Securities Industry Commentator by Bill Singer Esq

February 28, 2018

How Morgan Stanley's ex-broker lawsuits could backfire (On Wall Street / Financial Planning by Kenneth Corbin)https://onwallstreet.financial-planning.com/news/how-morgan-stanleys-ex-broker-lawsuits-could-backfire. 

Following Morgan Stanley's exit from the Broker Protocol, the wirehouse has launched a wave of lawsuits that could set a precedent for how advisors handle transitions and shape the way firms approach recruiting.

In the process, some experts warn that Morgan Stanley's litigation campaign could inflict significant damage to the firm's reputation within the industry.

FINRA seeks comment on a proposed new rule to address the outside business activities of registered persons. The proposal is the result of FINRA's recent retrospective review of FINRA's rules governing outside business activities and private securities transactions, FINRA Rule 3270 (Outside Business Activities of Registered Persons) and FINRA Rule 3280 (Private Securities Transactions of an Associated Person), respectively. The proposed rule would replace FINRA Rules 3270 and 3280 and is intended to reduce unnecessary burdens while strengthening investor protections relating to outside activities. "

SEC: Insider Bought Minutes After Warnings Not to Trade (SEC Litigation Release No. 24056 ) https://www.sec.gov/litigation/litreleases/2018/lr24056.htm Without admitting or denying the SEC's allegations and subject to the Court's review, Yang Xie agreed to the entry of permanent injunctions as well as payment of a  $2,287disgorgement plus prejudgment interest and a $6,681 civil penalty of three times his trading profits. .As set forth in the "Summary" portion of Securities and Exchange Commission v. Yang Xie (Complaint, DNJ, 18-CV-02779) https://www.sec.gov/litigation/complaints/2018/comp24056: 

1. On November 20, 2014, Defendant Yang Xie, then an employee of Merck & Co., Inc. ("Merck"), was sent an email with attached documents from an attorney in Merck's Office of General Counsel. One of the attachments contained "privileged and confidential" information that "Merck and Cubist Pharmaceuticals, Inc. ('Cubist') are in discussions regarding a contemplated strategic transaction" that "is likely to be considered material to Cubist." The email attachment further advised that, pursuant to Merck's corporate insider trading policy, "[y]ou may not purchase, sell or otherwise engage in any trading of Cubist's stock until a full trading day has elapsed after a public announcement of the Transaction." 

2. Within approximately 14 minutes after being sent the email, Xie purchased 80 shares of Cubist stock in his personal brokerage account at a price of $73.39 per share. 

3. On December 8, 2014, Merck publicly announced its intention to acquire Cubist for $102 per share in cash (39% premium to Xie's purchase price) via a tender offer, which was completed on January 21, 2015. 

4. Xie sold his Cubist stock on January 21, 2015, for a profit of approximately $2,287.

Keeping Shareholders on the Beat: A Call for a Considered Conversation About Mandatory Arbitration (Speech by SEC Commissioner Robert J. Jackson at CECP CEO Investor Forum) 
https://www.sec.gov/news/speech/jackson-shareholders-conversation-about-mandatory-arbitration-022618 A very thoughtful and erudite opening salvo from new Commissioner Jackson. Among his trenchant observations (footnotes omitted):

So now-when SEC enforcement is hamstrung by budgetary and legal limits-is hardly the time to be thinking about depriving shareholders of their day in court. But there's another reason why I'm so skeptical of proposals like these: they deprive the public of the law our judges make when they hold corporate insiders accountable to investors. 

You see, the resolution of private disputes in public courts creates positive externalities. In other words, the public also benefits when private litigants use courts because a public hearing gives judges a chance to tell corporate insiders what the law expects of them. Holding wrongdoers to account tells the public that we take corporate fraud seriously-and sends a signal to insiders, the bar, and investors, that being unfaithful to investors doesn't pay. Arbitration, on the other hand, is usually conducted in a closed-door proceeding, depriving investors of their chance to air their objections-and the rest of us the knowledge of what the law is. 

That's especially true when it comes to the fiduciary duties managers owe to their investors. One reason, of course, is that we have the benefit of the expertise of the courts of Delaware. Indeed, one of the many costs of proposals to bring shareholder lawsuits into the dark is that they would deprive the public of the many investor protections developed in state courts. Those protections would not exist if the underlying disputes had been privately arbitrated.

Of course it's true that lawsuits have their own costs. But let's be clear: steps have already been taken to address those concerns. For example, Congress chose to limit the scope of investor lawsuits in federal court over twenty years ago. And the Delaware courts have also put in place limitations on shareholder litigation that companies and shareholders can use today.

Ponzi Scheme Nets Federal Prison Sentence, Probation for Berjac Company Leaders (DOJ Press Release) https://www.justice.gov/usao-or/pr/ponzi-scheme-nets-federal-prison-sentence-probation-berjac-company-leaders
Between 2008 and 2012, brothers Michael and Gary Holcomb were the principal managing partners of the Oregon-based Berjac, an insurance premium financing business. The brothers solicited investments for the alleged purpose of financing loans to small businesses to pay for insurance premiums and investors were promised between  5% and 7% returns. Federal prosecutors alleged that the Holcombs concealed the investments' under-performance and diverted funds into real estate speculation and various personal uses. Pursuant to their guilty pleas, Michael and Gary Holcomb were sentenced to 72 months in federal prison followed by three-year terms of supervised release.