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Neil Baritz recently testified as Respondents’ expert on the issue of the reasonableness and amount of attorneys’ fees incurred in defending a FINRA arbitration (Lucy Chua, as Trustee of Yife Tien Trust, et al, v. Int’l FCStone Financial Inc., et al., Case No. 18-02134). Peter Fruin and his team at the Maynard Nexsen firm did the heavy lifting and their efforts were clearly rewarded – the Award reflects that all claims were dismissed, the individual Respondents were granted expungement relief, and Respondents were awarded attorneys’ fees of $1.8 million and costs of $294,024!
FINRA is making expungement more expensive beginning September 14, 2020.
Now is the time for financial advisors to think about improving their public-facing CRD record. Read more
April 23, 2020
“Don’t count the days, make the days count.”
-Muhammad Ali
Many of us find ourselves in an odd position these days: stuck at home in a constantly changing – often for the worse – economic environment over which we often feel helpless. While waiting for this uncertain time to pass, registered persons can take control of the situation by acting now to expunge false claims from their CRD records.
Financial advisors should use this time to improve their public-facing record and, in the process, make themselves more attractive to future employers and potential clients.
As his or her public-facing “permanent record,” a broker’s CRD has become more publicly accessible in recent years, and the SEC’s new Form CRS requirement will further make available any CRD disclosures to new and potential clients.
As a result, it is now even more important to pay attention to and manage that record. It often seems unfair that any complaint, however frivolous or false, is included on the CRD. But that is why FINRA’s expungement process is so important.
A surprising number of advisors still have CRD disclosures from complaints lodged during and after the 2008 market failure. Specifically, disclosures related to certain securities transactions from that time remain ripe for expungement – at least until FINRA succumbs to external pressure to changes its rules and limit the look-back time.
Under current FINRA rules, expungement requests can be heard pursuant to FINRA’s Simplified Arbitration procedure, meaning the request is heard in front of a single arbitrator as opposed to a panel of three. There are a number of procedural benefits to this process, including lower fees and an expedited timeline.
However, FINRA has indicated its intent to revise its expungement rules to make the expungement process more arduous and significantly more expensive.1
As FINRA shuts down some aspects of its dispute resolution process until at least June, expungement hearings, most of which occur telephonically and are not subject to social distancing restrictions, will continue unabated. This makes now an ideal time to file expungement claims under the current, more broker-friendly rules.
This means that, even during this unpredictable time of nationwide shutdowns and quarantines, financial advisors can take action to improve their job security and increase their marketability. It’s an opportunity to take some control over your career in a seemingly uncontrollable environment.
Now is the time to act. While financial advisors are working overtime to help clients manage through the current health and market turmoil, we are available to take this time to help prepare for what’s next.
1 If you need more incentive to act now: FINRA has proposed rule changes that would, among other restrictions, (a) prohibit expungement of complaints over a year old and (b) require 3 arbitrators and higher fees for expungement claims.
For more information, please contact:
John Stewart, Esq.
Baritz & Colman LLP
The Woolworth Building
233 Broadway, Suite 2020
New York, NY 10279
Tel: 212-886-1693
Fax: 212-886-1694
www.baritzcolman.com
Baritz & Colman LLP
1075 Broken Sound Parkway, NW
Suite 102
Boca Raton, Florida 33487
Tel: 561-864-5100
Fax: 561-864-5101
www.baritzcolman.com
Baritz & Colman LLP provides securities arbitration, regulatory, litigation, corporate, employment practices, white collar criminal defense and real estate services to clients nationwide. The firm maintains offices in Boca Raton, Florida, and New York City.
A deluge of lawsuits under the Americans with Disabilities Act is sweeping through the courts. The litigation, which began almost two decades ago but has been picking up steam in recent years, is predicated on the theory that business websites are places of public accommodation under the ADA and thus must be accessible to individuals with visual or hearing impairments. Absent DOJ or Congressional guidance as to how the ADA is to be interpreted in the digital age, the risk of such claims under the ADA is higher than ever. Read more
March 6, 2020
“The power of the Web is in its universality. Access by everyone regardless of disability is an essential aspect.”
Tim Berners-Lee
Inventor of the World Wide Web
The Americans With Disabilities Act is a civil rights statute designed to prohibit discrimination against the disabled by assuring them equal access to places of public accommodation. It is an outgrowth of the disability rights movement that found its legal voice with the passage of Section 504 of the 1973 Rehabilitation Act, which prohibited disability-based discrimination by recipients of federal funds. The enactment of the ADA also followed determined efforts by the disability community during the 1980’s to generate Congressional support (and more enlightened decisions by the U.S. Supreme Court).
Title III of the ADA mandates that all businesses serving the public, identified as places of public accommodation, remove all physical barriers that would hinder a disabled individual from accessing the goods and services offered by those businesses. The Department of Justice is charged with enforcing the provisions of this Title.
When the ADA arrived, the Internet was still in its infancy. At that time, access barriers meant literally that, e.g., stairs that impeded a wheelchair-bound customer from entering a store. As Internet usage exploded, however, courts (starting with a lawsuit against Bank of America in the year 2000) began empathizing with the plight of visually- and hearing-impaired people facing different kinds of barriers: those posed by “unfriendly” websites that lacked assistive technologies.
In 2010, the DOJ asserted in an Advance Notice of Proposed Rulemaking that business websites are effectively extensions of places of public accommodation under the ADA and that Title III would be amended to ensure its applicability to websites. In 2016, the DOJ went even further by vigorously supporting a visually-impaired plaintiff’s position in a Federal Court case filed against Winn-Dixie Stores, Inc., a Florida supermarket chain. In the first case of this kind to reach trial, the Judge, without a jury, found for the plaintiff. The matter, however, is currently on appeal to the 11th Circuit Court of Appeals. The Florida Justice Reform Institute, comprised of a diverse group of industries, has joined the battle on the side of Winn-Dixie in an effort to demonstrate that the language of the ADA does not require websites to accommodate the disabled.
So far, the DOJ has not, as promised, updated its regulations this year. This past January, the Trump Administration apparently pressured the DOJ to move its ADA guidelines agenda to an “inactive” list. This action begs the question as to whether the DOJ, at some point, will be compelled to withdraw its prior support for the disability community and to abandon its previously expressed intention to formally impose regulatory constraints on businesses acting through websites. If that happens or if the DOJ simply backs away, the plaintiffs’ bar will likely rush in.
A legal landscape devoid of clear and comprehensible guidance from the DOJ (or, for that matter, from Congress) poses a challenge for our judiciary. Courts, facing an expected surge of lawsuits by disabled plaintiffs alleging discrimination in website accessibility (well over 600 such cases have been filed since 2015), will be asked to render decisions without the benefit of any statutory or regulatory framework.
One large law firm that has been involved in this controversy has responded to the DOJ’s latest pronouncement that it will not issue guidelines for website accessibility anytime soon:
“This is an unfortunate development for the disability community and covered businesses alike. Instead of having clear rules to follow, businesses will have to look to the constantly evolving patchwork of decisions coming out of the courts for guidance. Meanwhile the number of website accessibility lawsuits continues to surge as businesses scramble to make their websites accessible.”
A serious litigation risk, a by-product of the Digital Revolution, has emerged for businesses dealing with the general public. While expanding their reach via the Internet, these businesses have exposed themselves to a new universe of potential plaintiffs: individuals whose access to the Internet is compromised by their physical, mental or emotional disabilities who seek recourse under the ADA. This exposure can be quite costly – both financially and from a public relations perspective.
By taking note of the prescient pronouncement by Sir Berners-Lee, we arrive at the current-day intersection of the Internet and the ADA, and what has become an avalanche of claims under the ADA by disabled individuals alleging insurmountable barriers to website accessibility.
The litigation floodgates are open and the torrent of website accessibility lawsuits has already begun. While the cases in play now deal, for the most part, with plaintiffs suffering visual or hearing impairments, what is to prevent others with, e.g., dyslexia, ADD/ADHD, cognitive issues and paralysis from entering the fray? What is particularly concerning about such a prospect – a dilemma, actually – is that modern day, technologically-driven businesses, like those before them, predicate their very existence on a philosophy of cost-consciousness. That mindset now needs to be expanded to accept the new reality of the ADA’s reach. While monetary damages are not available to successful plaintiffs under ADA Title III, a losing defendant may still confront very significant legal fees – both its own and those incurred by the plaintiff. And that financial exposure is further increased by the high cost of repairing the offending website.
The ADA legal terrain, as it relates to Internet websites, is uneven. Courts are divided. The first issue before them is the applicability of the ADA to websites. If it is, the next question is whether all Internet businesses are covered (as a Massachusetts State Court held in a case against Netflix which led to a settlement of $750,000) or just those which also operate through physical (brick-and-mortar) locations (as was held by the 9th Circuit Court of Appeals in another Netflix case).
In this Bulletin, we examine a recent decision vacating a FINRA Arbitration Award for 'manifest disregard'. Read more
March 18, 2019
“Remember not only to say the right thing in the right place, but far more difficult still, to leave unsaid the wrong
thing at the tempting moment.”
-Benjamin Franklin
Practitioners in the world of FINRA arbitration know certain truths to be self-evident. One is that unless specifically requested by both sides, Arbitrators are not required to provide explanations for their Awards. We have all seen many large or significant Awards that are maddeningly silent even as they dole out seven-figure sums to delighted claimants.
This Bulletin discusses a recent decision from the Fourth Circuit that highlights the perils to Panels (and prevailing parties) of uttering even the most minimalist explanations for their Awards. (It also provides us a platform to digress about the benefits and detriments of mandatory arbitration of FINRA disputes.)
A. THE CLAIMS
In Interactive Brokers LLC v. Saroop, C.A. 3:17-cv-127 (E.D. Va. Dec. 18, 2018), [link to Decision] customers of an on-line brokerage firm, Interactive Brokers, commenced a FINRA arbitration proceeding against the firm for the loss of the entire value of their account (hundreds of thousands of dollars).
Claimants alleged that they traded naked short call options on portfolio margin in their Interactive accounts on the advice of an independent advisor, Brar Capital. Brar Capital was unaffiliated with Interactive, and claimants did not allege that Interactive was asked to, or rendered, any investment advice.
Following the Dow’s largest one-day decline in its history, in August 2015, the value of claimants’ accounts decreased by 80%. Claimants alleged that Interactive’s “auto-liquidation” process to address their margin deficiencies wiped out the balance of claimants’ accounts, leaving a six-figure margin debit.
Claimants initially alleged multiple claims, including breach of contract, negligence, violation of state securities statutes, and unjust enrichment. By close of the Hearings, they had reduced it to two: that the securities were ineligible for margin under FINRA Rule 4210, and that Interactive’s liquidation process was unreasonable. Interactive counterclaimed for the debit balance. The parties did not request that the Panel issue an explained decision.
B. THE AWARD
The Panel awarded claimants all their alleged compensatory damages, plus attorneys’ fees equivalent to 30% of compensatories. Without more, no basis for vacatur here, right? But wait. The Panel also stated in the Award that its ruling was solely “based on [Interactive’s] violation of FINRA Rule 4210,” which governs margin and portfolio margin requirements for member firms. To wit, that “[t]he securities placed in the portfolio margin account were not eligible for that account based on [Rule 4210].”
Oops. Interactive brought an action in Federal District Court seeking vacatur of the Award on the grounds that the Panel had manifestly disregarded the law.*FINRA rules, such as 4210, do not provide a private right of action for investors. According to the Panel, that was the sole ground for its award to Claimants and dismissal of Interactive’s counterclaim. Interactive also argued that there were no rational bases for the amounts of damages and attorneys’ fees awarded.
The court remanded the Award to the Panel for “clarification.” In response, the Panel made its disregard even more manifest, and reiterated its position that the Panel should “enforce a FINRA rule [4210]” so as not to “provide an opportunity for investors to commit financial suicide by investing in securities that are ineligible for inclusion in a portfolio margin account.” In other words, the Panel was providing to claimants the non-existent private right to relief under FINRA Rule 4210.
And so the court ruled: the court held that “the law is clear that there is no private right of action to enforce FINRA rules,” and that “the arbitrators knew of and understood the law,” and “they ignored it.” (Slip Op. at 19.) The court “reinstated” Interactive’s counterclaims, and remanded the dispute “to a new panel of arbitrators.” (Id.) Claimants have appealed the court’s decision to the Fourth Circuit Court of Appeals
What can we learn from the errors of the obdurate SaroopPanel? For panels: when crafting an Award, the less said the better – if the parties don’t ask for an explanation, don’t give one. For litigants: if you believe you have a strong case, do not agree to a reasoned or explained Award, lest you prevail and set up the Award for a petition to vacate – and the accompanying protracted court proceedings.
While we’re on the topic (sort of), some observations on the pros and cons of mandatory FINRA arbitration.
PROS:
1. Awards are generally not appealable, thus avoiding a potentially lengthy and expensive appeal process.
1. FINRA arbitration does not authorize expensive and time-consuming discovery tools such as depositions and written interrogatories.
1. Unlike juries, panels are composed of people familiar – if not expert – in the rules and practicalities of the securities industry.
1. For industry members and reps, there is a perception that panels tend to have a pro-industry bias.
CONS:
1. No motion practice. A case like Saroop appears apt for summary judgment disposition, if not F.R.C.P. 12(b)(6) dismissal.
1. Awards are generally not appealable, so there is no recourse for even the most egregious panel conduct. The decision in Saroopwas a rarity indeed, and arose out of an unusual misstep by the Panel. In some jurisdictions, such as New York, courts are so arbitration friendly that they will not hesitate to sanction lawyers who bring even facially meritorious petitions to vacate.**
1. While FINRA rules limit discovery, we have encountered many customer and rep agreements that provide for other arbitral forums, such as JAMS or AAA, and such arbitrators often permit depositions and interrogatories – you might as well be in court.
1. While FINRA arbitrator compensation is modest, forums such as JAMS and AAA provide for handsome compensation for arbitrators – often their going hourly rates for their private practices. In one case, a client ended up compensating a single arbitrator in excess of $100,000 for his services. (We prevailed.)
Arbitration agreements continue to be prevalent and enforceable in the securities industry. But it may be time for the industry to reconsider just how much is gained versus how much is lost strategically.
For more information, please contact:
Baritz & Colman LLP
1075 Broken Sound Parkway, NW
Suite 102
Boca Raton, Florida 33487
Tel: 561-864-5100
Fax: 561-864-5101
www.baritzcolman.com
Baritz & Colman LLP
The Woolworth Building
233 Broadway, Suite 2020
New York, NY 10279
Tel: 212-886-1693
Fax: 212-886-1694
www.baritzcolman.com
Baritz & Colman LLP provides securities arbitration, regulatory, litigation, corporate, employment practices and real estate services to clients nationwide. The firm maintains offices in Boca Raton, Florida, and New York City.
*“Manifest disregard” is not a basis for vacatur under the Federal Arbitration Act. However, many jurisdiction – both state and federal – provide such a basis. (A topic for another B&CLLP Bulletin, perhaps.)
**See, e.g., Digitelcom, Ltd. v. Tele 2 Sverige AB, 2012 WL 3065345 (S.D.N.Y. July 25, 2012)
Back in May of 2015, we posted a Bulletin in this space regarding the DOL’s then-proposed Fiduciary Rule for investment advisors. In April 2016, DOL promulgated the Rule to much fanfare. Not so fast, guys. In this Bulletin we discuss the recent Fifth Circuit Court of Appeals decision vacating the DOL Fiduciary Rule. Stay tuned to this space for subsequent judicial proclamations about the Rule.
On behalf of the firm, John Stewart recently filed a comment with FINRA with respect to its pending proposal to amend its expungement rules (Regulatory Notice 17-42). While based on the premise that there is a perceived need for increased customer participation in the expungement process, in our view, Regulatory Notice 17-42 reflects FINRA’s ongoing efforts to effectively further limit a financial adviser’s access to the process. If approved, we believe a consequence will be decreased access and result in a legacy of potentially prejudicial, false misleading and inaccurate reporting.
Baritz & Colman LLP, due to writing title for almost $500,000,000 in transactions, was recognized by First American Title Insurance Company as one of the "Top Five" agents in Palm Beach County for 2016.
We are pleased to announce Ned R. Nashban has joined Baritz & Colman LLP as a Partner in the firm's Florida office. Ned concentrates his practice in the areas of commercial litigation, business law, bankruptcy or creditor's rights and problem loan workouts, for more than four decades. Prior to joining the firm, Ned was a partner at Glaser Weil Fink Howard Avchen & Shapiro LLP and is actively involved as a member of State of Israel Bonds' Board of Directors. He is a member of the Florida and Wisconsin Bar Associations.
We are pleased to announce Andrew Thomson has joined Baritz & Colman LLP as Senior Counsel in the firm's Boca Raton office. Andrew concentrates his practice in business litigation, including securities litigiation and governmental investigations. Prior to joining the firm, Andrew was an Associate at Proskauer Rose LLP. Andrew is a graduate of Georgia Institute of Technology and earned his Juris Doctor from University of Miami School of Law. He is a member of The Florida Bar.
We are pleased to announce Lauren Galvani has joined Baritz & Colman LLP as a Senior Associate in the firm's Boca Raton office. Lauren concentrates her practice in the areas of estate planning, estate and trust administration, public charities and private foundations, business succession planning and wealth preservation for high net worth individuals and families. Prior to joining the firm, Lauren was a senior associate at a boutique estate planning practice serving high net worth individuals. Lauren is a graduate of Boston College and earned her Juris Doctor and her LLM (Masters in Taxation) from the University of Miami School of Law. She is licensed to practice in Florida and Massachusetts.
Aaron Taishoff wrote an article that was published in the October 2015 edition of the New Jersey Labor and Employment Law Quarterly. The article focused on the recent decision in Khazin v. TD Ameritrade Holding Corp., 773 F.3d 488 (3d Cir. 2014), in which the Court of Appeals for the Third Circuit held that the Dodd-Frank Act's whistleblower retaliation protection provisions do not prohibit the enforcement of employment agreements containing pre-dispute arbitration clauses. Baritz & Colman LLP represents the defendants in this case.
We are pleased to congratulate Aaron Taishoff for being named to the Super Lawyers Rising Stars list for the second straight year! Each year, less than 3 percent of the lawyers in the state are selected by Super Lawyers to receive this honor. Super Lawyers, a Thomson Reuters business, is a rating service of outstanding lawyers from more than 70 practice areas who have attained a high degree of peer recognition and professional achievement. The annual selections are the result of a process that includes a statewide survey of lawyers, an independent research evaluation of candidates and peer reviews by practice area.
We are pleased to announce Heather Cooper has joined Baritz & Colman LLP as an Associate in the firm's Boca Raton office. Heather concentrates her practice in the areas of securities arbitration, commercial and real estate transactions, and corporate matters. Prior to joining the firm, Heather worked as a law clerk at Florida's Office of Financial Regulation. Heather is a graduate of the University of Florida and earned her Juris Doctor from the University of Florida Levin College Of Law.
We are pleased to announce that John Stewart has joined Baritz & Colman LLP as an Associate in the firm's New York office. John concentrates his practice in the areas of corporate, real estate and employment litigation and arbitration. Prior to joining the firm, John was a Captain in the United States Army Judge Advocate General's Corps, and prior to his military service, John was an Associate at a prominent large law firm in Manhattan. John is a graduate of Tufts University and earned his Juris Doctor from the Fordham Law School.
Recently, New York Partner David S. Richan was quoted at length in the Wall Street Journal as an authority on disputes between financial advisors and their employers
On April 23, 2015, Neil Baritz was an invited speaker at the Financial Markets Association 2015 Securities Compliance Seminar in Ft. Lauderdale, Florida. The topic was Establishing Effective Policies, Procedures and Best Practices for Dealing with Elderly Clients. The panel was moderated by William Reilly, Associate Director of Oyster Consulting. Mr. Baritz was joined on the panel by Joseph Borg, Director of the Alabama Securities Commission and Ronald Long, Director of Elder Client Initiatives and Regulatory Affairs at Wells Fargo Advisors.
The United States Department of Labor recently issued its version of a proposed fiduciary rule. The proposed rule, and the political history leading to its release, is discussed in the attached bulletin. While the SEC is "still working" on their own version of a fiduciary rule, the DOL jumped ahead in the looming political battle, basing its proposed rule on the premise that conflict-laden commission based advice is costing retirement account holders up to $17 billion per year. The problem with DOL's proposal, we posit, is that while it may ultimately have merit, the rule proposal fails to address, among other things, how existing rules and regulations have failed, or identify actual victims of non-fiduciary based investment advice. Read more
May 3, 2015
"While legislation obviously is political, we now have allowed regulation to become politicized, which we believe will likely lead to some bad outcomes."
-James Dimon
In the almost five years since Dodd-Frank was enacted, a multitude of constituencies have sounded off on the pros and cons of a uniform fiduciary standard for the entirety of the financial services community, including broker-dealers, investment advisers, and life insurance agents. The latest to throw its hat in the ring is the Department of Labor, seemingly holding the view that retirement account holders are somehow being victimized by a theoretical conflict inherent in commission-based financial advice. The fact that the DOL has the White House as its partner, evidenced by a leaked “memo” authored by President Obama's Council of Economic Advisers, leaves a stench of executive fiat and bespeaks another example of politically motivated regulation in search of a problem.
In the words of SEC Commissioner Daniel Gallagher, the "White House memo is thinly-veiled propaganda designed to generate support for a widely unpopular rulemaking." We agree. More to the point, if the process were to have any intellectual integrity, the White House, DOL's proposal and the CEA memo should each have lead with an empirical evaluation of how the current mountain of rules and regulations to which the financial advisory and broker-dealer communities are now subject, are failing the investing public. Moreover, one would hope for an impact study of how those affected by dueling and often inconsistent regulatory regimes (including the SEC, FINRA and the DOL, among others) would be expected to comport themselves.
The DOL, on its website, champions its own cause with the following Q and A:
Q: But what evidence do you have that a financial adviser's conflicts of interest harm savers?
A. Based on extensive review of independent research, the White House Council of Economic Advisers (CEA) has concluded that conflicted advice causes affected savers to earn returns that are roughly 1 percentage point lower each year (for example, a 5 percent return absent conflicts would become a 6 percent return). As a result, a retiree who receives conflicted advice when rolling over a 401(k) balance to an IRA at retirement will lose an estimated 12 percent of the value of his or her savings if drawn down over 30 years. If a retiree receiving conflicted advice takes withdrawals at the rate possible absent conflicted advice, his or her savings would run out more than 5 years earlier. Since conflicted advice affects an estimated $1.7 trillion of IRA assets, the aggregate annual cost of conflicted advice is about $17 billion each year.
And what is the basis for the CEA's conclusion? Sounds very much like the cart before the horse. Last we checked, a conflict does not by definition translate into wrongdoing, much less actual losses.
If we are to have an honest and open and, dare we say, apolitical debate on the subject of a uniform fiduciary standard, should we not first accept or reject the current regulatory constructs? Should we not be intellectually honest with ourselves and first conclude that existing rules and regulations have failed to protect the investing public? Evidently not. In a speech at AARP in Washington this past week, President Obama had already determined that "we don't have the rules and regulations to protect those who we're supposed to be serving."
The CEA memo concludes that current phantom consumer protections cost IRA investors up to $17 billion a year in excessive fees. One would think that such a bold conclusion would be supported by empirical study and a thorough evaluation of the relative performance of the so-called evil commission and conflict laden investment advice behind these alleged "excessive fees." We keep looking for an analysis of how the current rules, principal among them, FINRA's Rule 2111, which requires a broker to make a suitability evaluation for every investment recommendation, have been determined to fall short. That is, where are the victims? Where are the legions of so-called bad-actors being pursued by regulators for their supposed sins?
Meanwhile, back at the SEC ranch, Chairwoman Mary Jo White continues to report that her staff is studying the issue. For what it's worth, it's clear that the White House and DOL just upped the proverbial regulatory ante. We continue to look for phantom victims amongst the vast investing public, much as we look for consensus among the affected parties – but it is likely not to matter. While investment advisors and broker-dealers have been regulated under different standards of care for over 70 plus years now, we suspect that the result of the battle will be conformity, to one degree or another. We neither oppose conformity nor a level playing field; we just wish the process had some integrity.
For more information, please contact us.
On January 30, 2015, Neil Baritz was an invited presenter at TD Ameritrade Institutional's National LINC Conference in San Diego. In a post Dodd-Frank regulatory environment, Neil gave a presentation to an audience of registered investment advisers in which he made the case for a new self-regulatory body, separate and apart from FINRA, designed solely for the advisory community.