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March 2009 Archives

March 2, 2009

FINRA Fines Brokerage Firm For Reverse Churning

FINRA fined Robert W. Baird & Co. $500,000 for supervisory violations relating to its fee-based brokerage accounts and ordered the company to return $434,510 in fees to 154 customers. FINRA found that customers were charged fees in accounts that were not generating any activity, otherwise known as “reverse churning.”

According to FINRA Baird failed to adequately review or supervise its fee accounts and allowed numerous customers to remain in the program despite conducting no trades for at least eight consecutive quarters. These accounts paid over $269,000 in fees during the inactive quarters.

According to Andrew Stoltmann at Investmentfraud.PRO, this type of fee based account has become more prevalent in the past 7 years and Baird is only one firm out of many who engaged in so-called reverse churning. Recent actions involving firms such as AXA Advisors, Morgan Stanley, SunTrust Investment and Wachovia Securities ranged from $700,000 to $6.1 million.

Written by David Welch, Esq.

March 3, 2009

Revisiting Regulation M, Rule 105: Short Selling Initial and Secondary Offerings

Written by David Welch, Esq.

Securities and Exchange Commission 17 CFR Part 242. Release No. 34-56206. Short Selling in Connection with a Public Offering.

Current economic conditions lend itself to increased short selling and, consequently, shorting has come under increased scrutiny by the SEC. Rule 105 of Regulation M prohibits purchasing securities as part of an “offering” if that security was also shorted within the five days immediately preceding the “pricing” (or within the period between the registration statement and the pricing, whichever is shorter).

Put another way, two actions have to occur to trigger a violation of Rule 105:

Continue reading "Revisiting Regulation M, Rule 105: Short Selling Initial and Secondary Offerings" »

March 11, 2009

New Finra Rule 2140: Interference With Customer Accounts

Written by David Welch, Esq.

About two weeks ago, on March 3, 2009, the Securities and Exchange Commission approved FINRA’s proposal to adopt NASD Interpretive Material 2110-7 as a stand-alone FINRA rule which will be renumbered as “FINRA Rule 2140.” Securities and Exchange Commission Release No. 34-59495 (March 3, 2009); File No. SR-FINRA-2008-052.

The new Rule, which codifies a long-standing FINRA policy, provides that it "shall be inconsistent with just and equitable principles of trade…to interfere with a customer’s request to transfer his or her account in connection with the change in employment of the customer’s registered representative[.]

Continue reading "New Finra Rule 2140: Interference With Customer Accounts" »

March 16, 2009

Regulatory Notice 09-16, "Explained Decision" Rule

Article Written by David Welch, Esq.

Effective April 13, 2009: The Securities and Exchange Commission Approved Amendments to Require FINRA Arbitrators to Provide an Explained Decision upon a Joint Request From the Parties.

FINRA has announced that the new rule (outlined in an earlier post here) will become effective on April 13, 2009. Under the new rule, FINRA will require arbitrators to provide an explained decision upon a request from both parties.

Continue reading "Regulatory Notice 09-16, "Explained Decision" Rule" »

March 17, 2009

U.S. Working on Comprehensive Framework for Regulatory Reform

Article written by Christine Lazaro, Esq.

At the G-20 Finance Ministers and Central Bank Governors meeting on March 14, 2009, U.S. Treasury Secretary Timothy Geithner announced that the United States would soon release a comprehensive framework for regulatory reform.

Geithner stated:

“We have committed to broad principles to guide the reform of the financial system:
First, all institutions that are important to the stability of the financial system should come within a much stronger framework of oversight, with clearer rules of the game that are enforced more evenly and consistently across countries.

Continue reading "U.S. Working on Comprehensive Framework for Regulatory Reform" »

March 18, 2009

Recent Fines and Penalties

Written by David Welch, Esq.

On March 9th, the SEC charged Locke Capital Management with falsely creating a billion dollar client in order to establish credibility and lure investors. See news release, here.

On March 11, the SEC announced that it fined Merrill $ 7 million for failure to protect confidential “Squawk Box” information. See news release here.

And lastly, on March 17th, FINRA released that it fined Citigroup $2 million for Range of Trade violations, including, failure to monitor trading systems at the opening of a Quadruple Witch Expiration Friday. See news release, here. Quadruple Witch Friday happens 4 times a year when 4 different types of derivative instruments expire. In theory, this causes more volatility on that day and throughout the week in which the day falls. This Friday, March 20, 2009, is a Quadruple Witch Expiration Friday.

March 19, 2009

Quadruple Witch Friday

Written by David Welch, Esq.

The Quadruple Witch is a term used to describe the occurrence, which happens only 4 times a year, of 4 different types of derivative instruments expiring in a single day. The 4 derivative instruments are (1) Stock Index Futures, (2) Stock Index Options, (3) Stock Options, and (4) Single Stock Futures.

In the US market, Stock Index Options and Stock Options expire every month, while Single Stock Futures and Stock Index Futures expire four times per year in March, June, September, and December. The combined expiration of these four derivative instruments creates the “Quadruple Witching."

The Quadruple Witch day can be slightly more volatile as options holders begin to exercise their options contracts and roll forward to contracts with later expiration dates. This Friday is a Quadruple Witch day and thus, according to theory, this week could be more volatile than usual.

Citigroup was recently in the news related to a violation occurring on a Quadruple Witch day (See previous post, here).

According to FINRA, who fined Citigroup $2 million:

Continue reading "Quadruple Witch Friday " »

March 20, 2009

SEC Charges Brokers and Hedge Fund Advisers in Alleged Bribery Scheme

Written by Christine Lazaro, Esq.

On March 12th, the Securities and Exchange Commission filed a suit against two brokers, David Harrison Baker ("Baker") and Daniel Schreiber ("Schreiber"), and the broker-dealer with which Schreiber was associated, Granite Financial Group, LLC ("Granite"), and Brian Travis ("Travis") and Nicholas Peter Vulpis, Jr. ("Vulpis"), two employees of a hedge fund investment adviser. Suit was filed in the U.S. District Court for the Southern District of New York, and alleged that Travis and Vulpis solicited bribes in exchange for routing hedge fund trades, and the associated commissions, to Baker, Schreiber and Granite.

The complaint alleges that Travis and Vulpis received at least $312,000 in personal benefits such as international air travel (including for family members), hotel arrangements, fully-paid vacations, daily car service, computer equipment, and monthly rent payments for a personal residence; and that Baker, Schreiber and Granite received a total of approximately $10,702,105 in commissions from trades that Travis and Vulpis directed to them.

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March 23, 2009

FINRA Proposes Clarification to Tolling Rules

Written by Christine Lazaro, Esq.

FINRA filed a proposed rule change with the SEC on March 11, 2009, seeking to amend the Code of Arbitration Procedure for Customer Disputes (Rule 12206) and the Code of Arbitration Procedure for Industry Disputes (Rule 13206), to clarify that the rules toll the applicable statutes of limitation when a person files an arbitration claim with FINRA.

Current Rule 12206(a) provides that “no claim shall be eligible for submission to arbitration under the Code where six years have elapsed from the occurrence or event giving rise to the claim.” Rule 12206(c) provides that “The rule does not extend applicable statutes of limitations…However, where permitted by applicable law, when a claimant files a statement of claim in arbitration, any time limits for the filing of the claim in court will be tolled while FINRA retains jurisdiction of the claim.” Rule 13206 contains identical language. FINRA has proposed deleting the phrase “where permitted by applicable law” from Rule 12206(c) and Rule 13206(c).

Continue reading "FINRA Proposes Clarification to Tolling Rules" »

March 25, 2009

Naked Shorting – Market Manipulation or Scapegoat?

Written by David Welch, Esq.

A lot has been said lately about naked short selling and its potential for market manipulation. Short selling, aka, "covered" short selling, occurs when a trader sells a borrowed stock with the intent to buy it back elsewhere at a lower price and pocket the difference. A short sale is considered “naked” if the trader has not made arrangements to borrow (or "cover") the stock before he sells it. Naked short sales that are never “covered” sometimes result in a “failure to deliver” and it is this practice that has produced divided factions regarding ethics and the need for greater regulation.

Those against naked short sales claim that the practice can be used to manipulate the market because more shares can be sold short than actually exist, which in turn:

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March 31, 2009

The SEC: Brokers and Advisers Should Expect Consolidated Oversight and Unannounced Audits

Written by David Welch, Esq.

Last week, before the Senate Banking Committee, SEC Chairman Mary Schapiro made it clear that she intends to consolidate oversight of financial services firms and subject them to stricter regulatory controls. Currently, FINRA and the SEC share supervision of broker-dealers and investment advisers. Investment advisers are required to abide by a “fiduciary duty” standard and brokers are held to a standard of “suitability.” Arguments regarding which standard is more stringent aside, Schapiro views the inconsistency as an encumbrance on regulatory oversight and implied that a uniform standard is on the horizon.

Schapiro and FINRA CEO, Richard Ketchum, explained that enforcement of the uniform standard will be consolidated under the purview of FINRA, for brokers and advisers alike. In his testimony before the banking committee, Ketchum stated:

Continue reading "The SEC: Brokers and Advisers Should Expect Consolidated Oversight and Unannounced Audits" »

About March 2009

This page contains all entries posted to Securities Litigation and Arbitration in March 2009. They are listed from oldest to newest.

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