In mid October of 2014, the Securities and Exchange Commission (SEC) reported that it filed a record 755 enforcement actions during the fiscal year ending September 2014. According to a press release issued by the agency, those actions included several first-ever cases, such as actions involving “the market access rule, the ‘pay-to-play’ rule for investment advisers, an emergency action to half a municipal bond offering, and an action for whistleblower retaliation.” SEC Chairwoman Mary Jo White has reiterated that the SEC will continue to expand its enforcement efforts in the coming years. That means more SEC enforcement actions, and SEC subpoenas, are on their way.
The SEC’s Division of Enforcement investigates and, in some cases, brings civil charges against individuals and entities for violations of the Federal securities laws. The Division does not prosecute criminal actions but works closely with law enforcement authorities, including the Department of Justice and U.S. Attorneys’ Office, and may refer matters to them under certain circumstances. It is critical to associate with experienced counsel at the outset of the investigation or immediately upon receiving a SEC subpoena. While SEC investigations and enforcement actions often are targeted at investment advisers, brokerage firms, publicly traded companies or others with close ties to the securities industry, individual investors and other members of the public may be pulled into investigations and enforcement proceedings through the use of SEC subpoenas and requests for testimony.
The first time an individual or entity may learn they are the subject of an SEC investigation or enforcement action often is upon receiving a subpoena from the SEC. Our New York, San Francisco, Irvine and San Diego SEC subpoena and enforcement defense attorneys have extensive experience in representing individuals and entities in SEC, FINRA and other regulatory investigations and enforcement proceedings. Contact us today for a confidential analysis of your situation.
A week after Commissioner Pinowar publicly questioned it, the SEC’s march toward admin enforcement seems inexorable. Tuesday brought two good articles on this troubling development, on page one of the Wall Street Journal, and on Bloomberg. Jean Eaglesham’s Wall Street Journal article (Tuesday, October 21, 2014 (“SEC Steers More Trials to Judges It Appoints”)) focuses on the push toward administrative enforcement, while Matt Levine’s Bloomberg post is about insider trading. Both articles cover the preemptive strike in NY Sup. Ct. by the friend-of-the-roommate-of-the-Herbalife-analyst, and raise very troubling questions of where we are headed in this brave new world of White/Ceresney priorities; as we asked recently, “Got (broken) Process?”
Recall that, to obtain an injunction in federal court, the SEC must not only prove each and every element of the underlying securities law violations, but, also and further and separately, the “likelihood of future violations.” The Journal article correctly notes that the SEC often stumbles in federal court when defendants call its bluff, and the notorious Cuban win is only one of quite a handful of defense victories at trial, or, on the eve of it, when the Commission quietly folds. While we are not aware of stats on this, we strongly suspect that these wins have a lot to do with the Commission being vulnerable on the likelihood requirement.
It is important to remember that even the most vile, venal defendant, who is found to have lied, cheated, stolen, and otherwise totally reamed widows and orphans on the baddest scam in history–even this type of dirtbag can win an SEC injunctive case against her if she can demonstrate that, at the time the judge must make his/her ruling (these are bench trials), there is no simply no likelihood that she will engage in misconduct in the future.
On the other hand, if the SEC sues in its own home admin court, it need only make out the underlying violation and not worry about proving likelihood; in fact, we are unaware of any authority for the Commission to seek to enjoin anyone administratively, and such authority does not make sense for obvious statutory reasons. However, the SEC, on a full court press on its own court, can still request and secure draconian sanctions, including penalties and cease and desist orders.
The question “Who should the SEC sue, and where?” entails a particularly critical judgment call in cases involving individuals who are no longer affiliated or engaged in any way with regulated entities such as BDs, RIAs, public companies, or engaged in capital raising activities qua issuer, promoter, finder or the like.
Our view is that, for example, on the presumed slew of Section 5 cases which will continue to be brought–and, as we have written, there are hundreds of clueless and/or arrogant entrepreneurs out there who violate section 5 every day!–on those cases where there is no real fraud, the Commission should think long and hard on whether it is prudent, even legal, to simply sweep them before its own judges. Does such admin enforcement deliver effective, meaningful results, much less long-term value? Whether in federal court or its own court, the SEC should re-read Hecht: “It’s the Public Interest, Stupid!”
The next public guidance will come this Friday when Ceresney, and Commissioners Stein and Gallagher, participate in the Los Angeles County Bar Association’s 47th Annual Securities Regulation Seminar. Let’s hope that we will hear some common sense from these Commissioners and their Enforcement Chief, if not a nod toward a “kinder, gentler” approach toward good actors who merely make dumb mistakes.
Dennis Stubblefield, Erwin Shustak and the team at Shustak Reynolds & Partners, P.C. focus on securities enforcement defense, internal investigations, and litigation and arbitration for broker-dealers, investment advisers, funds and others involved in the retail delivery of financial products and services. Learn more about Shustak Reynolds & Partners, P.C.
Erwin Shustak attended the first annual Arbitrator Appreciation evening hosted in San Diego by FINRA, the Financial Industry Regulatory Authority, the successor to the NASD. Erwin has been a FINRA arbitrator since 1996. Since then, he has been selected to hear dozens of cases involving both public investors and industry disputes, typically acting as the chairperson of the three person panels.
Shustak Reynolds & Partners, P.C. is pleased to announce that Jonah A. Toleno, Esq., a partner based in our firm’s San Diego office, has been named as a finalist for the San Diego Business Journal’s 21st Annual “Women Who Mean Business” Awards. The award honors dynamic women business leaders in San Diego who have demonstrated leadership and excellence in their chosen fields. We congratulate Jonah on her accomplishments and recognition. To learn more about Ms. Toleno’s practice and our firm, please visit our attorney biography page.
Shustak Reynolds & Partners, P.C.’s business and securities lawyers in San Diego, Irvine, San Francisco and New York are highly experienced in handling a wide variety of business disputes, securities and investment disputes, employment disputes, breach of contract claims and other matters. We represent public and closely held companies, brokerage firms, investment advisors, registered representatives and individuals in California, New York and elsewhere across the country.
“If every rule is a priority, then no rule is a priority.” So observed SEC Commissioner Michael Pinowar, in his speech Tuesday, questioning the efficacy of the Commission’s so-called “Broken Windows” approach to Enforcement. His pointed and poignant remarks force the Commission–and really each and every one of us and our clients–to ask the question: “are we properly governing ourselves, and our institutions, and are we effectively accountable to those who we serve?” His comments were delivered on the same day that Rep. Scott Garrett (R-N.J.) told Finra to slow down its ambitious, but very controversial, so-called “CARDS” customer-data-gathering initiative. As reported by Investment News (“Congressman tells Finra to hold CARDS” (by Mark Schoeff Jr.)), Representative Garrett, who heads the House Financial Services Subcommittee on Capital Markets and Government-Sponsored Enterprises, warned that “he is far from convinced that this new, costly and burdensome proposal is needed.” Clearly, serious voices within the Commission, and up the line in Congress, are taking this important debate–about effectiveness of securities regulation and enforcement–to the next level.
We recommend reading the Pinowar speech from beginning to end. It is a due process-based analysis of whether the SEC is properly discharging its Enforcement responsibility. It seeks to generate debate on what it really means to be all about “investor protection” when, Pinowar fears, perhaps too many smaller dollar-figure cases against local predators are being neglected in favor of the more conventional, press-worthy, and stat-driven big institution splashes. He points out, for example, that in big accounting fraud cases, “…the risk to any single investor of financial reporting fraud by any single issuer can be mitigated by holding a diversified portfolio of securities…[o]n the other hand, a dishonest or corrupt broker, investment adviser, or promoter might cause an investor to lose all of his or her investment [which might account] for 100% of that person’s holdings. So we must ensure that our efforts appropriately focus on these types of frauds as well.” (He further notes that many of these frauds are perpetrated against senior citizens and urges that the Commission, which last held a Senior Summit in 2006, put “the protection of seniors back high on the agenda.”).
But Commissioner Pinowar goes further. For example, in suggesting that the mandate of the Commission’s Ombudsman be broadened from its current focus on merely the concerns of “retail investors,” Pinowar reinforces the notion that all constituents–including the individuals and entities regulated by the Commission–deserve fundamentally fair and even-handed treatment, based on the notion of due process, particularly in our brave new world of administrative proceedings on steroids.
As we wrote a few weeks back, “our thoughts exactly.” However, the Commission, to its great credit, continues to do very good things, like pushing out micro-cap enforcement cases and investor alerts, including its most recent: “SEC Staff Issue Risk Alert…” and “SEC Charges Current and Former E*TRADE Subsidiaries…”. Micro-cap fraud (like Ponzi Schemes and their ilk) continues to be a scourge upon the generally honest capital markets. The SEC should make stamping it out–including holding gatekeepers accountable–one of its very highest priorities!
Our vote is for the SEC to do a “Management 101” 360-degree feedback exercise on itself–does anyone see evidence of it here as a predicate for the Commission’s new “Strategic Plan?”–and formulate a truly effective approach to securities enforcement. Every honest and well-meaning constituent would benefit by this, and hopefully at a compliance cost which will not break the bank.
Dennis Stubblefield, Erwin Shustak and the team at Shustak Reynolds & Partners, P.C. focus on securities enforcement defense, internal investigations, and litigation and arbitration for broker-dealers, investment advisers, funds and others involved in the retail delivery of financial products and services. Learn more about Shustak Reynolds & Partners, P.C.
Every successful small business reaches a critical point in its journey, where things get so complex and there is so much work to be done, that the original architects of success are simply too few in number to get everything done. There are a lot of names for this very common problem for small businesses: “Founder’s Syndrom,” “Founderitis,” and even “The Baby Trap.”
What these terms describe is when the founders of a business, who have been responsible for bringing a successful new enterprise into the world, refuse to allow their baby to “grow up” into a mature business. The very people whose genius spawned the business, now hold it back and limit its potential. This leads to stagnant or slow-growth and can even lead to ultimate failure of the business as competitive forces and market changes eat away at the business’ revenue stream.
I was speaking with a professional business coach with over 30 years of experience recently and he said something that I thought was simple but profound: Every business has to think like big business, even if it’s a one-man show, otherwise you cannot grow.
The Solutions:
Business experts, accountants, attorneys, consultants, and other experts talk a lot about how a business is structured. There are opinions both for and against having structure in a business. Some find comfort in a traditional corporate structure with a board of directors, officers, and procedures. Some feel that it is somehow wasteful, or bureaucratic to have structure in a business.
EVERY BUSINESS HAS A STRUCTURE. Every single business ever conceived has a structure, whether people know it or not. Those who operate “without a business structure” are actually operating their business with an unplanned and disorganized structure. Those businesses that have well-defined and faithfully-executed procedures, job descriptions, allocations of responsibility and authority, and utilize this structure, are far more capable of growth.
Every business has someone who performs: Management, Administration, Finance, Marketing, Sales, Production, and Quality Assurance (the “Seven Departments”). If a small business has no plan about how these departments are supposed to work, the business will constantly be in a reactive mode, reacting to problems more often than preventing them. The proverb “penny-wise and pound foolish” comes to mind.
EVERY STRUCTURE HAS ITS LIMITS. The primary hazard of “Founderitis” is the limits this places on the ability of a business to grow. One person can only do so much before they reach their own limit. If a business is to grow beyond its childhood, founders must release the limitations they place on the business. For example, if the founder retains direct control over management, admin, finance, marketing, sales, production, and quality assurance, then as a business grows, more and more of the work falls through the cracks and festers into legal problems, tax problems, or even worse: missed opportunities for greater revenue and profit. Resources that could be devoted to growth are instead devoted to survival.
A mature and well-thought-out business structure gives the small business the strength and ability to actively prevent problems and pursue opportunities, plan for the future, and ultimately increase profits. This happens for two reasons: (1) a deeper and larger talent pool can simply handle more work than founders could ever hope to accomplish on their own, and (2) with responsibility and authority for each area of the business delegated amongst the talent pool, everyone in the organization knows who to go to in order to accomplish the goals of the business, and people are able to do so because procedures are in place to facilitate that active communication.
A mature but poorly-thought-out business structure leads to bureaucratic waste, mismanagement of resources and personnel, poor morale from having “multiple bosses”, and excessive overhead costs.
TREATING SEVERE CASES OF FOUNDERITIS. Founderitis comes down to one issue: control. Founders often have the very-natural and common-sense mindset that “I built this business into what it is, and I know what’s best.” For founders, accepting a more mature business structure, creating formal job titles, creating procedures, and delegating authority feels like they are releasing control. This doesn’t have to be the case. Procedures are the key element. Specifically, procedures for communication.
Effective two-way communication with founders can give them the control they desire, while freeing the business of the limitations of founderitis. The way I recommend accomplishing this involves a couple of different strategies.
First, the founders should receive regular written reports from each of the “seven departments” in a format that is clear and concise. Information is power and ultimately, control. These reports should be informative and complete, but short enough that the Founder doesn’t skip reading them (“TLDR”). The best examples of these that I have seen also have features like checkboxes for the Founder to “authorize” whatever action is being discussed in particular items on the report. This gives the founder a quick and easy method to continue to exercise control over the business.
Second, are regular meetings, preferably scheduled at the beginning of a week or month. This strategy is obviously more complex and harder to do effectively (there are some hilarious videos on the internet about the various follies and failures in company meetings), but just about every mature business enterprise recognizes the value of getting decision makers into a room to talk about what’s going on. Effective meetings (1) have an agenda, which is distributed before the meeting, (2) Stick to the agenda as much as possible, (3) involve discussions that concern the entire group, rather than discussions that could be had one-on-one between the seven departments, (4) Don’t last so long that people tune-out, and (5) have someone (a single person) designated in the meeting who has both the responsibility and the authority to enforce each of these rules. These regular meetings must be attended by the Founders (if it is an inter-department meeting), otherwise the Founders will miss out on gaining the sense of control that they need in order to feel comfortable with the new business structure.
Philosophers may tell us that control is an illusion. I would say that the sense of control is very real in the minds of just about every human alive. It is critical to our sanity to believe we have some control over our lives. For founders to release the limitations placed on their businesses by founderitis, they must shift their perspective from “controlling the business” to “managing a team.” The two strategies laid out above go a long way towards making that shift easier.
What tools do we need to build a mature business structure?
Most of this has been said before, but without the perspective of making the transition described above, things like written contracts, employee handbooks, standard operating procedures, manager handbooks, accounting systems, employee performance appraisal systems, etc. sort of exist only in the abstract. They are things “we all know we should have” but we may not know why, or how it will make businesses stronger and more profitable, while giving the founders the sense of control they need to feel comfortable with growth.
About the author:
John H. Barkley is a Partner with Shustak Reynolds & Partners, P.C. specializing in tax law, employer compliance with the Affordable Care Act, contract drafting & negotiation, employment law, corporate law, John regularly consults on matters of internal accounting, business strategy, growth strategies, strategic partnerships, and assists small businesses with creation of standardized contracts, employee handbooks, standard operating procedures, manager handbooks, accounting systems, and employee appraisal systems. Learn more about John and Shustak Reynolds & Partners, P.C.
This coming January, the rubber meets the road when it comes to employers having to provide minimum essential health insurance coverage to their full-time employees.
At first glance, the final regulations published by the IRS this past February seem serpentine, but they represent a good-faith effort by the IRS to create a workable system for employers to follow in order to comply with the Affordable Care Act (“ACA”). The Act and the Regs lay out what employers must do to follow the law, this article is meant to make certain aspects of the law easier to understand in real-life and suggest some “best practices” to avoid accidental violations.
Applicable Large Employers
The Employer Mandate only applies to Applicable Large Employers (“ALE”). The public perception is that the ACA applies only to businesses with 50 or more employees. While that’s not exactly the case, any employer with at least 50 employees should be familiar with the ACA’s rules. The reason for this is that since the rules are so complex it might be easy to accidentally conclude that a business is exempt, when it is not.
The ACA Employer Mandate applies to employers with 50 or more full time employees. However the definition of “full time employee” is rather complex, and requires an intense amount of very precise tracking of employees’ time, and even requires consideration of vacation and sick leave. So, even an employer with only 20 full time employees and 30 “part-time” employees might accidentally trigger the ACA’s requirements. Making this even more confusing is the fact that employers must evaluate their situation month-by-month, over the course of an entire year.
For employers in situations like this, failure to understand and decide how to approach the ACA could very easily lead to scrambling to figure it all out in the face of an IRS enforcement action.
The Employer Mandate
For Applicable Large Employers, the second, and more difficult question is: who must be covered and when?
The ACA and the IRS regulations lay out some pretty complex rules for determining which employees must be offered health coverage and when that coverage must be effective.
The regulations set out three categories of employees. (1) The current, on-going employees, (2) Those new employees that the employer believes will be full-time from the day they start, (3) Those new employees that the employer “can’t reasonably determine” if they will be full-time from the day they start (so-called “Variable Hour Employees”). Each category has its own rules, and can sometimes even overlap (requiring the employer to apply more than one set of rules). The diagram linked hereis meant to illustrate approximately how these rules apply over time. Again, this comes down to intense and precise tracking of nearly every employee’s hours of service to the employer.
Strictly speaking, the Regs for “Variable Hour Employees” could be read to only apply to those employees that the employer can’t determine if they will be full-time or not. At first blush, this seems to indicate that if the business thinks they are hiring a part-time employee, they don’t need to track that employees’ time. If a business does so, it risks having someone “slip through the cracks” and trigger the penalties. So, prudent businesses should track all new employees as “Variable Hour” unless they’re considered full-time from day one.
The Penalties:
The penalties are the most straight-forward part of the employer mandate. There are two kinds.
The first penalty is triggered if the employer fails to offer coverage to at least 95% of its full-time employees. This penalty equals $2,000 for every full-time employee. This includes all full-time employees, whether they were covered or not. There is an allowance that deducts from the total penalty, but this can still be a significant financial hit even after taking the allowance into account.
The second penalty is triggered if the employer offers coverage that is not affordable. This penalty equals $3,000 for every full-time employee who receives a tax credit against his or her insurance premiums. You also have to figure what your penalty would be under the first method, and take whichever is smaller as the final bill.
The one hidden feature of these penalties is that they are excise taxes and therefore not tax deductible. So practically speaking, the actual cost to the business is actually the penalty plus the business’ effective tax rate (so a $20,000 penalty would cost a C Corp $20,000 in the year the penalty is assessed, and approximately $7,000 in additional income tax for that year depending on the corporation’s actual tax bracket). So in addition to paying the penalties, a business will also later on have to pay at least some income tax on income it never had.
Final Thoughts
This article is meant as a very brief overview and to give some insight into some of the hidden dangers for employers in dealing with the ACA. The realities of the rules are far more complex than can be explained in brief. Navigating its rules for business’ individual situations is an extremely complex task and any business that thinks there is any possibility of triggering the ACA should seek competent advisors on the subject.
About the author:
John H. Barkley is a Partner with Shustak Reynolds & Partners, P.C. specializing in tax law, employment law, corporate law, and employer compliance with the Affordable Care Act. John also regularly consults on matters of internal accounting, business strategy, growth strategies, and strategic partnerships. Learn more about John and Shustak Reynolds & Partners, P.C.
The SEC today announced it was taking steps to bar a former stockbroker and investment adviser who stole $2 million from trusting clients. In 2013 FINRA barred Marshall from associating with any broker-dealer member firm. Last year, the SEC charged Marshall and his investment advisory firms, Bridge Securities and Bridge Equity, Inc., with purloining $2 million for his personal use which he spent on luxury vacations, child support, alimony, private school and summer camps for his kids and other, personal goodies. On September 16th, Judge Timothy Batten found Marshall liable for $1.5 million in disgorgement of profits he gained as a result of his illicit scheme. Marshall began his career at PaineWebber in 1989 and obviously went downhill from there.
Brokers and investment advisers are fiduciaries under many state laws (including California) and federal statutes. Entrusted with other people’s money (the old “OPM”), however, rogue brokers and investment advisers quickly forget the money is not theirs to spend as they want. Although, in this case, Marshall was caught; thrown out of the securities industry and ordered to pay restitution, it is doubtful his victims will see any money from him.
Shustak Reynolds & Partners, with offices in New York and California, has a national reputation for helping victims of dishonest brokers and investment advisers recover their losses. If you, or anyone you know, believes they may have been victimized by a rogue, dishonest broker, contact the firm, attention Erwin J. Shustak, Esq., managing partner. More information can be found at www.shufirm.com
We are pleased to announce that three lawyers from our firm-Erwin J. Shustak, Robert L. Hill and George C. Miller-were selected as SuperLawyers® for 2015. Erwin was named a SuperLawyer® in the business and securities litigation categories, while Robert and George each were recognized as SuperLawyers® “San Diego Rising Stars” in the business litigation and securities litigation categories, respectively.
SuperLawyers® recognizes attorneys who have attained a high degree of peer recognition and professional achievement in their respective practice areas. The award selection process is highly competitive and includes independent research, peer nominations and peer evaluations among attorneys from over 70 practice areas. No more than 5% of practicing attorneys are recognized as SuperLawyers®, while the SuperLawyers® “Rising Star” recognition is given to no more than 2.5% of California attorneys under the age of 40. Courts and Bar Associations across the United States have praised the SuperLawyers® selection process. Award recipients are recognized in the San Diego SuperLawyers and Riviera San Diego magazines which reach thousands of readers each year.
We congratulate Erwin, Robert and George on their accomplishments and recognition. To learn more about our firm and our SuperLawyers® award recipients, please visit our attorney biography page.
Shustak Reynolds & Partners, P.C.’s business and securities lawyers in San Diego, Irvine, San Francisco and New York are highly experienced in handling a wide variety of business disputes, securities and investment disputes, employment disputes, breach of contract claims and other matters. We represent public and closely held companies, brokerage firms, investment advisors, registered representatives and individuals in California, New York and elsewhere across the country.
A recent study from the Public Investors Arbitration Bar Association (PIABA), a group formed to assist investors in recovering investment losses, concludes that the arbitrator pool maintained by the Financial Industry Regulatory Authority (FINRA) lacks diversity.
The PIABA study found that investors often are forced to choose an arbitration panel from a pool consisting of mostly elderly men. According to the investor group, males make up approximately 80% of the arbitrator pool while the average age of arbitrators is 69 years old. PIABA maintains that this lack of diversity is a factor in the declining number of awards favoring investors.
In July of this year, FINRA assembled a 13-person task force to review its arbitration procedures and identify areas that could be improved. According to FINRA, the task force was empaneled to improve the transparency, impartiality, and efficiency of the arbitration process.
FINRA’s arbitration division is the mandatory forum for most investors who bring claims against brokerage firms, stock brokers and financial advisors. In addition, most financial advisors and employees of FINRA brokerage firms must bring any employment disputes in the FINRA arbitration forum. Shustak Reynolds & Partners, P.C.’s securities and investment attorneys in San Diego, Irvine, San Francisco, and New York are highly experienced in handling FINRA customer and employment disputes, as well as FINRA and SEC investigations and enforcement proceedings.
