Badge - AV Preeminent 2020
Badge - Expertise, Best arbitrators & mediators in New York, 2016
Badge - Best Attorneys of America
Super Lawyers
Badge - Badge - Avvo Rating 10.0 Top Attorney
Badge - Super Lawyers Jenice L. Malecki

On July 20, 2020, the Securities and Exchange Commission brought investment advisor and former registered representative Michael “Barry” Carter up on multiple federal charges relating to the alleged misappropriation of over $6 million in funds.  Mr. Carter allegedly stole this money from his brokerage customers, including nearly $1 million from one elderly client, defrauding them in the process in an effort to remain undetected.  His alleged fraudulent acts occurred between the fall of 2007 and spring of 2019 while working at Morgan Stanley, with over 40% of the misappropriation occurring in the last five years, all to sustain his extravagant lifestyle.

Mr. Carter was reportedly fired from Morgan Stanley in the summer of 2019 for misappropriation of funds.  Later that fall, FINRA launched an investigation into his alleged crimes and he was then barred by FINRA for refusing to turn over documents relating to the alleged misappropriations.

Additionally, the state of Maryland reportedly brought criminal charges against Mr. Carter, to which he has already pled guilty to the investment advisory fraud charges and wire fraud; as part of his plea agreement he will, according to prosecutors, be required to pay back about $4.3 million, the total net proceeds of his illegal activities.

Filing a claim for most investors is a walk over a new bridge and involves doing something they have never done before: filing a “lawsuit.” Most people never wanted to have anything to do with the law, but if you lost your life savings, you really do not have much of a choice but to fight to get it back.    The stress you may feel engaging in this process can be mitigated by understanding what lies ahead to prepare yourself mentally, emotionally and physically – by getting your evidence lined up.   Outlined below is the process of filing a claim in arbitration through the final days of trial, which will hopefully bring ease to questions you may have regarding investor arbitrations.

In today’s world, many people invest their money as a way to increase their income.  Some choose to invest on their own, while others use brokers and investment advisors.  As with any job, unfortunately in these professions, bad apples do exist.  Where wrongdoers exist, they cause harm to their clients and to their clients’ investment accounts.  If this happens, clients can sue their broker by filing an arbitration claim within the dispute resolution forum of the Financial Industry Regulatory Authority (FINRA) – the only forum for retail investors to sue brokers and brokerage firms.  The initial claim papers filed details the party or parties that have wronged you, specifies the relevant facts of the events leading up to and causing the harm in your investment account(s), and lists the remedies requested.  When deciding on whether to file an arbitration claim with FINRA, Malecki Law’s FINRA arbitration attorneys can help discuss the merits of your claims and frame them in what is known as a “Statement of Claim,” like a complaint pleading in court.

Once a Statement of Claim arbitration has been filed with FINRA, the party or parties you are suing, also known as the “respondent(s),” have 45 days to file a response, which is called the “Statement of Answer.”  The Answer will typically include relevant facts, supporting documents, and defenses from the perspective of the broker or firm you are suing.  One can anticipate that in the Answer the respondent(s) will try to discredit your claims.  Malecki Law is skilled and very familiar with debunking these typical defenses, as well responding to any creative new tricks.  After reading the Answer, you have the opportunity to amend your Statement of Claim if you feel something should be changed from your originally filed claim.

Many clients are asking whether FINRA arbitration claims can be brought against a bank and/or its employees for losses sustained in their investment accounts.  The answer is yes.  There are more than 5,000 commercial banks in the United States.  Along with traditional banking services, many of these banks also provide in house “financial advisors.”  In order to charge their customers more, these bank branch financial advisors encourage bank customers to invest their savings with them.  Now more than ever, bank customers are being pressured into using these services, and their life savings are being invested rather than saved.  This can lead to losses in customer accounts, where customers would have been better off keeping their funds in a savings account.  Malecki Law’s FINRA arbitration attorneys have handled many cases involving claims where customers lost money investing with a commercial bank financial advisor.

Up until Congress repealed the Glass Steagall act in 1999, commercial banks, banks that take in cash deposits and make loans, could not offer investment services.  The Glass Steagall Act separated commercial banks and investments banks and prohibited commercial banks from providing any investment service to its customers.  Once the act was repealed, in order to make greater profit, banks took advantage and began offering these services.  Although banks often incentivize their customers to use these services, such as offering lower fees or free checking, the bank’s investment services, however, are not free.

Investing funds with a bank is no safer than investing funds through an online or traditional brokerage firm.  Customers ordinarily use banks for savings, checking, CDs, and, sometimes, securing a mortgage or other type of loan.  These types of accounts are a bank’s specialty and are FDIC insured, meaning that these are vehicles designed to prevent the loss of money in customer accounts.  Contrarily, investments are not a bank’s specialty and investing with a bank’s financial advisor, similar to making an investment in an online or traditional brokerage account, comes with risk, often incurring higher fees than an online or traditional brokerage account.  Moreover, not only do the investment products offered at banks charge higher fees, but the quality and diversity of investment products is limited, which increases risk to the customer’s investments.

Can a Broker-Dealer Firm be Sued for Failure to Supervise a Broker?

Broker-dealers, also known as brokerage firms, are routinely sued for “failure to supervise” claims.  The Financial Industry Regulatory Authority (FINRA), the organization which regulates broker-dealers and their employees, has a series of rules requiring broker-dealers to establish and maintain a supervisory system to supervise its brokers and other employees, as well as to monitor all trading activity to ensure compliance with applicable securities laws and regulations.  In many of our clients’ cases, the brokerage firm’s lack of supervision and failure to properly supervise a broker’s misconduct has directly and indirectly impacted our clients’ accounts, causing losses.  Malecki Law’s FINRA arbitration attorneys have handled many cases against brokerage firms in New York (and across the country) for failure to supervise and have received favorable monetary awards and settlements for our clients.

A supervisory system that cannot reasonably surveil and detect trades that violate securities laws and deceptive trade practices does not meet FINRA’s minimum requirement of proper supervision.  Moreover, proper supervision also requires a firm supervisor to approve a broker’s daily trades, as well as to systematically review clients’ accounts for wrongful trading activity such as recommending unsuitable investments, trading without proper authority from the customer, or charging high commissions that make it virtually impossible for the customer to make any sort of profit.

Investors often ask whether a clearing firm can be liable for losses sustained in their accounts.  The answer is “yes.”  Traditionally, clearing firms, also known as clearing houses, are financial institutions established to handle the confirmation, settlement, and delivery of transactions.  To ensure its clients’ transactions are made in a prompt and efficient manner, the clearing firm acts as a middle-man and is essentially the buyer and seller in the transactions.  To attract business and compete with other clearing firms, clearing firms offer an ever-expanding suite of services that go beyond mere routine clearing functions, which often brings them to be actively and directly involved in the actions of brokerage firms and their brokers.  Courts have held that clearing firms that extend services beyond “mere ministerial or routine functions” can be liable to an investor for a broker-dealer or broker’s misdeeds.

On behalf of several investor clients, Malecki Law’s FINRA arbitration attorneys are currently investigating cases involving claims against Pershing, LLC, a clearing house, and its introducing brokerage firm client, Insight Securities, Inc.  The claims involve an SEC-censured entity, Biscayne Capital.  Our clients sustained losses in their accounts due, in part, to Pershing’s alleged negligent supervision of transactions through its shared platform with Insight.

In relationships like this, the introducing firm and clearing firm have a clearing agreement, usually giving the clearing firm discretion to terminate any account, the responsibility to notify the introducing broker of suspicious activity, and to provide training or trained employees to look out for misconduct.  Usually the clearing firm has the responsibility to conduct regulatory monitoring of SEC Financial Responsibility Rules and to be directly involved in Anti-Money Laundering oversight.  Thus, with these heightened responsibilities, a clearing firm can move beyond its ministerial and routine clearing functions.

Many clients are asking, “can my arbitration hearing be done online by video?” The answer is yes.  FINRA allows for remote hearing services, via Zoom and teleconference, to parties in all cases.  In arbitration, all parties can agree as to almost anything and FINRA will allow it – such as who the arbitrators are, methods of picking arbitrators and/or how the hearing will happen.  The trick is to get your adversary to agree to alternative hearing methods or to get a sitting arbitration panel to order (force) your adversary to do it. A hearing can happen a number of ways with FINRA’s blessing, so long as it can be recorded.  Next week, we expect that FINRA will set out more formal guidelines and we will update this blog in a new post.

Zoom is a user-friendly video platform that provides high-quality and secure options for conducting remote hearings.  The platform allows parties, arbitrators, counsel, and witnesses to share documents and their screens with other participants.  Zoom is a viable option for parties unable to attend an in-person hearing. Malecki Law’s FINRA arbitration attorneys have experience and systems in place, ready to use this method for hearings in investor arbitrations, as well as industry employment and regulatory matters.  For many years, remote witnesses have participated and testified via video and telephonic methods.  It is really not a completely new concept.

Whether the hearing is remote or in-person, the prehearing process will not be hindered.  In customer dispute cases, where customers bring claims against their broker and/or broker-dealer, all aspects, except for an in-person hearing, are done remotely (such as filing the claims, resolving discovery disputes, and interviewing witnesses).  As a matter of fact, most claims against a broker and/or broker-dealer will settle before the hearing is scheduled to begin.

U.S. oil prices have been on a roller coaster ride over the last few weeks, at one point dropping below $0 for the first time in history to -$37.63 a barrel.  Oil has since rebounded from its subzero levels, but it remains questionable as to whether it can stay there.  It begs the question, what does this mean for investors and the U.S. oil market generally?

When prices cratered below zero, there were those that weighed in that it was nothing to worry about.  After all, the subzero price drop really had more to do with the expiration of contracts for oil futures.  It was explained that the current demand for oil is so low that producers would rather put their oil in storage and then sell it at some point in the future.  Placing additional strain on the market, the U.S. is running out of places to store it, with backlogs of oil tankers from Saudi Arabia out at sea and being turned away from U.S. shipping ports.

The U.S. has traditionally been a net importer of oil, but with the emergence of oil fracking, the U.S. at one point in 2019 surpassed Saudi Arabia as the world’s top oil exporter.  This trend towards parity gave many observers of the U.S. oil market a feeling of confidence that the U.S. was a rising oil power, with President Trump going so far as describing the U.S. level of participation as “energy dominance.”  But as pointed out by professionals, increased participation in the market has little to do with control over the market.  For instance, the price of U.S. oil recently began to spiral down when Russia and Saudi Arabia started to increase their production levels.  U.S. oil prices teetered even further, and then below zero, when the global and U.S. economic response to the spread of Covid-19 began to take shape – every state being under some level of a stay-at-home order, with fewer cars on the road, fewer people travelling by air, and U.S. oil workers in Texas and elsewhere being laid off in the tens of thousands.  The pumps have stopped and oil companies are already declaring bankruptcy, with likely more to follow.

Retirees and other retail investors who lose money in the stock market often don’t know where to turn to.  In fact, many people are often surprised to learn that they can recover their investment losses, but this realization is often delayed or completely obscured by our understanding of the markets being informed by two competing views.  On the one hand, the daily news feed of a fluctuating market conditions us to believe that putting our hard-earned savings in the stock market has its risks, no different from a casino, so “buyer beware.”  On the other hand, investment banks and brokerage firms pump out a steady diet of ads that lead us to believe that their financial advisers can guide us with our investment choices to help manage the risks, and safely plan for our retirement years.

For the average investor, it is difficult to know whether one is truly receiving sound investment advice.  A booming market can often hide the flaws in a poorly constructed investment portfolio.  Flaws in investment strategy usually don’t reveal themselves until the markets show some extreme volatility.  We are seeing this of late in the wake of the Coronavirus fallout — the market goes down by a thousand points one morning, only to swing up by a thousand points the same afternoon.  This leads many investors to ask a logical question:  If the market went down by a certain amount and then recovered by the same amount or more, how come my portfolio did not rebound in kind?  Diagnosing what went wrong with your portfolio can be a challenge for the average person, and financial advisers and firms will be quick to distance themselves from any responsibility, often blaming the market and then encouraging you to just hold on.

It is our human instinct to trust the financial professionals whom we have built a relationship with over the years.  In a bull market, that relationship and bond of trust likely only grew stronger.  So we are reluctant to burn a bridge and walk away from a bad adviser, who in some cases may have given you tickets for a sporting event or improperly befriended you (it is a business relationship and your broker should not rely on your friendship).

As we have been saying in this space for many years, getting a Rule 8210 Notice from FINRA can be a jarring event.  If you have received an 8210 notice, you should take it seriously, as well as immediate steps to develop your best course of action to comply with the request. An 8210 Notice is a subpoena from FINRA that is typically sent to registered representatives in connection with an informal inquiry that does not have to be reported on your form U4. When you first receive an 8210 notice, FINRA is likely trying to determine if there have been any violations of securities and/or industry rules and/or regulations.  You should notify your compliance officer, as they will likely have already received a copy from FINRA, but being transparent is important.

It is important to meet with an attorney as soon as possible to determine the best ways in which to protect your interests during the process.  All involved parties will not necessarily share the same interests, i.e., your firm and/or supervisor may have their own self-preservation interests.   As part of the 8210 notice, you will be required to answer a list of questions (interrogatories) and produce sometimes a wide range of documents, both business and personal.  The attorneys at Malecki Law are experienced in defending FINRA registered representatives and firms in FINRA disciplinary matters and can work with you in responding to interrogatories and assist you with your document production using state of the art electronic discovery tools.

In working with your attorney to respond to interrogatories and produce documents you should also start to prepare for a potential “on the record” interview (or “OTR” for short).  OTRs before FINRA involve sitting in a conference room with investigators and answering their questions under oath.  You should have your attorney prepare and accompany you to an OTR. While not all cases involve an OTR, many do.  Experienced counsel will know the best way to couch what happened with the right language and explanation.  Furthermore, it is important to identify and explain mitigating circumstances as soon as possible before enforcement decisions are made.

In March 2020 Oil prices had their worst day since 1991, plunging to multi-year lows. Tensions between Russia and Saudi Arabia and OPEC’s failure to strike a deal were escalated by the global economic slowdown spurred by COVID-19 resulting in oil’s worst day since 1991. With oil’s and the energy markets substantial price plunge the investment fraud attorneys at Malecki Law announce the firm’s investigation into potential securities law claims against broker-dealers relating to the improper concentration or oil and gas in portfolios, as well as the sale of energy related structured notes, Exchange Traded Funds (ETFs), and Master Limited Partnerships (MLPs).  Malecki Law has successfully prosecuted a number of these cases, including obtaining awards of attorneys’ fees and costs for investors.

Malecki Law is interested in hearing from investors who were recommended concentrated positions in oil and gas, as well as those recommended futures in Oil and Gas, MLPs or energy sector ETFs. Investors have lost millions in these products as the energy markets dropped.  As prices have continued to slide, losses have compounded. The energy market plunge is terrible for those whose financial advisors recommended that investors stay in and “ride it out.”

Unfortunately, many energy sector investments are risky investments that can be inappropriate for typical “mom and pop” investors, as well as those heading to or in retirement.  Unfortunately, there are some financial advisors and brokers that sell them to their clients anyway, without fully disclosing the potentially devastating risks.

Contact Information