Industry Topics

Recovering Customer Financial Losses from UBS’s Yield Enhancement Strategy (“YES”)

August 29, 2019 | Malecki Law Team

The investment and securities fraud attorneys at Malecki Law are currently investigating UBS’s Yield Enhancement Strategy (“YES”) for the purpose of investor recoveries. Our attorneys are interested in hearing from investors and others who have information and/or have experienced losses due to UBS YES or other complex yield enhancing investments regardless of the brokerage firm.

It appears that the YES strategy may have been sold to UBS clients as a conservative and low-risk investment strategy that would provide them with an increased yield (income) in their portfolio. In fact, in our opinion, the strategy was an esoteric leveraged options strategy that utilized an options strategy known as the Iron Condor, which is inherently risky as it relies on consistent stability in the markets.

USB YES employing the esoteric Iron Condor strategy uses a leveraged options strategy in a client’s portfolio. UBS would use the client’s assets as collateral in a margin account then execute four different options trades, simultaneously selling calls and puts in an attempt to generate income and buying calls and puts in an attempt to hedge risk. This resulted in the creation of a price spread. If the price of the index or security the options were a derivative of stayed within the spread it would produce a premium to the investor. However, the excessive volatility experienced by the markets recently and most notably in the fourth quarter of 2018 blew through these spreads resulting in serious losses to investors.

House of Representatives Votes to Block Controversial Regulation Best Interest

June 27, 2019 | Malecki Law Team

The House of Representatives has voted to block funding for the highly contentious four-pronged investment advice reform package deemed “Regulation Best Interest” through an amendment to the Financial Services and General Government Appropriations Act. Huge fiduciary duty proponent, Rep. Maxine Waters, D-California proposed this amendment which prevents the SEC from using any funds under the Act to enforce Regulation Best Interest. The amendment could halt the SEC’s recently approved advice package, which includes Regulation Best Interest, Form CRS Relationship Summary and the agency’s interpretations of two concepts under the Investment Advisors Act. Our investor fraud attorneys echo Maxine Waters sentiments that the final rules fail to include the much-needed fiduciary duty and only facilitates further confusion, which is a far cry from strengthening investor protection.

Regulation Best Interest emerges a year the courts repealed Obama Era’s Department of Labor’s fiduciary standard, which required advisors to put their client interests first. Historically, the regulatory landscape distinguished between financial advisors who were obligated to legitimately act as fiduciaries and brokers not held to as stringent of a standard. Investment advisors are required to show an ongoing duty of loyalty and care, in serving their clients best interests at all times under the Investment Advisors Act of 1940. Meanwhile, brokers were only obliged to meet a “suitability standard,” according to FINRA rules, when recommending securities to investors. Under FINRA rule 2111, brokers must have a “reasonable” belief that a potential investment product or strategy is “suitable” for the investor based on the customer’s age, objectives, risk tolerance, and other information.

The most significant rule included in the standards reform package, Regulation Best Interest is intended to strengthen the duty of care owed by brokers above just the suitability standard. The SEC claims that the regulations would disclose conflicts and clarify the duties owed to investors. However, under these rules, broker-dealers are only required to disclose, but not necessarily mitigate any conflicts of interests with investors, unless state law is more strict. With this in mind, brokers are still not required to put their client’s interests entirely before their own genuinely if state law does not provide protection. Essentially, brokers can now advertise themselves as serving their clients’ “best interest” while not putting their clients’ interests first absent state prohibitions. While more disclosures are always beneficial, Regulation Best Interest fails to raise the standard of care enough to help investors not get taken advantage of by unscrupulous financial professionals.

The SEC Collects Only Around Half of Fines

May 24, 2019 | Malecki Law Team

A significant way that the Securities and Exchange Commission enforces federal securities laws is through levying fines on wrongdoers in the financial services industry. Within the past few years, the SEC has issued billions of dollars in civil penalties and disgorgements in civil enforcement proceedings against defendants. The SEC allocates received fines, amongst other things, to compensate victims of securities violations. The unfortunate reality, however, is that the SEC only collects a little over half of the fines imposed through settlements and judgments according to agency statistics reported by Wall Street Journal.

In a five-year fiscal period ending in September 2018, the SEC reportedly collected 55% of the 20 billion dollars in fines imposed upon wrongdoers in the industry. Between 2009 and 2013, the SEC issued $14.6 billion in fines but collected 60% from the defendants. In the fiscal year 2018 alone, the SEC only received about 28% of their 4 billion dollars in fines levied through 821 enforcement actions. Out of the total owed fines, $1.7 billion comes from a settlement with an international oil company, Petrobras and the SEC is permitting this owed money to go to Brazilian authorities instead. Therefore, it is not unlikely that the SEC will never collect this significant fine that could have gone to funds meant for harmed investors.

The SEC has struggled with collecting civil penalties and disgorgement ordered in enforcement proceedings for quite some time. Based on the kinds of people and entities fined, the SEC often holds a low chance of actually getting the money. Fined defendants often do not have the money to pay, on top of dealing with the other consequences of their actions such as serving prison time and owing civil suits. After all, several fraud perpetrators, such as Ponzi Schemers get charged for their actions only after losing money needed to maintain their scheme. Even if the defendants can afford to pay the fine, the SEC does not have the right to force payment by seizing a debtor’s property or assets. Instead, the SEC must go through the long, tedious process of collecting money through liens and other court remedies to collect on the judgments.

The SEC called me, should I talk to them?

May 16, 2019 | Malecki Law Team

Getting called by the SEC can be a frightening experience for anyone. Such a call is especially serious for financial professionals including those that trade in stock or work for public companies or companies which had stock that sold in private offerings. The SEC can oblige any American citizen to comply with any demands for information that could assist in their enforcement of federal securities laws. One of the more frequently asked questions that our securities regulatory law team answers in our free consultations is: “Should I respond to the SEC’s phone call?” The answer is yes, but only after retaining an experienced securities regulatory attorney to represent you in the process and be your intermediary. The contacted party should take down the SEC caller’s name and information to call back later.

Our securities regulatory attorneys advise individuals not to respond immediately and without a lawyer to mitigate risks. Through this course of action, contacted parties are more protected from unwarranted charges and other risks that arise when speaking with the SEC unprepared. The SEC may tell you that you are not a target, but they will not make any enforceable promises in that regard. It is up to you to make sure that you do not become a target. Remember, the English language can be tricky, and lawyers’ use of it is different from that of the average layperson. A point to keep in mind is that when the SEC calls, it has an agenda that prioritizes their mission and not your specific interests.

The SEC reaches out to people to gather facts to determine whether any provisions of federal securities laws or rules have been violated. Thus, financial professionals contacted by the SEC are either the target of an investigation or believed to have related knowledge. The SEC may use the information you provide in the testimony to pursue civil charges through administrative or court proceedings. Additionally, the SEC may provide information to other agencies for their own separate federal, state, local or foreign administrative, civil or criminal proceedings. Individuals contacted by the SEC must respond fully, truthfully, and honestly or risk receiving fines and even possibly terms of imprisonment. In certain cases, it may be in your best interest to asset your fifth amendment rights and not testify at all.

Malecki Law Securities Attorneys Lobby for Investor Rights on Capitol Hill

April 12, 2019 | Malecki Law Team

On Friday, Malecki Law securities attorneys Jenice Malecki and Darryl Bouganim traveled to Washington D.C to lobby on behalf of investors as part of PIABA’s annual Hill Day. PIABA is an international bar association for securities attorneys representing investors in disputes within the financial services industry. As part of Hill Day, PIABA attorneys from across the nation met with representatives and their legislative aids on Capitol Hill to lobby for stronger investor protection. Following a day of discussing the issues amongst PIABA members, our attorneys met with officials across party lines including at the offices of Brian Higgins, John Katko, Tom Reed, Danny Davis, John Hawley, Tim Scott, and Patty Murray. Alongside other PIABA members, Malecki Law securities attorneys lobbied for the FAIR Act; legislation to fund outstanding arbitration awards; and modification or clarification of the proposed Regulation Best Interest.

On Capitol Hill, Malecki Law attorneys lobbied for members of the House of Representatives and Senate to co-sponsor the Forced Arbitration and Repeal Act, known as the FAIR Act. U.S Rep. Hank Johnson (D-GA) and U.S Sen. Richard Blumental (D-CT) introduced the FAIR Act to end the use of mandatory arbitration in their effort to restore public accountability. As it stands now, investors must sign contracts with forced arbitration clauses when opening new brokerage accounts. The FAIR Act outlaws forced arbitration, thereby granting investors the freedom to choose venues besides private arbitration to adjudicate their disputes. Investors will still have the option to choose to use arbitration under FINRA rules, just as how it was before the historic Shearson/American Express v. McMahon case.

Mandatory arbitration clauses within investment account contracts undermine investors’ rights for fair process and their right to trial by jury under the 7th amendment. The industry’s self-regulatory agency, FINRA runs arbitrations as off the record legal proceedings. Instead of a judge and jury, one or three arbitrators decide on the verdict of cases. A major problem is that arbitrators are usually industry people who tend to be overwhelmingly older, white and male. Thus, the arbitration pool is not diverse enough for the diverse investors that use it to feel their case is being heard by their peers, which undermines the process. Additionally, arbitrators do not have to apply the law or include any reasoning behind their decisions. When only 40% of their cases win their cases, the process should be more transparent especially with the other forces that could foster bias. Even after winning their case in arbitration, investors sometimes cannot collect their damages from the wrongdoers found liable. This undermines self-regulation.

Two Whistleblowers Win $50 Million Award from SEC for their Smoking Gun Evidence

April 1, 2019 | Malecki Law Team

The Securities and Exchange Commission continues to make it clear that whistleblowers are among their most potent enforcement weapons in their law enforcement arsenal. In a press release on March 26, the SEC awarded a combined $50 million to two whistleblowers who provided info leading to a successful enforcement action against a major financial institution. Jane Norberg from the SEC’s Office of the Whistleblower referred to the involved whistleblowers and others who lead the enforcement as the “source of smoking gun evidence and indispensable assistance.” One whistleblower received $13 million, and the other won a $37 million award, which is the SEC’s third-highest whistleblower award as of yet. Our whistleblower attorneys view this particular case as another example of the SEC’s growing willingness to provide large sums of money to qualifying individuals.

The whistleblower is said to have provided information that helped the SEC and CTFC pursue action against JPMorgan Securities and JPMorgan Chase Bank. While the SEC did not openly name any involved party, the law firm representing the whistleblowers that received the smaller award has come forward with information. The charges involve allegations that from 2008-2013 JP Morgan failed to provide certain disclosures that would have been pertinent to their wealthy investors. Allegedly, JP Morgan steered clients towards its own mutual funds and hedge funds, without providing the proper disclosures. All in all, the whistleblowers’ original information allegedly assisted the SEC and the Commodities Futures Trading Commission with securing a $307 million settlement with JP Morgan.

As this case, as well as others show, whistleblowers have a lot to gain besides just helping restore public order and market integrity. Clients represented by whistleblower attorneys know that being an asset to the SEC can pay off. The SEC’s whistleblower program launched in 2011 to incentivize people to come forward after the passing of the Dodd-Frank Wall Street Reform and Consumer Protection Act. As part of the program, whistleblowers with original, timely and credible information are eligible to receive a percentage of recovered funds. Whistleblowers qualify if their tip helps the agency to achieve a successful enforcement action recovering least $1 million. The award, which ranges between 10-30% of recovered funds comes from an investor recovery fund set up by Congress. The investor fund is from sanctions paid from federal securities law violations. The Dodd-Frank Act also grants whistleblowers the right to anonymity and protection from employer retaliation.

FINRA’s 2019 Risk Monitoring and Examination Priorities Letter

January 31, 2019 | Malecki Law Team

Financial professionals handling compliance keep abreast with changes in the regulatory landscape to effectively allocate resources. At the start of each year, regulatory agencies Financial Industry Regulatory Authority and the Securities and Exchange Commission publish their priorities. FINRA’s recently released Risk Monitoring and Examination Priorities Letter states emerging issues as well as ongoing concerns for the upcoming year. In an introductory note, Robert Cook explains that this year’s letter more broadly relays FINRA’s priorities for risk monitoring with a more pronounced focus on new issues. Firms can use the information contained within this letter to ensure that their compliance, supervisory and risk management programs reach FINRA’s standards. Distinct from earlier times, the FINRA letter focuses on explaining new issues and risk analysis.

The main new issues on the regulatory agency’s radar are the firm’s involvement with online distribution platforms, fixed income mark-up disclosure, and regulatory technology. Specifically, FINRA is concerned with how firms meet AML requirements, supervise communications with the public and conduct suitability analysis when involved with the distribution of securities on online distribution platforms. FINRA plans to evaluate the risks of excessive or undisclosed compensation arrangements between firms and issuers for offerings exempt from registration under Regulation A. Furthermore, FINRA intends to assess how firms handle risks with sales of offerings under Regulation D to non-accredited investors. FINRA expects firms to follow FINRA rule 2232 and MSRB Rule G-15 to comply with mark-up or mark-down disclosure obligations on fixed income transactions. As more firms use regulatory technology for compliance, FINRA plans to examine the efficiency and risks involved.

While this year’s letter pays more mind to new issues, FINRA briefly restates ongoing problems that have already been named as top priorities. Notably, FINRA mentions suitability determinations, outside businesses activities, and private securities transactions; private placements; data quality and governance; communications with the public; trade and order reporting; anti-money laundering (AML); net capital and consumer protection; best execution; fraud; insider trading and market manipulation; record keeping, risk management and supervision related to these and other areas. As per usual, FINRA will be mindful of how firms supervise and respond to associated persons with flawed disciplinary records. In the rest of the letter, FINRA categorizes the other concerns into sales practice risks, operational risks, market risks, and financial risks.

The Government Shutdown Stalls the Securities and Exchange Commission’s Enforcement Activity After Impressive 2018 Achievements

January 18, 2019 | Malecki Law Team

The current ongoing federal government shutdown adversely affects the Securities and Exchange Commission with a “very limited number of staff members available” to carry out the agency’s tasks. The SEC handles the enforcement of federal securities laws through overseeing approximately $90 trillion in annual securities trading as well as the activities of over 27,0000 registered entities and self-regulatory organizations. The SEC’s Division of Enforcement investigates into potential securities laws or regulatory violations and recommends any required action against perpetrators. Now, the SEC is reportedly operating at 5.8% and the enforcement division at 8% of capacity. In fact, the Division will take months after the shutdown ends to recover, according to the SEC’s Office of Internet Enforcement’s chief, John Stark. The constraints posed by the government shutdown come after the SEC’s outstanding enforcement and accomplishments in 2018, posted in their second annual report.

Starting with the first 2017 report, the Division assesses the performance of their fiscal year with five core principles in mind. These Division of Enforcement’s five principles are a focus on the Main Street Investor; individual accountability; keep pace with technological change; impose remedies that most effectively further enforcement goals; and continuously assess the allocation of resources. Based on their assessment, SEC’s codirectors Stephanie Avakin and Steven Peikin described the Division of Enforcement’s efforts this year as a “great success”. In evaluating their effectiveness, the Division’s assessment focuses more on the “nature, quality, and effects” of their enforcement actions, rather than just the quantitative metrics.

Nonetheless, the Division did accomplish impressive numeric feats as well despite the constraints of a hiring freeze and the Supreme Court’s 2017 decision in Kovesh v. SEC. The Division has investigated and recommended hundreds of cases alleging misconduct, leading to $794 million returned to harmed investors. Compared to the prior year, the SEC filed more enforcement actions (821) with higher numbers for stand alones (490), follow-on admin proceedings (210) and delinquent filings (121) in 2018. The most common stand-alone enforcement actions involved securities offerings, investment advisors, and issuer reporting as well as disclosure. Despite Kovesh v. SEC limiting the window of time for collecting, the SEC ordered around $2.5 million in disgorgement and another $1.5 million in penalties.

Barclay PLC Fined After CEO Allegedly Tried to Find Anonymous Whistleblower’s Identity

January 8, 2019 | Malecki Law Team

Securities employees who decide to report covert unjust employer practices to other individuals are oftentimes taking a huge personal risk for public betterment. Without legal protection, these whistleblowers could end up facing termination, workplace harassment, and other retaliation. While various federal, state, and common laws exist to provide anonymity and other protections to whistleblowers, violations are not completely unprecedented. Perhaps unsurprisingly, some employers might still try to take illegal measures to find and persecute whistleblowers without regard for the rules. Fortunately, certain federal and state laws exist to also provide whistleblowers with justice because of the infringement of their rights.

Recently, New York state regulators ordered that Barclay PLC, as well as its New York branch, pay a $15 million fine for their “shortcomings in governance, controls and corporate culture” in handling a whistleblower matter. Barclay PLC’s chief executive officer, Jeff Staley allegedly tried to uncover the identity of an anonymous employee whistleblower. A New York Department of Financial Services probe uncovered that Barclay PLC’s handling of Staley’s situation potentially compromised its whistleblower program. As an additional caveat of the settlement, Barclays will submit a detailed written plan to ensure the implementation of the whistleblowing program as well as improve the board’s oversight going forward. Big banks, such as Barclay PLC are required to have a strong program in place to protect their employees.

The alleged violation ensued when Mr. Staley requested the head of Barclay PLC group security uncover the identity of the whistleblower author of two letters circling around the bank. The purported letters criticized Barclay PLC’s management, Mr. Staley and a newly hired employee, Tim Main. As repeated, Mr. Staley claims to have needed the identity of the letter writer to protect Tim Main from “personal attack”. The group chief compliance officer, general counsel and other bank officials had advised Mr. Staley to steer clear from his inquiries into the whistleblower. Yet, Mr. Staley claimed to have not been aware that unmasking a whistleblower was even against the law, according to news sources. Our whistleblowers find it puzzling how a highly ranked bank official could not understand nor respect the sanctity of whistleblower identity protections.

What is the Difference Between a SEC Subpoena and a FINRA 8210 Request?

December 12, 2018 | Malecki Law Team

At some point in their careers, many financial professionals will find themselves on the receiving end of a subpoena from Securities and Exchange Commission (“SEC”) or a Financial Industry National Regulatory Authority (“FINRA”) 8210 Request. The receipt of such documents signifies the regulatory or self-regulatory agencies’ request for information and/or documents in relation to an investigation of a potential securities laws violation. While the Securities and Exchange Commission will formally issue a subpoena, FINRA sends parties the equivalent inquiry letter, often referred to as an “8210 Request.” Both entities can request the receipt of a wide range of information and a high number of documents within a short amount of time. Furthermore, recipients who do choose not to respond to these critical requests honestly could ruin their careers and lives. While the SEC subpoena and FINRA 8210 request may share some similarities, and as we have explained in this space before, there are many differences based on the powers allotted to the respective regulatory agencies.

The Securities and Exchange Commission is a federal government regulatory agency entrusted to develop national regulations and enforce federal laws. Upon reasonable suspicion of securities laws violations, the SEC can issue a subpoena to anyone. Meanwhile, FINRA is not an official government entity, but rather the security industry’s self-regulated membership organization. FINRA has the authority to request documents, information, and testimony from those under its’ jurisdiction in a FINRA 8210 letter. Both the SEC and FINRA run a similar on-the-record “OTR” interview, with the option of an attorney present in the event of a testimony request. However, the SEC offers more response flexibility, protections under the Fifth Amendment and investigation information access in comparison with FINRA.

In the face of a potential securities law violation, the SEC will often send subpoenas to the targets as well as any potential witnesses with information. A SEC subpoena can demand documents (duces tecum) or oral testimony (ad testifcandum) without including context. The SEC can start an investigation by presenting their suspicions in a formal order of investigation. Chiefly, a former SEC Enforcement attorney, John Reed Stalk alleges that there is a “low standard” of cause needed for approved subpoena issuance. The formal order of investigation mainly contains information regarding the scope and possible subjects of the investigation. Subpoenaed parties and their attorneys can request the order.