Securities Regulation and Litigation Lawyer & Attorney : OverRegd Blog : Lindquist & Vennum Law Firm, Minneapolis and Denver

Legislators on Capital Hill reintroduced the "Securities Litigation Attorney Accountability and Transparency Act" last week. The Act, which was initially introduced in 2006, would permit courts to award successful defendants their attorneys’ fees in federal securities class actions when it is determined that the plaintiffs’ position was not “substantially justified,” require the disclosure of conflicts of interest between plaintiffs and their counsel, and allow courts to appoint lead counsel through a competitive bidding system. Continue Reading...

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There’s a timely article up at Bloomberg regarding the ongoing back and forth between the securities industry and claimants’ bar regard the fairness of mandatory industry arbitration. The article cites the recent survey on claimant perceptions of arbitration fairness commissioned by the Securities Industry Conference on Arbitration ("SICA"), and conducted by the Investor Rights Clinic at Pace University Law School.

The SICA survey, together with a to-be-expected rebuttal piece from SIFMA, point out the sharp differences in perception regarding whether the current arbitration system is fundamentally biased toward firms. The SICA survey pointed to, for example, the declining numbers of hearings ending in awards, as well as the increasing number of early settlements. Does this show that the system is increasingly stacked against investors? Does it indicate, rather, that firms identify meritorious cases and settle, rather than defend through a hearing? Can any generalizations be drawn about the large number of industry and public arbitrators, other than that every lawyer and firm in this area – whether on the claimant or defense side – has had both fair results and real head-scratchers.

One thing is clear: both investors’ groups and state regulators will continue to push FINRA to make its arbitration forum more investor-friendly – or to eliminate mandatory arbitration entirely.

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Yesterday, the U.S Supreme Court handed down an important decision regarding the liability of ERISA plans, and in particular, employer-sponsored 401(k) plans, to individual plan participants.

In LaRue v. DeWolff, Boberg and Associates, Inc., the plaintiff had sued his employer-sponsored 401(k) for breach of fiduciary duty under ERISA § 502(a)(2) after, he alleged, the plan failed to implement his investment directions, resulting in a loss of about $150,000 to his account. The Fourth Circuit affirmed the District Court’s dismissal on the pleadings, holding that ERISA provides such remedies only for entire plans, and not for individual participants.

The Supreme Court reversed, holding that its reasoning in Massachussetts Mutual Life Ins. Co. v. Russell, 473 U.S. 134 (1985) which limited recoveries under § 502(a)(2) to “the plan as a whole” nonetheless did not bar an fiduciary breach claim by the plaintiff in the present case. Interestingly, the majority opinion by Justice Stevens pointed to particular features of defined contribution plans such as 401(k) plans, as opposed to the defined benefit plan at issue in Russell. Justice Steven’s opinion noted that “Russell’s emphasis on protecting the “entire plan” from fiduciary misconduct reflects the former landscape of employee benefit plans. That landscape has changed.” The unanimous court ruled that the plaintiff could proceed with his ¶ 502(a)(2) fiduciary breach claim. (Chief Justice Roberts, joined by Justice Kennedy, concurred in the judgment, noting that he questioned whether the claim was properly brought under § 502(a)(2), rather than the non-fiduciary provisions of § 502(a)(1)(B). Justices Thomas, joined by Justice Scalia, filed a separate concurrence, noting, characteristically, a reliance on the “plain text” of 502(a)(2), and that the decision should not be “contingent on trends in the pension plan market” nor “the ostensible “concerns” of ERISA’s drafters.”

So what does this mean? The short of it is that ERISA plan fiduciaries are now, unequivocally, subject to claims by individual participants based on alleged fiduciary breaches in handling an individual participant’s account. This is a walk-down from what had been understood to be a fair degree of protection under ERISA, at least for ERISA-based fiduciary claims, from lawsuit based on losses in individual participant accounts, as opposed to claims for damages by plan fiduciaries to the “plan as a whole.”

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The latest on the market-timing settlement front: Oppenheimer agrees to pay FINRA $4.5 million for mutual-fund market timing conducted by five of its traders on behalf of hedge fund clients. 

Once again, a firm is stung by an apparent “head in the sand” compliance and supervisory approach to a small group of its reps acting on behalf of a small number of high-value clients. This in the face of what FINRA describes as “about 200 communications from 65 mutual fund companies” regarding the short-term trading those companies were noting.

Lessons: (1) establish and enforce consistent compliance systems; (2) don’t make exceptions for “high value” clients or reps; (3) don’t ignore apparent red flags.

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On February 14, 2008, Chairman Cox testified before the U.S. Senate Committee on Banking, Housing, and Urban affairs. His remarks leave no doubt that the SEC views the subprime fallout that began in 2007 to be a prudential concern to all investors and market participants. Citing "the resulting large losses for some market participants, the concern in the markets about the future performance of a range of complex structured finance instruments, and the more generalized concern about the effects on credit markets overall have led to a more risk-averse environment, and have contributed to a slowdown in the rate of the nation's economic growth," Chairman Cox noted the SEC has devoted resources from all of its divisions to tackling the problems at hand. But it is apparent the problems stemming from the subprime debacle will not be easily fixed.

The accounting treatment of special purpose trusts as off balance sheet items that sold securities comprised of residential mortgages bundled together is at the heart of the issue. But the SEC considers there to be a panoply of related issues - "the adequacy of capital and liquidity at the nation's major investment bank, and the strength of their risk management practices; the impact on money market funds from the devaluation of presumptively safe assets; the quality of issuer disclosure by public companies involved in structured finance; the role of the credit rating agencies, over which the SEC gained regulatory authority eight months ago; and the possibility of violations of the securities laws by subprime lenders, investment banks, broker-dealers, and other market participants."

Based on Chairman Cox's comments, an overnight fix is definitely not in the cards. But a flurry of investigations into the activities of those market participants involved seems imminent.

Stay tuned ...

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