With the announcement on June 17 of a proposed federal agency tasked with a role in consumer protection as part of the revamping of the financial system; a new chair (from FINRA) appointed by President Obama to head the SEC; and a new Congress proposing to end mandatory FINRA arbitration (HR 1020, S 931)—the right to choose court over FINRA may be restored to investors.

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“I think when the red flags get disclosed -  not all of them are out there yet - that will clear the air and lawyers can then decide what’s the best course of action for their clients to take . . . . We need to see who did what.”

Ted Eppenstein, interviewed by Kristin McNamara, Dow Jones Newswire (February 19, 2009)

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Indeed, as described in the SEC civil complaint, investors and others appear to have been taken twice over by Allen Stanford’s and his confederates’ “web” of related companies, Stanford International Bank, Ltd, Stanford Group Company and Stanford Capital Management:

“Contrary to [the bank’s] representations, SIB’s investment portfolio was not invested in liquid financial instruments or allocated in the manner described in its promotional material and public reports. Instead, a substantial portion of the bank’s portfolio was placed in illiquid investments, such as real estate and private equity. Further, the vast majority [of] SIB’s multi-billion dollar investment portfolio was not monitored by a team of analysts, but rather by two people-Allen Stanford and James Davis. And contrary to SIB’s representations, the Antiguan regulator responsible for oversight of the bank’s portfolio, the Financial Services Regulatory Commission, does not audit SIB’s portfolio or verify the assets SIB claims in its financial statements. Perhaps most alarming is that SIB has exposure to losses from the Madoff fraud scheme despite the bank’s public assurances to the contrary.” (SEC Complaint at 3-4)

We can now visualize how complicated things can get for investors when a scheme as seemingly vast as Madoff collides with that of Stanford:

 ”In a December 2008 Monthly Report, the bank told investors that their money was safe because SIB ‘had no direct or indirect exposure to any of [Bernard] Madoff’s investments.’ But, contrary to this statement, at least $400,000 in Tier 2 was invested in Meridian, a New York-based hedge fund that used Tremont Partners as its asset manager. Tremont invested approximately 6-8% of the SIB assets they indirectly managed with Madoff’s investment firm.”  (SEC Complaint at 14)

The disastrous consequences for unsuspecting investors has only been magnified by the lack of transparency, oversight and truth seemingly present in both schemes.

Contact Ted Eppenstein at 212-679-6000 or teppenstein@eppenstein.com to discuss your situation.

As predicted, with the advent of a new administration in Washington the Arbitration Fairness Act is back on track.  Representative Hank Johnson, Jr. (D-GA) re-introduced the legislation now known as the “Arbitration Fairness Act of 2009″ (H.R. 1020) on February 12, 2009.  Ted Eppenstein testified at hearings on October 25, 2007 before the U.S. Congress House Judiciary Committee, Subcommittee on Commercial and Administrative Law in support of predecessor legislation, H.R. 3010, the “Arbitration Fairness Act of 2007.”

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Suzanne Barlyn, Dow Jones Newswire, Interviews Ted Eppenstein (January 8, 2009):

“Theodore G. Eppenstein, a New York securities arbitration attorney, says he’s been consulting with investors who have incurred losses through Madoff. His firm will examine hedge funds and advisors ‘that fed client money blindly into Madoff without doing adequate due diligence,’ he says. Read the rest of this entry »

Though the final chapter has yet to be written, the events of 2008 may be remembered as the most painfully bizarre episode in the history of human financial fraud and inadequate regulatory oversight.  As if the unprecedented global market turmoil and the financial sector meltdown weren’t enough excitement for one year, investors were socked with the coup de grâce in the very last month by revelation of the alleged fraud at Bernard L. Madoff Investment Securities LLC.

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For the many investors who have suffered catastrophic stock market losses this year, few would dispute that the failure of self-regulation by the financial services industry has played a significant role in precipitating the global economic crisis. Ironically, in the midst of this chaos the primary U.S. self regulator, FINRA, has been broadcasting advertisements for its BrokerCheck Web page on radio in the New York metropolitan area as a “service” to aggrieved investors. Read the rest of this entry »

The Charles Schwab Corp. YieldPlus Fund, a short term bond fund, turns out to be another failed vehicle employed by brokers to lure unsuspecting senior investors with conservative investment profiles into products that were made toxic by their exposure to the sub-prime mortgage market.  According to Bruce Kelly’s InvestmentNews item in the October 19 issue, from its $13 billion in assets a year and a half ago through earlier this month “the fund lost more than 30% of its value and saw its assets drop 95% to $432 million.”
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Investor Alert: The stock market crash this year has taken its toll on the investing public. If you have lost a substantial portion of your life savings or your portfolio, including common stock, mutual funds, annuities, options or bonds, because of an unscrupulous broker who breaks the rules, a hedge fund, advisory firm or other investment company, you have the right as an investor to pursue relief. Read the rest of this entry »

It began today, a day on which the Dow broke a new record for volatility: FINRA’s two-year “pilot program” permitting investors to effectively opt out of having mandatory industry arbitrators in a small proportion of cases relative to all filings.  It may be a gross understatement to say that the program is too little, too late.  FINRA has undertaken to study over a period of the next two years, more likely longer, the issue that investor advocates have complained about for decades: the fundamental unfairness of the SRO arbitration system, in which the public has been forced to adjudicate its claims, that requires an industry arbitrator on all three member panels.  The results will presumably enable FINRA to distill subjective conclusions about the “fairness” of it’s own system, possibly in time for the next presidential election four years hence.

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We are witnessing unprecedented upheaval in the financial markets and investor insecurity.  Sadly, against this backdrop in a few days FINRA will launch a wholly inadequate band aid for its own broken arbitration system, the so-called “Public Arbitrator Pilot Program,” in response to mounting Congressional and public pressure to eliminate mandatory securities arbitration and to remove the required industry arbitrator panelist.  FINRA purports to study the impact of a panel’s composition on various “outcome” criteria – instead of taking bold action to benefit all investor participants in the FINRA arbitration system.  But the last thing we need in order to truly foster public confidence in this compulsory system for the adjudication of most investor claims is yet another study. Read the rest of this entry »