such actions are within the exclusive province of the federal district courts, the court pointed out, reversing the lower court’s order and dismissing the Complaint. In early 1998, FINRA (then the National Association of Securities Dealers) filed a disciplinary complaint against Fiero Brothers, a broker-dealer firm owned by John J. Fiero. The complaint alleged that Fiero and Fiero Brothers had carried out a “bear raid” to drive down the price of securities underwritten by a competitor, causing that firm to collapse and generating significant profits for the Fieros. A hearing panel in 2000 ruled against the Fieros. The NASD began its efforts to collect the $1 million fine in 2003 by filing an action in New York Supreme Court, and the Fieros moved to dismiss claiming that the NASD “lacked authority to recover the fine because it ‘was not affirmed by the SEC, confirmed by a court, or otherwise converted into a judgment.’” The state court denied the Fieros’ motion, finding that the NASD suit was based on contract law since the Fieros had signed various NASD documents agreeing to abide by all NASD rules. The Fieros also moved for summary judgment, arguing that the complaint was time-barred under the one-year limitations period to confirm arbitration awards. The court also denied this motion, rejecting the claim that the disciplinary action was an arbitration. Ultimately, the NASD obtained summary judgment awarding it $1.3 million in fines, costs, and interest. The Fieros appealed to the First Department, which affirmed. They appealed again. The state high court reversed, finding that “state courts do not have subject matter jurisdiction over this lawsuit.” Even though the question of jurisdiction was not raised earlier, the court said, subject matter jurisdiction is not waivable and may be considered by a court on its own motion. The NASD, according to the court, is “not seeking to enforce a state law claim.” Rather, it sued “to enforce a penalty imposed on the Fieros as a result of disciplinary proceedings” brought to enforce the Exchange Act. “Section 27 [of the Exchange Act] vests federal district courts with exclusive jurisdiction to entertain such a suit,” the court found.

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