We have been regularly updating the wave of lawsuits that have been filed against the SEC this year, charging that the Commission’s use of in-house courts to try civil actions against individuals is unconstitutional.
In the wake of these lawsuits, the SEC indicated that it may revise how its internal court system functions for the first time in 20 years. The SEC commissioners voted yesterday to seek public comment over the next 60 days on certain reforms it is proposing, which include: (1) letting the people being sued in the SEC’s internal courts depose witnesses; and (2) providing the defendants more time to prepare for the trial hearings against them.
These proposed changes go to the heart of the practical criticisms against the SEC’s internal courts, namely that a defendant’s discovery rights are seriously curtailed in such a setting, while at the same time the pace of the proceedings is significantly expedited. This often leaves the defendant headed to trial in a few months with very little discovery in hand for his or her defense. It’s likely that the recent crush of litigation – which the SEC probably has gotten the better of, but which has still resulted in defeats at the district court level and a federal appellate stay of one in-house court proceeding in New York – led to this apparent compromise proposal from the SEC.
Note, however, that after the public comment period, the commissioners would have to hold a second vote for the proposed changes to become binding. It would be surprising, though, for the commissioners to change course after taking this rare step of proposing change. We’ll circle back to this issue after that second vote occurs.
Jeffrey Petersen, Esq. Shustak, Reynolds & Partners, P.C. Shustak, Reynolds & Partners, with offices in California and New York, represent clients across a broad spectrum of SEC investigations and enforcement actions. Jeff can be reached in San Diego at 619.696.9500. Dennis A. Stubblefield, Esq., a partner with the firm and former attorney with the SEC Enforcement Division, has extensive experience in SEC investigations and enforcement actions and can be reached in Irvine at 949.451.6800.
Former Morgan Stanley financial adviser Galen Marsh plead guilty to accessing the firm’s computer network without permission, some of which information wound up on a public website.
Between 2011 and 2014, Galen Marsh accessed MS’ database and transferred confidential information on over 730,000 MS customers to a private server he maintained in his New Jersey home, according to prosecutors. Subsequently, information relating to about 900 MS customers wound up on an external website this past January. Marsh had been with Morgan Stanley since 2008 and worked at the firm’s Manhattan location.
According to Marsh’s attorney, Marsh did not post the information he purloined, nor share it with anyone or plan to sell it. Marsh did, however, acknowledge that he should not have obtained the account information. He was promptly fired by MS once the firm learned of the theft and transfer of the client data from its database.
Marsh, who plead guilty before U.S. District Court Judge Kevin Duffy in Manhattan, faces as long as five years of prison when he is sentenced December 7th. Following his guilty plea, Morgan Stanley released a statement that his guilty plea “makes clear that misuse of client account information will not be tolerated”.
Shustak Reynolds & Partners, P.C. focuses its practice on the securities industry and matters affecting broker-dealers and registered representatives. The Firm has extensive experience in the area of broker expungements. For more information, contact Erwin J. Shustak, managing partner, at [email protected], or call 800.496.5900 for a free consultation.
FINRA’s Board of Governors voted to implement several key regulatory changes for broker-dealers including one that will make it harder for brokers to expunge, or erase, customer complaints from their CRD records. The changes are part of FINRA’s continuing efforts to minimize the ability of brokers to redact negative reports and customer complaints from their CRD records following negative reports about customer complaints or other issues. The CRD, or Central Registration Depository, is a FINRA maintained data bank which lists, among other information, broker information and regulatory and customer complaints about those brokers. Through Broker-Check, available to the public through the FINRA website, www.finra.org, the investing public can have simple, free access to those reports.
In its initiative, FINRA reminds its arbitrators that expungement of customer complaints and other negative reports on brokers “is an extraordinary remedy that should be recommended only under appropriate circumstances” and that “customer dispute information should be expunged only when it has no meaningful investor protection or regulatory value”.
This latest movement by FINRA follows on the 2013 highly controversial report issued by the Public Investor Bar Association (PIABA), a group of plaintiffs’ lawyers, which showed that expungement requests were granted in as many as 90% of cases resolved by settlement or stipulated awards before FINRA arbitration panels.
As part of that effort to make it more difficult for brokers to expunge customer complaints from their CRD record, FINRA last year proposed, and the SEC approved, an amendment that prevented member broker-dealer firms from including an agreement that the settling claimant would not oppose expungement of the broker’s records as part of any settlement.
While FINRA continues to tighten the rules allowing expungements, there still are avenues for a broker disputing an untrue or unfair report to challenge and expunge the customer complaint from his or her CRD record.
Shustak Reynolds & Partners, P.C. focuses its practice on the securities industry and matters affecting broker-dealers and registered representatives. The Firm has extensive experience in the area of broker expungements. For more information, contact Erwin J. Shustak, managing partner, at [email protected], or call 800.496.5900 for a free consultation.
Two federal appellate courts, the Seventh and Second Circuits, respectively, have recently weighed in on the issue of the SEC’s use of in-house administrative judges in civil enforcement proceedings against individuals. Many of the respondents in such cases have challenged the constitutionality of the forum, essentially arguing that the SEC cannot use the ultra-expedited internal proceeding with its hand-picked administrative judges to impose potentially severe civil penalties on individuals.
The recent Seventh Circuit opinion in Bebo v. SEC served as an important victory for the SEC on this issue, as the Court there found that the federal courts lacked jurisdiction to determine Bebo’s challenge to the administrative proceeding at this time. Instead, Bebo will have to wait until any appeal of the SEC administrative court decision to present her challenge to that forum to an appellate court.
In its decision, the Seventh Circuit followed the reasoning of the majority of federal courts that have ruled on the issue, stating that it was apparent from the statutory framework that Congress intended judicial review to occur within the regular SEC administrative process of administrative decision followed by appellate review, if desired, rather than proceeding outside that process immediately to a federal court. The decision is of major importance because it will serve as the first marker – in the SEC’s favor – of appellate decision in this hotly contested arena.
Over in the Second Circuit, the appellate court there just yesterday issued an exceptionally unique ruling, ordering a halt to an SEC administrative proceeding against New York financier Lynn Tilton. The matter had been set to go to trial on October 13th. The lower federal court had previously rejected Tilton’s efforts to bar the administrative case from going forward, and her appeal on the matter was heard by the Second Circuit this past Wednesday. Although the rare order to halt the case does not necessarily suggest that the Second Circuit is inclined to rule contrary to the Seventh Circuit’s recent decision (and/or otherwise favorably to the Commission), it does illustrate that the Second Circuit’s concerns about the implications of the SEC’s use of the administrative forum are substantial enough to take a pre-emptive approach to use of that forum in this case.
New law is being made in this arena—including SEC Enforcement across the board, particularly in Insider Trading cases—every week, it seems, and the fallout will dictate how individuals must respond to SEC civil enforcement actions going forward.
Dennis A. Stubblefield, Esq. and Jeffrey T. Petersen, Esq. Shustak, Reynolds & Partners, P.C., with offices in California and New York, represent clients across a broad spectrum of SEC investigations and enforcement actions. Dennis can be reached in Irvine at 949.451.6800 and Jeff can be reached in San Diego at 619.696.9500.
Massachusetts Secretary of the Commonwealth, William Galvin, responsible for policing the state’s securities laws, announced his office sent letters to Bank of New York Mellon Corp., which provides third-party services to fund companies, and six top assets managers as part of an investigation by his office “to address concerns that individual investors may have suffered losses” if they were unable to trade funds “at accurate prices.” The six asset managers involved are Goldman Sachs Group Inc., Deutsche Bank AG, First Trust Portfolios, Guggenheim Partners, Prudential Financial Inc. and Federated Investors Inc.
On August 22nd, a full accounting platform used by BNY Mellon collapsed during routine maintenance. That system crash delayed accurate accounting of the value of billions of dollars funds issued by at least 46 fund companies, Galvin said.
The delays and mispricing forced BNY Mellon and SunGard, the system developer, to work around the clock to deliver accurate pricing to its clients. They’ve also been an enormous embarrassment for the mutual fund and exchange-traded fund industries, casting a spotlight on the accounting, technology and other so-called back-office operations that support an industry responsible for $33 trillion in savings globally.
The investigation sheds light on one of the dirty dark secrets of the investment world. Accurate pricing and a smooth operating trading and pricing system is almost totally dependent on less than perfect computers and electronic data bases.
Shustak Reynolds & Partners, P.C. has extensive expertise and experience in the areas of securities, financial services and business law. For more information contact Erwin J. Shustak, Esq, Managing Partner, at 619.696.9500 or via email at [email protected]
Former investment manager Joseph Zada, charged with swindling $43 million from former Detroit Red Wings star Sergei Fedorov was convicted in Florida last week of 15 counts of fraud and faces a 20 year prison term. The specific charges on which he was convicted also included two counts of making false statements in connection with a loan application. Zada is also charged with stealing millions from other dozens of other, unsuspecting investors.
Fedorov, 45, won three Stanley Cups and a Hart Trophy as the NHL’s most valuable player while a Red Wing from 1990-2003.
According to court records, Zada swindled the money by pretending to be a rich and successful businessman with ties to Saudi Arabian oil ventures. Zada told potential investors that he could quickly turn investments into large profits. Ultimately, Fedorov brought a civil suit against Zada in 2009 for embezzling $43 million over 11 years.
Like many fraudsters, Zada hosted extravagant parties, drove luxury cars and kept expensive homes in Grosse Pointe and Florida, according to federal documents. Zada used his victims’ money to pay for his lifestyle, according to the government.
Fedorov met Zada in 1998, the same year he signed what was at the time one of hockey’s most lucrative contract’s ever — a $38-million, 6-year deal. Fedorov invested money with Zada but their relationship quickly soured. Whenever Fedorov inquired about the money, Zada “intentionally lied,” according to the lawsuit, and provided him with false information and other “deceptions.” Zada and Fedorov struck a deal that called for Zada to pay Fedorov $60 million but he never paid.
Shustak & Partners, P.C. has extensive expertise and experience in the areas of securities, financial services and business law. For more information contact Erwin J. Shustak, Esq, Managing Partner, at 619.696.9500 or via email at [email protected]
Governor Jerry Brown recently signed Senate Bill 470, which amends California Code of Civil Procedure section 437c regarding summary judgment and summary adjudication. In addition to correcting grammar throughout the code section, the amendments will excuse judges from ruling on all evidentiary objections deemed not material to a motion for summary judgment. The following subsection will be added to the code section effective January 1, 2016:
“(q) In granting or denying a motion for summary judgment or summary adjudication, the court need rule only on those objections to evidence that it deems material to its disposition of the motion. Objections to evidence that are not ruled on for purposes of the motion shall be preserved for appellate review.”
This amendment codifies the 2010 California Supreme Court case Reid v. Google, in which the court held evidentiary objections contained in summary judgment papers are preserved for appellate review even if the trial court does not rule on the objections. The amendment will lift some of the burden from the courts of having to rule on the voluminous evidentiary objections attorneys frequently include in summary judgment papers. However, it will not relieve practitioners from having to make all necessary objections in their papers; objections not made in the parties’ papers will not be preserved for appeal.
Shustak Reynolds & Partners, P.C.’s San Diego, Irvine, Los Angeles, San Francisco, and New York attorneys handle a wide range of litigation and arbitration matters. Contact us today for a confidential analysis of your situation.
