FL Court Rules Statute of Limitations Apply in Arbitration

We finally have a ruling on the questionable argument that is often advanced that the statute of limitations does not apply in arbitration. The argument is premised on a contorted interpretation of a Florida statute and requires one to believe that an arbitration proceeding is not a "civil action or proceeding." Unfortunately, a lower court agreed with this argument, and ruled that the statute of limitations did not apply when a dispute was brought in arbitration, rather than court. The Florida Supreme Court reversed.

Every so often a claimant attempts to convince an arbitration panel that the statute of limitations does not apply to their claims. For better or worse, every type of legal claim has a statute of limitations. The Florida statute adopting limitation periods uses the phrase "civil action or proceeding." In an attempt to avoid the limitations period, some attorneys have argued that an arbitration is not a "civil action or proceeding." The argument continues to the illogical conclusion, that there is no statute of limitations for a claim that is brought in arbitration, and the only restriction is whether or not an arbitration forum will process an old claim.

Fortunately, the language used in the Florida statute is not used by a significant number of states, and in those states the door is not open to such wordsmithing. That door is also now shut in Florida, and we can expect it to be shut in other states where similar language is used.

The Florida Supreme Court put an end to this, and ruled that Florida's statute of limitations apply not only to court proceedings, but to securities arbitration cases between investors and their brokers. The ruling resolves this dispute and forces investors to file their claims in a timely fashion like everyone else.

While some in the press are calling this a significant blow to investors, this is nothing more than a court enforcing the law. Very few states use the phrasing that is used in the Florida statute, and this is not a significant change in arbitration practice.

The simple fact is, you need to pay attention to the statute of limitations, whether you are in court, or in arbitration.

Florida court rules state time limits apply to securities arbitration

SEC, FINRA Issue Investor Alert On Pension or Settlement Income Streams

The SEC and FINRA issued an investor alert entitled Pension or Settlement Income Streams – What You Need to Know Before Buying or Selling Them. The investor alert informs investors about the risks involved when selling their rights to an income stream or investing in someone else’s income stream.  

The alert urges investors considering an investment in pension or settlement income streams to proceed with caution. Anyone receiving a monthly pension or regular distributions from a settlement following a personal injury lawsuit may be targeted by salespeople offering an immediate lump sum in exchange for the rights to some or all of the payments the person would otherwise receive in future. 

ypically, recipients of a pension or structured settlement will sign over the rights to some or all of their monthly payments to a factoring company in return for a lump-sum amount, which will almost always be significantly lower than the present value of that future income stream.

“Investors should always learn as much as possible before making an investment decision, and this is certainly true with respect to investing in pension or structured settlement income stream products,” said Lori J. Schock, Director of the SEC’s Office of Investor Education and Advocacy.   “This alert will help investors understand the costs as well as the potentially significant risks of these transactions.”

SEC, FINRA Issue Investor Alert On Pension or Settlement Income Streams; Release No. 2013-86; May 9, 2013

FINRA Wants Your Facebook Account

You read that right, just as the SEC is embracing social media, FINRA wants access to brokers' Facebook accounts.

We all know that an employer's demand for access to an employees Facebook account is illegal in many states, and probably illegal in all. It is simply an outrageous overreaching and an invasion of privacy. But such things do not seem to bother FINRA. FINRA is actively seeking to have its member firms exempted from the laws, all in the name of "investor protection."

According to this article on CNN.com, FINRA wants legislatures to exempt broker-dealers from the privacy ban, and allow firms access to the Facebook accounts of all registered representatives, to insure that they are not posting stock tips or other communications related to their business.

While FINRA denies that it does not want firms to conduct routine surveillance of Facebook accounts, it has declined to comment on specifics as to how it proposes such monitoring to work.

Imagine this - your boss has access to your Facebook account, which gives him access to all of your posts, all of your friends' posts, all of your pictures, likes, etc. Given the flagrant abuses by the firms of their access to business related emails, one can only imagine what they will do with Facebook accounts.

And then of course, since the firm has access, FINRA has access, and once FINRA has your Facebook account, so does the SEC.

So, FINRA wants to give your boss access to your Facebook account. Next they want to monitor your cellphone, your home phone, your personal email. After all, you might mention a stock while talking on your cellphone.

Hopefully this will be shot down before it gains any traction. Once again, brokers need that trade organization that they simply refuse to join, but there are other ways to prevent brokers from using Facebook for illicit purposes, the same methods that are currently in use for cellphones and email.

If anyone has run into an issue with their broker-dealer wanting access to their Facebook or other social media account, I would love to hear from you. All information will be kept strictly confidential. Call me at 212-509-6544 or email me at astarita@beamlaw.com.

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SEC Charges Former Medical Device Company Employee for Illegally Tipping Brother with Quarterly Earnings Data

The SEC charged a former employee at a California-based medical device manufacturer with illegally tipping confidential financial data to her brother, who illegally traded in the company's stock and enabled his hedge fund clients to do the same.

The SEC alleges that the former employee, who worked in the finance department at Abaxis Inc., regularly provided material nonpublic information to her brother, whose insider trading in advance of the company's quarterly earnings announcements generated $144,910 in illicit profits. The brother, who was charged by the SEC last year, also passed confidential information to clients of his equity research firm Insight Research, including hedge fund managers.

To settle the SEC's charges, the former employee has agreed to pay $144,910 and be barred from serving as an officer or director of a public company for five years.

"When corporate insiders leak confidential information to a select few, the integrity of our markets is undermined," said Sanjay Wadhwa, Senior Associate Director of the SEC's New York Regional Office. "Abaxis entrusted [the former employee] with market-moving information, and she violated that trust to financially benefit her family."

The SEC's charges stem from its ongoing investigations into expert networks that have uncovered widespread insider trading at several hedge funds and other investment advisory firms. The investigations have so far resulted in enforcement actions against 40 entities or individuals who have reaped more than $430 million in alleged insider trading gains.

For more information, visit SEC Charges Former Medical Device Company Employee for Illegally Tipping Brother with Quarterly Earnings Data.

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UBS Willow Fund Investors Filing Arbitrations

UBS WILLOW FUND

A CLASSIC CASE OF RISKY DERIVATIVE BETS GONE BAD

In October 2012 investors were informed that the Willow Fund would be liquidated, after having sustained substantial losses. In a recent New York Times article on the UBS Willow Fund, it was reported that the fund had suffered losses of approximately 80% in the first three quarters of 2012 after its manager made a radical change in investment strategy and “piled into some colossally bad derivative trades.” “The investors, some of whom hadn’t realized they were holding a portfolio filled with risky bets against the debt of European nations, were stunned,” says the article.

The Willow Fund’s exposure to credit default swaps began to significantly increase, and by the end of 2008 while corporate bonds amounted to only 6% of the portfolio, the value of credit default swaps rocketed to 25% of the portfolio, from only 2.6% in 2007. By 2009, credit default swaps amounted to 43% of the Willow Fund’s portfolio composition, the article claims. In 2012, the Willow Fund posted an 89% decline and, as the fund was being wound down, UBS reported that approximately 70% of its losses derived from exposure to credit default swaps – a stunning fact.

It has been reported that UBS Willow Fund investors are expected to receive pennies on the dollar after liquidation of the fund.

Various press reports have stated that the Willow Fund’s radical change in investment strategy through its increasing exposure to credit default swaps, and commensurate decrease in exposure to corporate bonds, transformed the fund into a highly speculative and aggressive gamble on, in essence, the debt of European nations. Did Willow Fund investors really understand what they were invested in and the magnitude of risk to which they were exposed and, if they did, would they have agreed to invest or remain invested?

Investors seeking to file arbitrations will allege that securities brokerage firms, like UBS, have a legal obligation to ensure that when offering and selling an investment, like the Willow Fund, it makes full, complete and accurate disclosures of all material facts to its customer, and ensures that the recommendation to purchase is suitable. The failure to do so is a violation of securities laws and securities industry rules and may give rise to liability for losses sustained.

Securities arbitration attorneys are presently reviewing cases for investors against UBS for their purchases of the Willow Fund. UBS customers who purchased the Willow Fund can contact our office  to explore whether they can recover their Willow Fund losses. All calls handled on a confidential, no obligation basis. Cases taken on a contingency fee basis, meaning no attorney’s fee owed to the law firms if no recovery. Call 212-509-6544 for additional information regarding Willow Fund arbitrations, or email us at info@beamlaw.com

SEC Acknowledges the Use of Social Media for Regulation FD Disclosure

The SEC has acknowledged that public companies can use social media, such as Facebook and Twitter, to make corporate announcements, without running afoul of Regulation FD.

Regulation FD requires companies to make announcements of material information to all investors at the same time.

Adopted in 2000, the regulation is intended to help insure that all investors receive equal access to information. Technology has changed dramatically since 2000. In December, 2012 the SEC sent a Wells Notice to Netflix and Reed Hastings, its chief executive, because Hastings made a Facebook post congratulating his team for reaching one billion hours of video that subscribers watched the previous month. The message was just 43 words, and contained information that had already been publicly discussed. Not to mention that Hastings had over 200,000 followers. The SEC Staff considered that post to be a violation of Regulation FD.

I discussed the Hastings Wells Notice back in December, and disccused securities disclosure and social media in January. The decision to pursue Netflix and Hastings was questioned by many commentators, including yours truly. I was actually a bit surprised that the Commission would take such a position, given its history of being at the forefront of adapting regulations to advancing technology (at least the forefront in the securities industry. Additionally, while I do not believe the number of followers is dispositive of the issue, the information had been publicly discussed, 200,000 followers, many of whom are investors and reporter, is not insignificant, and the fact that Netflix customers viewed one billion hours of video hardly seems to be material.

The Commission itself has reviewed the matter and on April 2 issued a press release stating that “companies can use social media outlets like Facebook and Twitter to announce key information in compliance with Regulation Fair Disclosure (Regulation FD) so long as investors have been alerted about which social media will be used to disseminate such information.”

The press release links to a “report of investigation” which details the activity of the Commission after the Staff issued the Wells Notice. It seems that the Commission conducted its own investigation after its Staff conducted an investigation. Curious, but an effective way to side-step the Staff who issued the Wells Notice. Keep in mind that a Wells Notice comes AFTER an investigation, and AFTER the SEC Staff decides to bring an action.

At the same time it is heartening to see the Commission not simply rubber-stamping the Staff’s recommendation, and conducting its own review. The dissemination of information is important to investors and the securities industry, and new methods of communication should be encouraged and not over regulated into disuse.

The Commission's press release, SEC Says Social Media OK for Company Announcements if Investors Are Alerted, and the SEC Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: Netflix, Inc., and Reed Hastings are at the Commission's website.

 If you have any questions about the interaction of social media and the securities laws, send me an email let's see if I can help. I have been providing legal advice on securities matters for over 25 years, have been providing advice on web sites and uses of the Internet for nearly 15 years, which includes use of Facebook, Twitter and LinkedIn by financial professionals. You can follow this blog (with over 10,000 subscribers) on Twitter, and Facebook, as well as my firm's Twitter and Facebook accounts.

SEC Charges Financier with Stealing Investor Funds in Purported Offerings of Pre-IPO Facebook Shares

The SEC announced charges against a financier masquerading as a sophisticated fund manager who defrauded investors seeking to acquire highly coveted pre-IPO shares of Facebook and other social media companies.

An investigation by the SEC’s Enforcement Division found that the financier, a former Oregon gubernatorial candidate who now lives in Florida, touted to investors that he had special access to scarce sources of pre-IPO stock in Facebook, LinkedIn, Groupon, and Zynga. Instead of purchasing shares on investors’ behalf as promised, the financier misused their investments to make Ponzi-like payments to earlier investors, fund personal expenses, and pay off claims against him in a bankruptcy case.

The SEC’s Enforcement Division also charged another man of Charleston, S.C., for his participation in the fraud as legal counsel to some of the financier’s companies. When investors in the financier phony Facebook fund began questioning what happened to their money after Facebook’s IPO occurred, the other man falsely assured them that their money was used to purchase pre-IPO Facebook stock being held for them by unnamed counterparties.

“[The financier]  blatantly capitalized on the market fervor preceding highly anticipated IPOs of Facebook and other social media companies to fleece investors whose cash flow he treated like an ATM to fund his own living expenses and pay court-ordered claims to victims of his past misdeeds,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.

For more information, visit SEC Charges Financier with Stealing Investor Funds in Purported Offerings of Pre-IPO Facebook Shares.

SEC Charges Investor with Insider Trading

The SEC charged an investor for his role in the massive insider trading scheme spearheaded by his older brother, a hedge fund advisory firm Galleon Management.

The SEC alleges that from 2006 to 2008, the investor repeatedly received inside information from his brother and reaped more than $3 million in illicit gains for himself and hedge funds that he managed at Galleon and Sedna Capital Management, a hedge fund advisory firm that he co-founded. In addition to illegally trading on inside tips, the investor was an active participant in his brother’s scheme to cultivate highly placed sources and extract confidential information for an unfair advantage over other traders.

“Our complaint against [the investor] tells a sad tale of a man who followed his brother down an illegal path of greed to its inevitable conclusion,” said George S. Canellos, Acting Director of the SEC’s Division of Enforcement.

Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office, added, “[The investor] profited handsomely from his brother’s insider trading activities, and he may have believed he wouldn’t have to pay a price for his involvement. But now he is learning the true cost of his participation in the most expansive insider trading scheme ever perpetrated.”

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against the investor’s brother.

For more information, visit SEC Charges Investor with Insider Trading.

SEC Obtains Asset Freeze Against Massachusetts-Based Investment Adviser Stealing Money from Clients

The SEC announced an asset freeze against a Massachusetts-based investment adviser charged with stealing money from clients who were given the false impression they were investing in a hedge fund.

In a complaint unsealed today in federal court in Boston, the SEC alleges an investment advisor and Insight Onsite Strategic Management in Wilmington, Mass., raised at least $1.1 million from clients that was used for purposes other than investing in the hedge fund they purported to manage. Investor money was merely transferred to the firm’s chief investment officer and other members of her family who spent it on personal expenses. The firm reported in SEC filings that it has $100 million in assets under management, however the purported hedge fund actually has no assets.

U.S. District Judge Mark L. Wolf granted the SEC’s request for an emergency court order to freeze the assets of the investment advisor and his firm as well as others who received investor money and have been named as relief defendants for the purposes of recovering investor funds in their possession.

According to the SEC’s complaint, the investment advisor’s scheme began around 2009. While soliciting funds, the investment advisor convinced one client and his wife to invest $275,000 in the hedge fund that he claimed would generate them about $1,000 per month in returns. The investment advisor also solicited a 20-year client who after considering his sales pitch decided not to invest in the hedge fund because she considered it too risky of an investment for someone her age. But the investment advisor apparently took action to obtain funds from the client’s IRA account and wire thousands of dollars to an Insight Onsite Strategic Management bank account. The client was not aware of the transfers and did not authorize them.

The SEC alleges that instead of using investor funds to purchase shares in a hedge fund or to manage or develop a hedge fund, the investment advisor transferred control of client money to a friend who works at the firm. Investor funds also were transferred to her children, and a company called The Knew Finance Experts. They used investor money to pay legal bills and other personal expenses at gas stations, drugstores, and restaurants.

For more information, visit SEC Obtains Asset Freeze Against Massachusetts-Based Investment Adviser Stealing Money from Clients.

Hedge Fund Analyst Charged with Insider Trading

The SEC charged a California-based hedge fund analyst with insider trading in advance of a merger of two technology companies based on nonpublic information he received from his friend who was an executive at one of the companies.

The SEC also charged the executive and another trader in the $29 million insider trading scheme.

The SEC alleges that the hedge fund analyst of San Clemente, Calif., was tipped in advance of a July 2008 announcement that Foundry Networks Inc. had agreed to be acquired by Brocade Communication Systems Inc. for approximately $3 billion. The hedge fund analyst’s source was Foundry’s chief information officer, a friend who he had previously given investment advice. The hedge fund analyst then caused the San Francisco-based hedge fund advisory firm where he works to buy Foundry shares in large quantities in the days leading up to the public announcement, and the hedge funds managed by the firm reaped millions of dollars in profits when Foundry’s stock value increased upon the news. The hedge fund analyst also tipped a Denver-based investment professional who he befriended through a previous working relationship. The investment professional then made illegal trades based on the nonpublic information. Foundry’s chief information officer also tipped the hedge fund analyst in advance of at least two other major announcements by Foundry, and the hedge fund analyst’s firm traded on the nonpublic information to make profits or avoid losses.

“[The chief information officer] was entrusted with Foundry’s most valuable secrets, but betrayed his company and set off an explosive chain reaction of illegal tips from friend to friend for illicit profits,” said George S. Canellos, Acting Director of the SEC’s Division of Enforcement.

Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office, added, “Company insiders who reveal confidential information and the traders who trade on it can expect robust scrutiny from the SEC. The charges against [Foundry’s chief information officer] and [the hedge fund analyst] are a cautionary tale for those considering insider trading that should make them think twice.”

For more information, visit SEC Charges California-Based Hedge Fund Analyst and Two Others with Insider Trading.