Securities Litigation Blog | Burr & Forman LLP

New FINRA Rules Address Elderly Abuse

Thu, 14 Dec 2017 09:00:01 -0500

On February 5, 2018, FINRA will enact two rules to assist brokers with addressing financial exploitation of the elderly. Statistically, the elderly have a 1 in 20 chance of being a victim of financial exploitation. [Financial Exploitation of Older Adults: A Population-Based Prevalence Study, Journal of General Internal Medicine (2015)]. As financial abuse, especially of the elderly, continues to be a concern, the SEC approved FINRA's request to amend FINRA rule 4512 ("Customer Account Information"), found here, and approved new rule 2165 ("Financial Exploitation of Specified ...

The SEC's Cyber Unit Files Its First Complaint Against an "Initial Coin Offering"

Tue, 05 Dec 2017 09:00:02 -0500

Implemented in September, the Securities Exchange Commission's ("SEC") Cyber Unit has brought its first enforcement action against an "Initial Coin Offering" ("ICO") called PlexCoin. ICOs, which are listed on digital exchanges, are designed to raise money through the issuance of digital tokens. Generally, coins or tokens entitle investors certain rights related to a venture underlying the ICO, such as a right to profits, shares of assets, rights to use certain services provided by the issuer, and/or voting rights. The SEC recently hinted that an ICO's digital coins are ...

SEC About-Face, About Time, on ALJs

Thomas K. Potter, III — Fri, 01 Dec 2017 09:00:03 -0500

On November 29, the SEC did an about-face and admitted its ALJs are "inferior officers" (not merely employees) subject to the Constitution's Article II appointment provisions. The Solicitor General's brief on behalf of the Commission sided with the argument of its opponent, Raymond Lucia; DOJ urged the Supreme Court to resolve a circuit split by ruling against the SEC's litigation position below and overturning the prior decision by the Court of Appeals for the DC Circuit.

The next day, the Commission took formal action ratifying the appointment of its ALJs, thus complying with the ...

Morgan Stanley Exits, Slams Protocol as "Unsustainable"

Thomas K. Potter, III — Mon, 30 Oct 2017 09:00:04 -0400

Morgan Stanley announced October 30 that it would exit the Protocol for Broker Recruiting, as part of strategy "to refocus [recruiting] resources on existing talent."

Adopted in 2004, the Protocol is a broad industry covenant-not-to-sue meant to establish basic free-fire rules for recruiting among its 1500 or so signatories. For years, firms recruited heavily from one another to boost assets under management [sometimes called "prisoner exchanges"], using techniques like front-money bonuses paid through wasting promissory notes. The Protocol was instituted to reduce the ...

TN Trust Code Authorizes Pre-Dispute Arbitration Agreement: Not Per Se Breach of Duty, but May Not Bind Non-Signatory Beneficiary

Thomas K. Potter, III — Wed, 25 Oct 2017 09:00:05 -0400

The Tennessee Supreme Court recently held that Tennessee's Trust Code and broad trust-instruments authorize a Trustee's execution of a pre-dispute arbitration clause. That isn't a per se breach of fiduciary duty, but the Court left that door slightly ajar. Moreover, a third-party relying on it will have to litigate whether it binds a non-signatory beneficiary.

The Guardian of tragically injured minor child sued the Trustees and financial advisors (and their firms) for breach of fiduciary and other duties in depletion of the child's personal-injury-proceeds Trust. The ...

Lorenzo's a Schemer, Not a Maker; Dissent Blasts SEC ("Not Fair," "Stinks")

Thomas K. Potter, III — Mon, 23 Oct 2017 09:00:06 -0400

Cut, paste and forward ‒ just as the boss instructed. But Lorenzo's email to two clients was misleading, so the SEC filed an enforcement action. The ALJ held Lorenzo liable for violating anti-fraud provisions and imposed a C&D plus a $15,000 penalty. The full Commission reviewed the case de novo and imposed a permanent industry bar along with the $15,000 fine.

On appeal, a split panel of the D.C. Circuit affirmed on liability but remanded to the Commission for reconsideration of the penalty. The majority held Lorenzo was not a "maker" of a Rule 10b-5(b) "false statement," but his ...

SEC's Chairman Makes Changes After the Agency's Latest Cyber-Attack

Fri, 13 Oct 2017 09:00:07 -0400

The Securities Exchange Commission ("SEC") has been busy the last couple months on the cyber front. On September 20, the SEC announced a renewed focus on cybersecurity efforts and disclosed that it had been a victim of a cyber-attack, which may have allowed hackers to use nonpublic information to make illicit gains. The press release revealed that the breach was induced by software vulnerability in the SEC's EDGAR system. In a more detailed statement on the matter, SEC Chairman Jay Clayton opened the door for cyber-attack related enforcement actions directed at public companies. He ...

SEC Announces New Cyber-Enforcement Initiatives

Thomas K. Potter, III — Tue, 26 Sep 2017 09:00:08 -0400

The SEC announced two cyber-enforcement initiatives on September 25. The Commission will establish a Cyber Unit within the Enforcement Division to address misconduct like:

Market manipulation through social-media "fake news";
Hacking to obtain material nonpublic information (ahem);
Blockchain- and bitcoin-like violations;
Dark web misconduct;
Hacking retail accounts;
Cyber-threats to trading and market infrastructure.

The Commission also announced a Retail Strategy Task Force to identify and respond to cyber-threats targeting retail investors.

The SEC's release ...

5th Circuit Hints SEC ALJs Unconstitutional

Thomas K. Potter, III — Wed, 13 Sep 2017 09:00:09 -0400

In an Opinion highlighting the Circuit split over the constitutionality of SEC administrative law judges ("ALJs"), the Fifth Circuit recently stayed an FDIC civil-penalty and bar order against a Bank director, pending complete judicial review.

Petitioner Burgess is a bank director (and former officer) prosecuted administratively by the FDIC for improper expense practices and misuse of bank property. An FDIC ALJ conducted the hearing and recommended civil penalties and a banking bar. The FDIC largely adopted those findings and conclusions. Burgess moved to stay ...

DOL to Postpone Deadline for Fiduciary Rule

Thomas K. Potter, III — Thu, 31 Aug 2017 09:00:10 -0400

The Department of Labor has received OMB certification, and sought expedited notice-and-comment, for a rule change that would postpone the full implementation deadline for its Fiduciary Rule from January 1, 2018 until July 1, 2019.

The DOL's Fiduciary Rule became effective June 9, but its transition-period deadline for full implementation of the Best Interest Contract and other requirements was set for January 1, 2018.

This week, the agency published, for quick comment, a proposed rule change extending that full-implementation through July 1, 2019. DOL says it needs the ...