Securities Industry Commentator by Bill Singer Esq

January 31, 2020

Federal Court Enjoins NYS Workers' Compensation Board Claims and Compels Arbitration. UBS Securities LLC, Petitioner(Memorandum Opinion and Order, United States District  Court for the Southern District of New York ("SDNY"), 20-CV-217)
As set forth in the Syllabus [Respondent's name redacted]:

The petitioner, UBS Securities LLC ("UBS"), brings a motion for a preliminary injunction and a petition to compel arbitration that would, together, enjoin the respondent, REDACTED from pursuing her claim for retaliation before the New York State Workers' Compensation Board (the "Board") and compel her to submit that claim to arbitration. In particular, UBS seeks to enjoin REDACTED from pursuing her claim for retaliation brought under Section 120 of the New York Workers' Compensation Law before the Board, a claim that is scheduled for trial before the Board on February 4, 2020. On January 10, 2020, this Court entered a temporary restraining order that relieved UBS of the obligation to appear at a pre-merits conference before the Board on January 14, 2020 but that permitted REDACTED to appear in order to present this Court's temporary restraining order to the Board. This Court now grants UBS's motion for a preliminary injunction, enjoining REDACTED from pursuing her Section 120 claim for retaliation before the Board, and grants UBS's petition to compel arbitration of the respondent's Section 120 claim.
Plaintiff Gaffney is an accredited invesstment fiduciary, certified fund specialist, and regsitered investment advisor, and the Opinion asserts that in "connection with those positions, plaintiff is subject to the rules and regulations of the Financial Industry Regulatory Authority (FINRA), formerly known as the National Association of Securities Dealers (NASD)." at page 2 of the Opinion. Plaintiff Gaffney became registered in 2007 with FINRA member firm LPL Financial Holidng, Inc., at which time he signed both a Branch Office Manager Agreement ("BOMA") and a Representative Agreement ("RA"), both of which disclose in part:

Branch Office Manager [and Representative] hereby expressly agrees to submit to final and binding arbitration before the NASD any and all disputes, claims or controversies relating to Branch Office Manager's [and Representative's] association with or termination from LPL. Branch Office Manager [and Representative] expressly gives up [the] right to sue in a court of law or equity, including the right to a trial by jury. Specific examples of disputes, claims or controversies that are required to be arbitrated include, but are not limited to, allegations of unlawful termination, sexual or racial harassment or discrimination on the job, gender discrimination, and claims of age or handicap discrimination.

After Plaintiff Gaffney suffered health problems in 2016, Defendant Sullivan (a Managing Director of the Private Advisor Group, LLC ("PAG")) allegedly encouraged Gaffney to sell his business to LPL representative Alan Levine, who operated Diversified Financial Consultants, LLC ("DFC"). Plaintiff Gaffney alleges tht Levine reneged on an agreement to purchase his business, and after Gaffney reported that to LPL, the firm terminated him. In his 2018 Complaint, Levine alleged 12 causes of action against the Defendants cited above (Morristown Financial Group ("MF")was voluntarily dismissed). Defendants moved to stay/dismiss the Complaint and compel arbitration. On March 29, 2018, the NJ trial court dismissed with prejudice the claims against PAG and MF; compelled all remainng claims to arbitration; and dimissed the Complaint without prejudice, which Plaintiff appealed citing the following arguments:

(1) neither the BOMA nor the RA are valid because he agreed to arbitrate before NASD and that organization no longer exists; (2) the arbitration provisions in the BOMA and the RA are unconscionable because they are not mutual in that only his claims are subject to arbitration; (3) the arbitration provision in the BOMA is unenforceable under California law; (4) the arbitration provision in the RA is unenforceable under Massachusetts law; (5) the arbitration provisions in the BOMA and RA are in conflict and are not sufficiently clear to be enforceable; and (6) the FINRA Arb. Code does not cover his LAD or CEPA claims.

Pages 6 -7 of the Opinion

The NJ Superior Court/Appellate Division affirmed the orders that compelled arbitration but remanded with direction that said orders be stayed pending the arbitration:

We disagree with the trial court in one respect. The trial court should not have dismissed the complaint. Instead, the FAA provides that a party may request a stay if a court action has been commenced and that action involves "any issue referable to arbitration under an agreement in writing for such arbitration." 9 U.S.C. § 3; see also Alfano v. BDO Seidman, LLP, 393 N.J. Super. 560, 566, 577 (App. Div. 2007) (finding that "[u]nder [9 U.S.C. § 3] the court must stay an arbitrable action pending its arbitration" after one of the parties applied for a stay). Accordingly, we remand with direction that the trial court enter new orders. Those orders will provide that plaintiff's claims are stayed pending arbitration, and the parties are to proceed to arbitration in accordance with the FINRA Arb. Code.

Page 15 of the Opinion

An interesting aspect of this case was the Court's consideration of Plaintiff's argument that there was no meeting of the minds per arbitration because the agreements he had signed designated the now defunct NASD as the arbitration forum:

[B]ecause FINRA is the successor entity to NASD, courts have consistently compelled arbitration before FINRA, where, as here, the arbitration agreement specified that arbitration will occur under the rules of NASD

Page 11 of the Opinion
In today's featured FINRA regulatory settlement, we come across an elderly, retired customer who was victimized by unsuitable options trading. As bad as the facts are, when you parse through the numbers, it's not as outrageous as you first think. Be that as it may, when choosing between the lesser of two evils, it's important to consider that the choice is still between two evils. 
Leroy King, the former Chief of Antigua's Financial Services Regulatory Commission ("FSRC"), pled guilty to one count of conspiracy to obstruct justice and one count of obstruction of justice for his role in obstructing the SEC's investigation into Stanford International Bank ("SIB"). As stated in part in the DOJ Release:

King is a dual citizen of the United States and Antigua.  Beginning in approximately 2002, he served as the administrator and CEO of the FSRC, an agency of the Antiguan government.  As part of his duties, he was responsible for Antigua's regulatory oversight of Stanford International Bank Limited's (SIBL) investment portfolio, including the review of SIBL financial reports and the response to requests by foreign regulators, including the SEC, for information and documents about SIBL's operations.

In or about 2005, the SEC began investigating R. Allen Stanford and Stanford Financial Group (SFG) and  made official inquiries with the FSRC regarding the value and content of SIBL's purported investments.  From 2005 through February 2009, Stanford, James Davis, King and others conspired to obstruct the SEC's investigation of SFG, SIBL and their related entities.  From at least 2003 through February 2009, Stanford made regular secret corrupt payments of thousands of dollars in cash and gifts to King in order to obtain his assistance in hiding the truth about SFG and SIBL from the SEC and other regulatory agencies.

Over the course of the conspiracy, Stanford's cash payments to King totaled approximately $520,963.87.  Stanford also provided King tickets to both Super Bowl XXXVIII in Houston, Texas (2004) and Super Bowl XL in Detroit, Michigan (2006).  Stanford also provided King with repeated flights on private jets Stanford or SFG entities owned.

King later denied the SEC's request for help, and he wrote that the FSRC "had no authority to act in the manner requested and would itself be in breach of law if it were to accede to your request."  In reality, the FSRC did have this authority and failed to exercise such because of the payments and other benefits Stanford gave to King.

A federal jury found Stanford guilty in June 2012 for his role in orchestrating a 20-year investment fraud scheme in which he misappropriated $7 billion from SIB to finance his personal businesses.  He is serving a 110-year prison sentence.  Five others were also convicted for their roles in the scheme and received sentences ranging from three to 20 years in federal prison.
Thurman Bryant, III, and Arthur Franz Wammel were convicted by a jury in the United States District Court for the Eastern District of Texas on conspiracy to commit wire fraud; and Bryant was sentenced to 240 months in prison and Wammel was sentenced to 136 months in prison, and each was ordered to pay $9,103,088.12 in restitution. As set forth in part in the DOJ Release:

[D]efendants devised and executed an investment fraud scheme that claimed to earn investors a guaranteed minimum 30% annual return on investment.  In addition, Bryant promised an investment that would be placed in a secure escrow account, when in fact the money was funneled to Wammel for  securities trading and other purposes. Evidence at trial showed that the defendants separately spent money on personal expenses such as home leases, home improvements, car leases, expensive jewelry, and private school tuition, and that defendant Wammel spent a large amount of money on expenses related to a Rolls-Royce, a Ferrari and a Range Rover.  Additional evidence showed that the investors contributed over $22 million to the scheme. 

Not so much a "news" story as a what-took-you-so-long event. Citigroup's robo-adviser will be bundled among the bank's Citi Priority suite, which is free for customers with at least $50,000 in bank deposits/investments. With Citigroup's annoucement, it now joins JPMorgan Chase, Bank of America, Wells Fargo, and Morgan Stanley in a robo-adviser field.
Navinder Sarao was sentenced to one-year of house arrest for his role in spoofing, and, notably, for his purported contribution to the May 6, 2010, Flash Crash. Following his 2016 guilty plea to spoofing and wire fraud, Sarao debriefed DOJ and CFTC about the darkside of electronic trading, which seems to have helped the feds better monitor ongoing HFT events. 

Former JPMorgan broker defeats restraining order in FINRA arbitration (On Wall Street by Kenneth Corbin)
Industry reporter Kenneth Corbin covers former JPMorgan employee Erik Weiss's ongoing lawsuit with his former employer after he joined Raymond James. JPMorgan hit Weiss with a TRO in federal court after he allegedly improperly solicited former clients; however, a  FINRA arbitration panel declined to impose a permanent injunction.
In part the SEC Release states:

The proposed amendments would eliminate Item 301 (selected financial data) and Item 302 (supplementary financial data), and amend Item 303 (management's discussion and analysis). The proposed amendments are intended to modernize, simplify, and enhance the financial disclosure requirements by reducing duplicative disclosure and focusing on material information in order to improve these disclosures for investors and simplify compliance efforts for registrants.

READ the Proposed Rule

READ the SEC's Commission Guidance on Management's Discussion and Analysis of Financial Condition and Results of Operations

Specific avenues of engagement that currently are of particular interest to me include:  (1) discussing with issuers, such as property and casualty insurers, the extent to which they use, and their experience with, environmental and climate-related models and metrics in their operations and planning, including price, risk and capital allocation decisions; and (2) discussing with asset managers that have been using environmental and climate-related models and metrics to allocate capital on an industry or issuer specific basis their experience with that process.  I have encouraged my international counterparts to pursue these avenues of inquiry as well, including in connection with our participation in IOSCO and the FSB.
In part, Commissioner Peirce states:

There is reason to question the materiality of ESG and sustainability disclosure based on existing practices.  In the guidance, the Commission notes that some companies voluntarily disclose environmental metrics.  While such metrics are widely used in the voluntary and supplemental sustainability reports available on company websites, the use of such metrics in annual reports filed with the Commission-where materiality is the controlling standard-is less common.  For example, one sustainability metric highlighted in the guidance, total energy consumed, only showed up in approximately six Form 10-Ks filed in 2019.  Contrast that with another metric mentioned in the guidance, operating margin, which approximately 499 registrants reported in their 2019 Form 10-K.  I am not questioning the materiality determinations of companies that did report these metrics.  Neither am I ready to mandate that every other company make the same materiality determination.

In part, Commissioner Lee states [Ed: footnotes omitted]:

It is also clear that the broad, principles-based "materiality" standard has not produced sufficient disclosure to ensure that investors are getting the information they need-that is, disclosures that are consistent, reliable, and comparable. What's more, the agency's routine disclosure review process could be used to improve disclosure under the materiality standard, but in recent years there's been minimal comment on climate disclosure.  Indeed, investors and shareholders have undertaken an arguably unprecedented and massive campaign to obtain climate-related disclosure from issuers. As a result, most large public companies now provide some sustainability disclosure, including in reports separate and apart from the SEC's required disclosure regime, that provide some of the information sought by investors. But these voluntary disclosures, while a welcome development, are no substitute for Commission action for a number of reasons.
The Federal Reserve Board, the Commodity Futures Trading Commission, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Securities and Exchange Commission invited public comment on a proposal to modify regulations implementing the Volcker rule's general prohibition on banking entities investing in or sponsoring hedge funds or private equity funds - known as "covered funds." 

SEC Chair Clayton's Statement on Proposed Amendments to the Volcker Rule
In part Chair Clayton states that:

[I] believe permitting banking entities to extend financing to start-ups and small and medium-sized businesses through qualifying venture capital funds could benefit the broader financial system by improving the flow of financing to these businesses, while allowing banking entities to compete more effectively with non-bank sources of financing.  Particularly important to me, the proposal could allow banking entities with a presence in and knowledge of the areas where venture capital and other types of financing are less readily available-i.e., "between the coasts"-to provide critical financing to businesses in those areas, as they have traditionally done.[3]  I believe the proposed exclusion for credit funds and certain other proposed amendments could have similar effects-each allowing a larger volume of lending and investing activities to occur in the regulated banking system, which is both geographically diverse and local market-oriented, resulting potentially in significant benefits to local businesses and economies.
In part, the Commissioners state that [Ed; footnotes omitted]:

The proposed amendments seek to address comprehensively the concerns many have expressed about the overbreadth of the Volcker Rule's covered fund provisions-and there have been many such concerns.  Banks and their affiliates can, of course, finance businesses, infrastructure projects, and real estate developments with their own balance sheets.  Until the Volcker Rule was adopted, banking entities financed many such endeavors through funds or other legal entity structures, in partnership with clients willing to make long-term investments in growing enterprises.  These types of arrangements were mutually beneficial; banking clients could invest alongside their bank, and the bank could share risks of its investment projects with its clients.  Also, businesses and entrepreneurs received capital through these funds. 

Since its adoption, the Volcker Rule has impeded banks' and their affiliates' abilities to perform these financing functions through fund structures.  Many banks, particularly regional banks, have been forced to cut back on certain of their investment activities or cease them entirely. This is not a good result for those banks and their clients, who have lost the benefits of making investments together; but also for those businesses, who lost this capital raising opportunity.
In part, Commissioner Lee states that [Ed; footnotes omitted]:

Today we continue the march toward effective repeal of the Volcker Rule. The rule is premised on the common sense proposition that banks should not be allowed to gamble with taxpayer money and that taxpayers should never again be forced to rescue banks and their highly compensated executives from the consequences of their bad decisions.

The Volcker Rule seeks to protect taxpayers by prohibiting short-term, speculative trading by banks and restricting their investments in high-risk funds (referred to as "covered funds"). Last fall, we significantly weakened the former,[1] and today we propose to undermine the latter.

Statement of CFTC Chairman Heath P. Tarbert in Support of Further Revisions to the Volcker Rule
In part, CFTC Chair Tarbert states:

Several months ago, I supported a rulemaking addressing the proprietary trading provisions of the Volcker Rule[1] and laid out my views as CFTC Chairman as well as someone who has witnessed the rule's implementation over the last decade.[2]  The proposal before the Commission today focuses on the other side of the Volcker Rule: the prohibition on activities related to private equity and hedge funds (the "covered funds" provisions).

Although this part of the Volcker Rule has only limited implications for the CFTC and the derivatives markets that our agency regulates,[3] I have voted for the proposal because it represents a more accurate reading of the law Congress actually passed.[4]  With this proposal, however, the Volcker Rule is laid bare and several inherent flaws become all the more apparent.  At the same time, the good news is that, if the proposal is adopted, the Volcker Rule will no longer be applied to investments Congress never intended to be included, such as credit funds, venture capital funds, customer facilitation vehicles, and family wealth management vehicles.  The proposal also contains important modifications to several existing exclusions from the covered funds provisions-for foreign public funds, loan securitizations, and small business investment companies.  In these ways, the proposal moves toward addressing the over-breadth of the covered fund definition and related requirements.

Statement of Dissent by CFTC Commissioner Rostin Behnam Regarding Volcker Covered Funds Proposal
CFTC Commissioner Behnam states [Ed; footnotes omitted]:

I respectfully dissent as to the Commission's decision to propose more revisions to the Volcker Rule.  The Volcker Rule, in simple terms, contains two basic prohibitions for banking entities:  (1) they may not engage in proprietary trading; and (2) they cannot have an ownership interest in, sponsor, or have certain relationships with a covered fund.  Last September, the Commission, along with other Federal agencies, approved changes that significantly weakened the prohibition on propriety trading by narrowing the scope of financial instruments subject to the Volcker Rule. Today, the Commission and the other agencies take aim at the second prohibition, and propose to significantly weaken the prohibition on ownership of covered funds.  When the agencies approved the changes on proprietary trading in September, the late Paul Volcker himself sent a letter to the Chairman of the Federal Reserve stating that the amended rule "amplifies risk in the financial system, increases moral hazard and erodes protections against conflicts of interest that were so glaringly on display during the last crisis."  I can imagine that he would say something very similar about the further changes that we propose today, particularly the erosion of the existing protections regarding conflicts of interest.  I fear that, if we continue to roll back the Volcker Rule, we will soon reach a stage where, sadly, there is nothing left.