2 December 2011

by Dona Szak and C. David Mee

This is the first in a six-part series regarding proper precautions companies can take to help a fleet survive a potential lawsuit should an employee become entangled in an accident claim.

Given the time and expense of defending a lawsuit – regardless of whether the suit has merit – what are the steps to take to avoid the possibility of a suit, or if sued, to mount an effective defense?  Discussed are the major grounds for liability, key steps in the claims process, and preventative measures that can help minimize liability.

To minimize liability, fleet managers can: 

Implement PM programs to avoid maintenance-related accidents.

Develop and enforce policies addressing use of cell phones, GPS, telematics, and other electronics.

Provide periodic driver safety training and keep records of such training.

Screen driver motor vehicle records, in compliance with local law.
 

In future columns, we will address:  

Two legal theories relevant to fleet users.

Responding to an accident.

Key steps in a claims process.

Evaluating whether to settle or go to trial.

Avoiding problems with preventive measures.

 

(originally published in “Fleet Financials," July/August 2010)

Practice Areas:  Complex Business Litigation and Arbitration 

 

The Dodd-Frank Act - What Employers Need to Know:   Part 1 of 5

2 August 2011

by Dona Szak

Dodd-Frank certainly is meant to address the financial system, but its effects are not limited to financial companies. This 1,000-plus page legislation touches virtually every publicly-traded company. The full name of the statute is the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, commonly called Dodd-Frank. What are some of the key provisions that employers should know about?

More than financial reform 

•  Will affect all publicly-traded companies.
•  New obligations for employers include: 
        »  Shareholder review of executive compensation 
        »  Disclose golden parachutes. 
        »  Explain why same person – different individuals – serves as both CEO and chairman. 
        »  Compensation committee independence. 
        »  Disclose relationship between executive pay and performance.
        »  Disclose whether hedging is allowed.
        »  Develop policy to claw back incentive-based compensation if financials are restated.

But probably the most important part of Dodd-Frank, from the standpoint of employment lawyers, is the bounty and whistleblower program. Let’s see how this works.

The program in a nutshell:

•  Expands Sarbanes-Oxley whistleblower protection.
•  Whistleblower may earn a bounty.
•  No retaliation against whistleblower.
•  Key statute: 15 U.S.C. § 78u-6.

Practice Areas:  Antitrust, Competition, and Trade Regulation; Financial Fraud; White Collar Litigation

 

Investor Protection Tips: Part 2 of 3

7 April 2011


by C. David Mee

One of the keys in having a successful experience with an investment firm is to understand your relationship with your broker or financial advisor. You should know what their role is, what they will (and won’t) do for you, and how they get paid. Here we discuss the four main types of advisors.

Full Service Stockbrokers

Full service stockbrokers represent the standard traditional model for investing. Upon opening an account at a full-service brokerage firm, you will work one-on-one with a personal broker or his team. Often called financial consultants or investment consultants, these brokers will offer assistance in making your investment decisions, structuring your portfolio, and may also provide additional services such as banking or loans. Full service stockbrokers typically are available to provide research or answer questions about your account. In exchange for this personal service and guidance, full service stockbrokers typically charge a relatively high commission or fee. They also may charge management fees and other account fees. For many people – especially for modest investors – these additional services are worth the extra cost. It is always important to have a clear idea of what you will be charged and for what.

One important thing to understand about brokers is that they are generally not considered to have a fiduciary duty to customers (although this standard may apply in certain limited circumstances). A broker is only required to know your financial situation well enough to understand your financial needs, and to recommend investments that are suitable for you based on that knowledge. Nothing more – nothing less. Because most full service stockbrokers are paid on commission, this may increase their interest in the frequency of trading in the customer’s account. This type of monetary interest can certainly come into play when the broker is making a recommendation. In the end, a good broker is probably worth it – but a poor one is nothing but a glorified salesman.

Discount Brokers

Discount brokers carry out buy and sell orders at a reduced commission (as compared to a full-service or traditional broker). A flat fee is typically charged for executing an order. Discount brokers generally provide no personalized investment advice. This approach is geared toward the do-it-yourself investor who does his or her own research. The customer places the order and the broker will simply execute it. Often this is done online or by calling a toll free number and speaking to whichever broker answers the phone. You will not develop a relationship with one individual. In exchange for giving up personal contact with a regular broker, customers are charged a significantly lower commission. Some discount brokers offer limited advice or research reports to their customers for a fee.

Investment Advisors

Investment advisors are in the business of giving advice about securities. They may deal with stocks, bonds, mutual funds, and annuities. They may use a variety of titles in addition to investment advisor (or adviser), such as investment manager, investment counsel, asset manager, wealth manager, or portfolio manager. Investment advisors provide ongoing management of investments based on the client’s objectives, typically with discretionary authority from the client. This allows the advisor to make investment decisions without having to get prior approval from the client for each transaction.

Virtually all investment advisors are registered and thus regulated directly by the United States Securities and Exchange Commission (SEC) or by state securities regulators. (Great caution should be used before hiring any unregistered advisor). Investment advisors are subject to a fiduciary duty, meaning they have to put your interests ahead of theirs at all times by providing advice and recommending investments that they view as being the best for you. This is one major advantage in hiring an investment advisor over a broker. Investment advisors also are required to provide up-front disclosures about their qualifications, what services they provide, how they are compensated, possible conflicts of interest, and whether they have any record of disciplinary actions against them.

Financial Planners

Financial planners as a rule look at every aspect of your financial life—including saving, investments, insurance, taxes, retirement, and estate planning. They help you develop a detailed strategy or financial plan for meeting all your financial goals. A financial professional can give you objective information and help you weigh your alternatives, saving you time and ensuring that all angles of your financial picture are covered. They may work for an hourly fee, a flat fee, on commissions, or a combination of the three.

Others call themselves financial planners, but they may only be able to recommend that you invest in a narrow range of products, and sometimes products that aren't securities. Most financial planners will also be registered investment advisors. Many will hold advanced certifications such as “CFP” which designates a certified financial planner. Some financial planners also serve as brokers. One difference is that a financial planner usually will be subjected to the higher fiduciary standard of care as opposed to the lower standard of care required by a broker.

If the idea of having a person working for your interests and not his firm’s appeals to you, consider a financial planner or registered investment advisor. Good luck and make the decision right for you!

Practice Areas:  Financial Fraud

Change-in-Control:  Pitfalls for the General Counsel to Avoid

11 February 2011

by Jason A. Braun

When a company changes hands, the general counsel is faced with numerous tasks that need to be accomplished. Among those tasks is the need to determine whether a change-in-control clause has been triggered under the company’s management incentive plan.

When analyzing change-in-control questions, keep in the mind the following points to avoid a few potential pitfalls:

1. The federal securities laws may not apply when you interpret the plan

Typically, change-in-control clauses include definitions that borrow heavily from the federal securities laws. In fact, many change-in-control clauses have identical definitions for terms such as “control” and “affiliate” as those found in the securities laws. As a result, there is a knee-jerk assumption that those terms will be construed in accordance with case law interpreting the federal securities laws. Tread carefully before making that assumption and relying on those interpretations. The plain meaning of the term “control,” for example, differs from the meaning set forth in the federal securities laws.

The purpose of the federal securities laws is different than the purpose behind a change-in-control clause and a management incentive plan. Under the federal securities laws, the concepts of “control” and “affiliates” are interpreted with the goal of protecting the public from fraud and ensuring adequate disclosures regarding the relationship of various entities. For a management incentive plan, management and the shareholders are concerned with practical changes at the company and not academic arguments about the interpretation of securities terms.

2. Fiduciary duties may arise based on the company’s conduct

It is not uncommon for management incentive plans to contain provisions disclaiming fiduciary duties. These provisions do not always prohibit a finding that a company voluntarily undertook a fiduciary duty as a result of actions taken by its board of directors.

When a potential change-in-control transaction occurs, a company will need to investigate whether the transaction triggered a change-in-control payment. The company’s actions in connection with the investigation may expose it to an argument that it undertook a fiduciary duty to the individual members of the management incentive plan. For example, assurances to management that the investigation or contemplated transaction will be “fair” (or similar words) to the management may also result in a finding that the company undertook a fiduciary duty.

3. Do you want a “closing” opinion or a full analysis?

When change-in-control issues arise, a company may decide to retain outside counsel to review the transaction and render an opinion on whether the transaction will result in a change-in-control. Outside counsel will be concerned about exposing their analysis to potentially adverse management and later scrutiny in litigation. As a result, these opinions may take the form of a “closing opinion” that states a conclusion without any legal analysis. What may be missing from these types of opinions is a detailed legal analysis of the transaction to support the conclusion. While such opinions may give a company comfort and may be acceptable for some purposes, they could result in difficulties when dealing with a complicated change-in-control analysis.

4. Closing thoughts

Depending on the transaction, whether a change-in-control occurred may require a detailed and thorough analysis of a management incentive plan, the plan’s change-in-control clause, and the terms contained therein. A company risks lengthy litigation and reputation damage should it make the wrong decision on a change-in-control issue. Take a measured and analytical approach to the analysis and, if you retain outside counsel, ensure a thorough analysis is performed with an eye toward disputes with management. If all goes well, incentive plan disputes with management will be avoided and the company will thrive after any ownership changes.

Practice Areas:  Complex Business Litigation and Arbitration

 

BP Litigation Update:  Consolidated RICO Complaint in MDL 2179

28 January 2011

by John W. Clay

Pursuant to an August 10, 2010 Order by the Multidistrict Litigation Panel, hundreds of individual and class action oil spill claims for the Deepwater Horizon blowout were transferred last fall to the Eastern District of Louisiana for consolidation in the multi-district litigation proceeding, 2:10-md-02719-CJB-SS (“MDL 2179”). Among the cases that were transferred for consolidation are causes of action asserted under the Racketeer Influenced and Corrupt Organizations Act (“RICO Act”), 18 U.S.C. §§ 1961–1968.

On January 24, 2011, the Plaintiffs’ liaison counsel filed a 91-page master complaint in MDL 2179, consolidating all of the RICO claims into one class action (the “RICO Complaint”) asserted against BP Exploration & Production, Inc., BP America Production Company, and BP p.l.c. (collectively, “BP”), for damages arising from the Deepwater Horizon accident on April 20, 2010 and the resulting oil spill in the Gulf of Mexico. The RICO Complaint focuses principally on the federal RICO Act, but it also alleges a claim under Florida’s state law equivalent.

In simple terms, the federal RICO Act creates a civil cause of action for damages that arise from a pattern of racketeering involving illegal acts that are committed (or attempted) on behalf of an enterprise. See 18 U.S.C. §§ 1962 & 1964. More particularly, the RICO Plaintiffs in MDL 2179 would need to show as part of their prima facie case that BP is a RICO “person” (within the meaning of 18 U.S.C. §§ 1961(3) & 1962(c)) that conducted, or participated in the conduct, management, or operation of an enterprise, through a pattern of racketeering activity. The RICO plaintiffs also would need to establish, among other things, that BP conducted or participated in at least two predicate acts to commit one or more of the criminal offenses enumerated in 18 U.S.C. § 1961(1).

In the consolidated RICO Complaint, the RICO Plaintiffs seek recovery only from BP, but they are required to establish the existence of a separate RICO “enterprise” (within the meaning of 18 U.S.C. § 1961(4)). In the consolidated RICO Complaint, the Plaintiffs define the enterprise as an “association in fact” between BP and the owner of the Deepwater Horizon drilling rig, Transocean, Ltd.

The RICO Plaintiffs’ primary argument is that BP tried to save costs by concealing from government regulators the alleged inadequacy of BP’s safety plan to prevent or remedy offshore blowouts and oil spills in the Gulf of Mexico. To show predicate criminal offenses that would trigger RICO liability, the RICO Plaintiffs allege that BP committed acts of wire fraud and mail fraud by transmitting false or misleading reports and information to the Minerals Management Service (“MMS”), the U.S. Interior Department agency responsible for offshore drilling operations that is now called the Bureau of Ocean Energy Management, Regulation and Enforcement (“BOEMRE”).

Unlike some of the causes of action that were transferred to MDL 2179, the RICO Plaintiffs must satisfy multiple layers of statutory requirements and predicate elements to establish civil liability for a RICO violation. On the other hand, as a unique feature of the RICO Act, an award of damages would automatically be trebled under 18 U.S.C. § 1964(c) if the RICO Plaintiffs are successful in establishing liability.

Practice Areas: Complex Business Litigation and Arbitration

 

Investor Protection Tips: Part 1 of 3

7 January 2011

by C. David Mee

“In 2009, FINRA took 993 disciplinary actions, barring 383 individuals, suspending 363 others and expelling 20 firms.  We levied fines against firms and individuals totaling nearly $50 million.  In addition, we ordered firms and individuals to return more than $8.2 million in restitution to investors.”   Source: Financial Industry Regulatory Authority (FINRA) annual report 2009.

It seems like every day brings a headline about another rogue broker, an investment firm shutting down, or a financial scam affecting thousands of investors.  The Financial Industry Regulatory Authority report of disciplinary actions for December 2010 was 44 pages long!

With such constant negative news, it brings up the common question of exactly what an investor should do to protect her in the very dangerous world of investments.  In a three-part series we will discuss how to investigate a financial advisor or broker before you hire one; how to understand the relationship between you and the financial advisor or broker; and finally what to do if something goes wrong.

Selecting and investigating your broker

For many people, hiring the right broker or financial advisor can make investing easier and more successful.  The vast majority of stockbrokers and brokerage firms are honest and reputable.  However, like any profession, there are those individuals and firms who are not.  A smart investor will investigate a brokerage firm or advisor before using its services.  While using a good broker does not guarantee that you will make a lot of money, it will, at least, help make your investment experience a happy one.  If you are about to entrust some of your funds to an individual or securities firm, it is worth your while to do a background check.  It may save you both money and future aggravation.

It is best to find a broker through recommendations.  Friends, relatives, financial advisors and co-workers can tell you their experiences with their own brokers.  The one who listens to his clients' needs, reviews his accounts, and has a proven record of looking out for their clients is the one you want.

Here are some additional steps to take to screen a potential broker.

1. The Financial Industry Regulatory Authority (FINRA) is the main regulator for all securities firms doing business in the United States.  FINRA’s stated mission is to “protect America’s investors” by making sure the securities industry operates fairly and honestly.  Whether and how FINRA does that is a subject for another blog.  However, FINRA oversees nearly 4,580 brokerage firms, about 162,850 branch offices and approximately 630,695 registered securities representatives.  Its website contains much information of use for the public.  In particular, any potential broker should be looked up using FINRA's Broker Check.  Here you will find information about employment history, licenses held, and customer complaints.  While there may be many reasons for a customer complaint, consider asking your broker about it if a complaint shows up.  Was it an isolated incident, or is there a pattern of dissatisfied clients?  An occasional customer complaint may be inevitable; however, an advisor with a history of customer complaints probably should be avoided.  If your broker has a pattern of changing firms, this should be investigated as well.

2. The United States Securities and Exchange Commission (SEC) provides a useful website to check out an investment advisor.

3. You should also check with the securities regulator in your state. The North American Securities Administrators Association (NASAA)'s website provides links to all 50 states' regulators.

4. Finally, consider performing a simple internet search of your potential broker’s name or checking with the Better Business Bureau (BBB). Many times these will turn up information useful in determining whether to entrust him with your money.

If you find red flags or warning signs discuss them with the potential broker before hiring him. A reputable broker will be happy to answer any questions that you have. You should feel comfortable talking with your broker.  If not, he may not be a good fit.  Remember, act like the advisor is going to be holding your life’s savings, because he may be doing just that!

Practice Areas:  Financial Fraud

 

Investor Rights After The Crash

10 December 2010

by David S. Siegel 

In 2008, American and world financial markets experienced an almost unprecedented loss in value. One of the first signs of trouble came in March of that year, when JPMorgan Chase purchased Bear Stearns, to prevent it from going bankrupt, for $2 per share, down from its high of $171 per share a year earlier. Next came the failure of AIG, and then the major banks. Black Week (October 6-10, 2008) saw the Dow Jones Industrial Average drop from 10, 831 to 8,451, a loss of 22%.

Unlike earlier major market downturns, such as the Tech Wreck of 2000-2002, which affected technology stocks, or the Asian Flu of 1997, the 2008 Stock Market Crash was not strictly limited to a particular sector or market. Though precipitated by the real estate bubble, it dragged the entire market down. Between January 1, 2008 and March 9, 2009, the Dow Jones Industrial Average dropped from 13,000 to 6,500, a loss of roughly 55%.

Unfortunately for investors, the financial services industry has been attempting to use the broad and supposedly unexpected nature of this market crash as a defense to its own negligence and intentional wrongdoing. The argument is made that a “perfect storm” of economic factors, which no one could have foreseen and which no one could have prevented, was responsible for losses in investors’ portfolios. As such, so the industry argues, “we cannot be responsible for your losses.” This convenient strategy has some superficial appeal. However, it ignores longstanding legal rules. Notwithstanding the unusually severe nature of the recent crash, financial services firms may still be liable for improperly recommending securities, improperly managing investor accounts, and deliberately withholding relevant information.

For example, the Financial Industry Regulatory Authority—FINRA—the governing body which oversees the financial services sector, has requires brokers to 1) “know your customer”—meaning that broker has a duty to learn the essential facts about each customer and each order placed for a customer, to ensure that only appropriate investment recommendations are made; and 2) to have a “reasonable basis” for believing that all recommendations are suitable for the customer for whom they are made, based on the customer’s circumstances and financial objectives. Additionally, well-established federal and state securities laws prevent a seller of securities from intentionally making false statements, or intentionally omitting to state key facts, in order to induce a purchase or sale of securities.

Regardless of the larger economic backdrop, financial services professionals are governed by clear legal duties. These duties exist regardless of market trends. As between the average investor (typically not a financial professional) and large brokerage houses with their research departments and underwriting functions, the industry is in a better position to analyze and predict market conditions. Indeed, the Madoff bankruptcy trustee has just filed suit against JPMorgan Chase alleging that it had advance knowledge that Bernard Madoff was running a Ponzi scheme, and in fact sold its own position in a Madoff feeder fund before the scam was made known to the public. A market downturn does not absolve your broker if he violated his professional duties to you.

Practice Areas:  Financial Fraud

"I Plead the Fifth"

2 December 2010

by Dona Szak

What do insider trading, the financial crisis, and the BP oil spill have in common? They may all result (or have resulted) in both criminal investigations and civil suits. We will see how these parallel proceedings develop as the government ramps up its insider trading investigations.  As reported by the Washington Post, the Justice Department has spent the past few years looking into criminal instances of insider trading.  The FBI is now executing search warrants to further the criminal investigations. The SEC is conducting its own probe. The SEC recently filed suit against a former Deloitte Tax LLP partner who allegedly passed confidential information as part of an insider trading scheme; the UK Financial Services Authority filed charges against others involved in the scheme.  Civil lawsuits by private parties likely will follow.

We have all heard of criminal defendants who “plead the Fifth.” That is, in a criminal case, a defendant may invoke his rights under the Fifth Amendment to the United States Constitution and decline to testify. At trial, the judge and jury may not use the defendant’s invocation of the Fifth Amendment as evidence of guilt.

But what happens when the same defendant is called to testify in a civil lawsuit or administrative action? May a defendant “plead the Fifth” in civil proceedings? A defendant indeed may assert his rights under the Fifth Amendment and decline to answer questions in a civil proceeding when he fears the answers may incriminate him. The implications, however, can be quite severe. In contrast to a criminal case, when a defendant “pleads the Fifth” in civil litigation, his silence may be used against him. The judge and jury accordingly may consider the defendant’s refusal to testify as evidence of his liability.

Given these consequences, the defendant and his lawyer must carefully consider the potential outcomes should the defendant be called to testify in a civil proceeding. The safest course is generally to protect the defendant from a criminal conviction to the extent possible. But there is no easy answer, and this dilemma will continue to confront counsel when a client faces the prospect of parallel criminal and civil proceedings.

Practice Areas:  Antitrust, Competition, and Trade Regulation; Financial Fraud; White Collar Litigation