The Corporate Observer Blog : Consumer Protection, Corporate Abuse : Class Action Lawyer & Attorney : Steven Berk Law Firm

Have you ever received mail from your bank or credit card company that includes a long, somewhat friendly letter saying benignly: “The terms of your agreement have been changed.”  “Huh, what terms?”  You read on looking for some clues but when you’ve determined that you haven’t bounced a check, your credit card was not stolen (as you feared) and your account has not been hijacked to buy a dozen bottles of Cristal at a Moscow nightclub for $25,000, you’re like “whatever” and throw out the letter with a sigh of relief.

But should you be relieved?  More often than not, that “change” to the terms means you can no longer sue your bank in court or file a class action.  You’re stuck with something called “arbitration.”  “Oh, who cares, I don’t plan on suing my bank or filing a class action.”  But you never know, and just the threat could keep your credit card company honest. (Click here to read about the Supreme Court’s decisions on Arbitration in Concepcion and CompuCredit.)

So to all the average Joes out there: Arbitration is all they get and the Courts have said it's good enough.  But for the folks in the know, it ain’t.  That’s exactly what Merrill Lynch was saying when it decided to ignore FINRA’s arbitration regulations and instead file collection suits against its employees in New York State Courts.  In response, FINRA slapped the firm with a $1 million dollar fine.

Strangely, I can’t help but empathize with Merrill Lynch and its executives.  I want to console them, to reach out and say, “I know, it’s excruciatingly frustrating to have a legitimate claim and be forced to arbitrate instead of pursuing real justice.  I know, Doug Preston (Chief of Compliance), you had no choice but to agree to arbitration – it was required by FINRA if you wanted to do business.  There, there, no need to sob, but I told you and your pals that this was unfair from the beginning.”

Merrill’s $1m penalty is pittance compared to what American consumers are losing every day as a result of Wall Street’s efforts to keep rightful claims out of court.  When Americans are wronged, they deserve the right to seek redress before a competent panel—the courts.  To be sure, arbitration has its place in the world—it is a remarkably effective means of resolving disputes between large corporations or equal parties who have both willingly agreed to it.  However, as Merrill Lynch’s own actions point out, a denial of access to the courts can be maddening when you didn’t choose arbitration.  In these cases (what we call adhesion contracts), the courts are more likely to offer a suitable remedy.  And everyone, corporation and consumer alike, should have the opportunity to select the forum for resolving disputes.

Corporate America claims to support arbitration.  Yeah, when it’s convenient.  In reality, they only support arbitration under their own rules, when the only person bearing the brunt of a systemic injustice is the American consumer.

Well, at least this week, the shoe is on the other foot. If Merrill’s actions are any indicator, it doesn’t feel nice.

Assisted by Zachary Kady

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The Wall Street Journal reported today that FINRA has fined Citigroup a whopping $725,000 for failures to disclose investment-banking relationships.  That’s it? $725,000?  We’ve seen slaps on the wrists before (click here and here) but this is hardly a slap (as a slap connotes some level of force). No, when a multi-billion dollar business like Citigroup is fined $725,000, that’s the equivalent of dropping a few pennies out of your pocket while looking for your keys.

Citigroup and other banks are required to submit disclosures of analysts’ stock ownerships and other conflicts in annual reports.  In this instance Citigroup omitted those disclosures in over 8% of reports published between 2007 and 2010 – 9,000 in total. It is generally accepted that most of Citigroup’s failures are a result of a technical error and not intentional deceit.  However, the nominal penalty FINRA imposed on Citigroup hardly encourages compliance in the future. Worse, it invites occasional deceit that analysts and unscrupulous compliance officials know they can later pass off as a simple “oversight”.

Remember, this is the same bank that packaged and sold distressed securities to its clients without disclosing their true value and then had the nerve to short their own position – an inexcusable action directly adverse to the interests of its clients.

Instead of the window dressing we are getting from FINRA, investors deserve strict and swift action. Substantial sanctions send a message that rules are important and that the public takes regulation seriously.  A $725,000 fine hardly sends that message. 

Assisted by Zachary A. Kady

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The New York Times’ Gretchen Morgenson has done it again.  Her article, “Findings That May Get Lost in Arbitration,” doesn’t just expose James G. Kelsoe Jr. and the Morgan Keegan Fund for misleading investors (she already did that in 2007).

Morgenson’s reporting also highlights the failure of both the SEC and the FINRA arbitration process.

The SEC enforcement action came almost four years (what in heaven’s name were they doing for four years?) after a settlement between Morgan Keegan and the Indiana Children’s Wish Fund.  Kelsoe, the Keegan Fund manager, pushed a bad investment — essentially making up the price — on the non-profit foundation, causing it to lose $48,000 and leaving nine terminally ill children with unfulfilled wishes.  Nice guy.  Stealing from a charity.

This belated enforcement action finally punished Morgan Keegan’s blatant misrepresentation of investments which cost investors more than $1 billion.  A leading firm in what they call Wall Street South (same level of greed, just add Southern accents), Morgan Keegan must pay a substantial fine and Mr. Kelsoe has thankfully agreed to a lifetime ban from the securities industry.  Let’s hope, like Pete Rose, the baseball ball player who bet against his own team, Mr. Kelsoe is never reinstated.

End of story?   Happy ending?  Well… not exactly.  Individual defrauded investors must seek a judgment against Morgan Keegan and damages in a FINRA arbitration process to be made whole.  Morgan Keegan attorneys blithely say they will try to block use of the SEC enforcement action as evidence in these individual proceedings.  How do those guys sleep at night?  (“Hi honey, how was your day at work?”  “Awesome, I spent my day beating up on investors who in some cases have lost their entire life savings.  Yep, I argued evidence of fraud by the very same firm, in the very same case should not be used against them.”  “That’s so nice dear, I’m proud of you, now wash up for dinner.”).

First, in those four years, when the SEC was taking its bureaucratic sweet time and dotting every I… crossing every T, they should have required as part of the “settlement” that Morgan Keegan be forbidden from arguing in the context of individual lawsuits against the admissibility of the SEC enforcement action.  Slam that door shut.

Second, any arbitrator worth his or her $600-800 hourly wage should act decisively and allow all credible evidence into the record.  They are perfectly capable of weighing its importance.  Unlike a jury, they are trained and paid handsomely to do just that.  We wish each of these investors well and remind them to send Gretchen Morgenson a nice thank you card.


Assisted by Natasha Duarte

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Nice work FINRA.  On the one hand you pay yourselves like captains of industry, but when the going gets tough you hide behind immunity reserved for lunch bucket civil servants making less than $80,000 per year.  And yes there is more.

If we could all be so lucky.

The Financial Industry Regulatory Authority released a report on its own internal investigation into excessive compensation for Mary Schapiro during her time as CEO of the Authority.  To be kind, the report was a joke and a self-serving cover up that demands further scrutiny.

As a threshold matter, let’s make something clear: FINRA is a government regulator.  It is the largest so-called “independent” securities regulator, overseeing almost 5,000 brokerage firms, and is designated overseer of the NYSE and the NASDAQ.  Yet as investors across the board were losing a nice chunk of their nest eggs in the financial markets (earned the hard way and put aside for college tuition and retirement), Mary Schapiro was raking in a base salary of $2.5 million and earning million-dollar-plus bonuses.  Try to challenge that salary.  You can’t.  FINRA will assert governmental immunities to thwart any challenges to its decision making or salary structure and they will win – trust me I tried.

Nice work FINRA.  On the one hand you pay yourselves like captains of industry, but when the going gets tough you hide behind immunity reserved for lunch bucket civil servants making less than $80,000 per year.  And yes there is more.  When Ms. Schapiro left FINRA, she received a parting payment of $9 million.  Yes $9 million.  As in, “Thanks Mary you did a great job.”  A great job?

During her tenure, the markets nearly imploded and investors lost trillions.  I don’t know Mary Schapiro.  When I was at the SEC, I would see her now and again in the hallways.  I have nothing against her personally, but the payments she received as President of FINRA are nothing short of an outrage.  A true public outrage.  But the internal report and investigation, paid for by FINRA after a feisty California securities broker-dealer called Amerivet demanded an explanation, was far from expressing outrage.  Indeed, it defended every aspect of Ms. Schapiro’s pay and her performance.  Relying on studies of executive salaries at leading investment firms, Ms. Schapiro was being—well if anything—underpaid.

And where did lucky Mary go?  To the chairmanship of the Securities and Exchange Commission, where else?  We commend Amerivet for its courage.  They are fighting an uphill battle to be sure.  But they are on to something and they should not let go.  These enormous salaries and benefits can only lead to abuse.

As to FINRA: are you fish or fowl?  If you are a private actor, accepting private sector dollars without any of the risks, don’t wrap yourselves around governmental immunity when the going gets tough.  And if you truly are a government regulator, stop taking enormous private sector salaries.  You can’t have it both ways.

Assisted by David Martin

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Uncharacteristically, FINRA plans to propose a rule that makes it easier and fairer for securities disputes to be decided.  Arbitration, currently presided over by a group least one member of the securities industry, would shift to a committee of only members of the public.

The SEC continues to crack down on phone investment scams that target innocent investors.  For a complete list of press releases regarding their cases, see the Commission’s press releases.

Some large banks have fully repaid their TARP loans, but we must not forget the billions loaned out to smaller banks, many of which are struggling to repay.  Less than 20% of the banks that accepted loans have repaid fully, and over $60 billion was still due to the Treasury as of August, Reuters reports.

Assisted by David Martin

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