We previously reported on the problems of RGT Capital Management and its former Managing Director, Ash Narayan. For those prior articles, please visit www.shufirm.com/blog.
Last week, the Securities and Exchange Commission revoked Narayan from working in the securities industry and working for any broker-dealer, investment advisor, transfer agent, municipal advisor and other, securities related companies. This was part of the SEC’s on-going investigation into Narayan and his diversion of millions of dollars of money belonging to RGT clients into businesses, including the now defunct Ticket Reserve. Specifically, the SEC made the following findings with regards to Narayan:
– Narayan, age 51, is a resident of Newport Coast, California. From February 1997 through February 2016, Narayan was the Managing Director of RGT’s Irvine, California office. Narayan was registered as an Investment Adviser Representative of RGT until the termination of his employment. Prior to working at RGT, Narayan was a Senior Manager at Arthur Anderson in Los Angeles, California. Narayan received a law license in November 1991, obtained a Series 65 license in August 1995, and became a licensed Certified Financial Planner in November 1998.
– On November 21, 2016 a judgment was entered by consent against Narayan, permanently enjoining him from future violations of Sections 17(a) of the Securities Act of 1933 (“Securities Act”), Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 promulgated thereunder, and Section 206(1)(2) of the Investment Advisers Act of 1940 (“Advisers Act”), in the civil action entitled Securities and Exchange Commission v. Ash Narayan, et al. , Civil Action Number 3:16-cv1417M, in the United States District Court for the Northern District of Texas.
– The Commission’s civil complaint alleges that, while working as an RGT investment adviser representative, Narayan violated his fiduciary duties to his clients by placing them in unsuitable private investments. The complaint further alleges that he often did this without his clients’ consent. In addition, the complaint alleges that Narayan received over $1.8 million in undisclosed payments from one of the private companies after placing his clients in these investments. Finally, the complaint alleges that Narayan held himself out as a Certified Public Accountant, even though he was not a licensed CPA.
We will monitor future proceedings involving Naryan and we fully expect a criminal indictment will follow. Typically, in frauds of this kind, the SEC first brings administrative, civil proceedings and, once all facts are developed, the case is referred to the Department of Justice which initiates criminal proceedings. Given the multi-million dollar diversion of money from RGT clients (estimated in the press to be in excess of $40 million), we fully expect criminal proceedings will follow.
Shustak Reynolds & Partners, p.c. focuses in the areas of securities, financial services and complex business disputes. For more information, contact our managing partner, Erwin Shustak. More information is available at www.shufirm.com
The Securities and Exchange Commission (SEC) approved amendments to FINRA Rule 12403 (Cases with Three Arbitrators) of the Code of Arbitration Procedure for Customer Disputes (Customer Code) to increase the number of arbitrators on the public arbitrator list that FINRA sends to parties during the arbitration panel selection process from 10 to 15. The amendments also increase the number of strikes to the public arbitrator list from four to six, so that the proportion of strikes is the same under the amended rule as it is under the current rule. The amendments will become effective for all arbitrator lists FINRA sends to parties on or after January 3, 2017, for panel selection in customer cases with three arbitrators. See Regulatory Notice 16-44 for more information.
Shustak Reynolds & Partners, p.c. focuses in the areas of securities, financial services and complex business disputes. For more information, contact our managing partner, Erwin Shustak. More information is available at www.shufirm.com
Recently, a group of 13 brokers left Morgan Stanley with $2.2 billion of client assets to start their own firm, taking with them a lucrative and sizable amount of revenues. By following the Broker Protocol, they were able to make the split from Morgan without fear of retribution or liability.
The 13 Morgan employees spent months of secret and meticulous planning for the departure. They left a Morgan Stanley office in Wichita, Kansas, on a Friday evening with the phone numbers and email addresses of over 800 Morgan clients and then spent the weekend frantically contacting those clients to induce them to move their accounts to their new, upstart firm. And they did this legally, exploiting their rights under the Broker Protocol which Morgan, and more than 1,000 other firms, have signed which effectively waived their right to sue in such situations.
While the Broker Protocol put an end to the squabbling of firms when brokers left one firm to join another, it has had the consequence of allowing brokers to shift billions of dollar of assets, and hundreds of millions of dollars of revenues, from the major wirehouses to smaller, upstart firms and independent broker-dealers.
Over the past handful of years, there have been some large defections. Bank of America Corp. and Deutsche Bank AG each lost $3 billion teams to upstarts. Many of these departing brokers have left after their forgivable, up-front notes, given to them as retention bonuses, or “golden handcuffs” during the financial crisis of 2008-2009, have expired.
The Protocol has had the unexpected effect of shifting large amounts of assets and diverting significant revenues from major firms by giving departing brokers a “blueprint” for lawfully diverting their clients to new, upstart firms. The Protocol for Broker Recruiting, initially intended to end squabbles amongst the major wirehouses when they recruited brokers from one to the other, is making some of those early signators question whether they want to continue to be parties to it.
According to the Protocol, if brokers are careful, and follow it precisely, they avoid any consequences of employment restrictions if they only take five pieces of information with them when they depart. Those five pieces of information are all that a broker needs to effectively solicit, and move, their clients from one firm to the other- names; addresses; email addresses and account titles. The Protocol is only a three page, double-spaced document, but the devil is in the detail and brokers planning a transition need the help of experienced legal advisors.
Brokers have a big incentive to leave the wirehouses with their clients and go independent. Wirehouses on average pay brokers 40% of their production- the fees and commissions they generate from their clients. Independent firms, on the other hand, pay as much as 95% payouts. By leaving a wirehouse and even transitioning 75% of a book of business to an independent with a high payout, a broker can almost double their income overnight.
Shustak Reynolds & Partners, p.c. focuses in the areas of securities, financial services and complex business disputes. For more information, contact our managing partner, Erwin Shustak. More information is available at www.shufirm.com
In the wake of Wells Fargo’s fraudulent account scandal, FINRA recently announced it is interested in speaking with former employees of the firm who were terminated and lost their securities registrations.
Certain employees of Wells Fargo Bank were registered with the bank’s sister brokerage firm, Wells Fargo Advisors, LLC. According to a recent FINRA statement, some of those employees reported that their termination was related to their inability or unwillingness to meet the firm’s aggressive cross-selling goals and that, following their termination, they did not receive a Form U5 as required by industry rules. Those advisors, in turn, were concerned that their Form U5 filings may have included inaccurate information which could prevent them from securing alternative employment in the securities industry. Inaccurate or improper disclosures may be removed through the FINRA expungement process, but it can be a costly and time consuming procedure.
Shustak Reynolds & Partners P.C.’s San Diego and Southern California FINRA, SEC and financial services attorneys have extensive experience representing financial advisors and other financial professionals in a variety of securities disputes, including FINRA expungement proceedings, arbitrations, FINRA and SEC investigations and enforcement actions. Contact us today for a confidential consultation.
A group of former Merrill Lynch international financial advisors have filed a class action complaint accusing the firm of fraudulently misrepresenting its commitment to the international marketplace. According to the complaint, captioned Perez, et al. v. Merrill Lynch & Co., Inc., et al., those misrepresentations, and changes Merrill Lynch made in its international wealth management platform, caused international advisors to lose existing clients and severely hampered their ability to generate new business.
The case ultimately arises out of Merrill Lynch’s decision to sell much of its international division to Julius Baer in August 2012. International financial advisors based in the U.S. were not, however, part of that sale. Merrill allegedly reassured those advisors that despite the sale the firm was fully committed to supporting their international business. Notwithstanding those promises and assurances, in July 2015, Merrill made sweeping changes to its international division, including an increase in its account minimums from $500,000.00 to $1 million for existing clients. The firm also scaled back the number of countries in which it did business. These and other changes at the firm, the plaintiffs allege, were discriminatory and damaged the firm’s international financial advisors.
The litigation remains in its early stages. Merrill Lynch filed a motion to dismiss and a motion to compel arbitration in July 2016, which resulted in the plaintiffs filing an amended complaint (which Merrill has not yet answered). Later in the proceeding, the plaintiffs will move to certify the class. To prevail on that motion, they must convince the court that (1) the class of potential plaintiffs is so numerous that joinder of each member is impracticable; (2) that there are questions of law or fact common to the class; (3) that the claims or defenses of the class representatives are typical of those of the class; and (4) that the class representatives will fairly and adequately protect the interests of the class. Merrill will likely focus its challenge on the commonality and typicality elements, as each international financial advisor necessarily has a different client base, suffered different degrees of harm and may have been told different things about Merrill Lynch’s commitment to the international marketplace. Given those differences, and the possibility of obtaining a larger recovery in an individual arbitration or litigation, potential class members may want to “opt out” from the class if it is certified and pursue their individual claims in the appropriate forum.
Shustak Reynolds & Partners P.C.’s San Diego and Southern California FINRA, SEC and financial services attorneys have extensive experience representing financial advisors and other financial professionals in a variety of securities disputes, including FINRA arbitrations, FINRA and SEC investigations and enforcement actions. Contact us today for a confidential consultation.
For the first time since 1983 when the Supreme Court issued its decision in Dirks v. SEC, the Supreme Court yesterday clarified what “personal benefit” the tipper of non-public, inside information must receive from the tippee to sustain a conviction against the tippee who trades on that inside information. The Supreme Court’s decision makes it clear that when one with non-public, inside information gives that information to a “trading friend or relative” who, in turn, trades on the information, and without any proof the tippee gave or agreed to give anything of monetary value for the information, the mere gift of inside information allows the trier of fact (i.e. the jury) to infer the tipper personally benefited from making the gift of inside information.
The decision, handed down December 6th, is Salman v. United States which arose out of the 9th Circuit Federal Court of Appeals in San Francisco. The decision essentially relaxes the requirements for prosecutors to prove, and win, insider trading cases under Section 10(b) of the Securities Exchange Act of 1934 and the SEC’s Rule 10b-5 which prohibit undisclosed trading on inside information by persons bound by a duty of trust and confidence not to exploit that information for their personal advantage. The Court’s decision in Salman resolves a dispute between the Second and Ninth Circuits and overrules the standard that had been used in the Second Circuit (which covers New York, the hub of the financial industry) since the 2013 Newman decision. The rule in the Second Circuit, decided in United States v. Newman in 2013, had been that prosecutors needed to show more than a mere gift of inside information to a tippee from a tipper. In Newman, the Second Circuit had ruled that there needed to be proof of an actual gift or money or something of monetary value from the tippee to the tipper. It had vacated a conviction against Newman where there was no proof that he, as the tippee who traded on inside, non-public information, had given or promised anything of value to the tipper. Yesterday’s Salman decision effectively overrules the Newman decision and resolves what had been a significant dispute between the Second and the Ninth Circuit Federal Courts of Appeal.
The facts of Salman are simple. Salman was indicted, and convicted, for federal securities fraud crimes for trading stocks on inside information he received from his brother in law, Michael Kara. Kara, in turn, had received an insider “tip” from his brother, Maher Kara, a former Citigroup investment banker. At Salman’s trial, Maher Kara testified he had shared inside information about a public company with his brother, Michael, which he expected Michael to use to trade stocks for his personal, financial benefit. Michael, in turn, testified that when he received this inside information from his brother Maher, he also shared it with his brother-in-law, Salman, who knew the inside information had originated from Maher. Salman was convicted at trial.
On appeal, Salman argued that, under the Second Circuit’s decision in Newman, the jury was not entitled to infer a personal benefit to the tipper (Maher) from a gift to Salman (the tippee) of confidential information, absent proof that the tipper received at least “…a potential gain of pecuniary or similarly valuable nature”. Salman argued to the Ninth Circuit, in effect, that since he never gave, or promised to give Maher anything of monetary value in exchange for the inside information, he could not be convicted of insider trading. The Ninth Circuit disagreed, holding that the mere gift of inside information to a trading friend or relative, even without the transfer or promise to transfer something of monetary value in exchange, satisfied the statute. The Ninth Circuit upheld Salman’s conviction and refused to follow the Second Circuit’s more restrictive rule established by its decision in Newman.
In a unanimous 8-0 decision (since deceased Justice Scalia’s vacant seat has not yet been filled with a replacement), the Supreme Court re-affirmed its 1983 decision in Dirks and ruled that the mere gift of inside information to a trading friend or relative is sufficient proof on which a jury could convict the recipient of that inside information of insider trading.
The decision is a great relief to prosecutors who feared that Newman would undercut their ability to prosecute, and successfully win convictions of insider trading cases where inside information is given to trading friends or relatives as a gift or favor, without anything of monetary value changing hands for that information. The decision, in my opinion, is the correct one. Anyone receiving inside information who then trades on that information knows: (i) the information is non-public, confidential and was not meant to be disseminated or shared; and (ii) by trading on that non-public, inside information, the tippee knows he or she is taking a risk of prosecution for insider trading.
Shustak Reynolds & Partners, p.c. focuses in the areas of securities, financial services and complex business disputes. For more information, contact our managing partner, Erwin Shustak. More information is available at www.shufirm.com.
