NASAA, which is the organization of heads of securities departments from each of the American states and territories, as well as the Canadian provinces and Mexico, has long perceived industry securities arbitration as unfair to investors.  The organization has advocated for substantial changes in the arbitration system, including abolition of mandatory arbitration.

NASAA's position on securities arbitration is abundantly clear in the title of the upcoming forum:  Arbitration is Broken:  How Can it be Fixed?  According to NASAA, the forum "will feature a panel of legal and regulatory experts, academics, and consumer advocates who will address the manner in which arbitrations are conducted; whether the selection, qualification, and composition of arbitration panels is fair; and whether the arbitration process should be an option, not a requirement, for investors. Panelists also will discuss the Arbitration Fairness Act of 2007 and current research exploring consumer views on securities arbitration."

Registration for the forum is free, on a first-come-first served basis.  Registration details are on NASAA's website.

The four separate proposed revisions relate to (1) Financial Responsibility (largely relating to net capital issues); (2) Supervision and Supervisory Controls; (3) Books and Records (consolidating and modifying various books and records rules, including in regards to client accounts and complaints); and (4) Investor Education and Protection (extending the scope of current FINRA Rule 2280). The new proposals contain extensive changes and additions, including many consolidations or relocations of existing rule provisions. 

Although there are specific changes in each of the four areas noted above, the changes to FINRA’s Supervision and Supervisory Controls rules (current Rules 3010 and 3012, which will be renumbered 3110 and 3120) are probably the most extensive and dramatic. Highlights include:

     ***  Proposed Rule 3110 provides much-needed clarification regarding the supervision of current Rule 3012’s provisions for supervision of “producing managers.” The new Rule will, more simply, prohibit “supervisory personnel” from (1) supervising themselves; and (2) being supervised by anyone who reports to or whose compensation is determined by the supervised person. The current, rather confusing, language requiring supervisory review of such managers' client accounts by “senior” or “otherwise independent” personnel will be removed.    Proposed Rule 3120 otherwise continues Rule 3012’s testing, verification, and certification requirements, though it now specifies additional information that firms with gross revenues over $150 million must include in the annual report to senior management.

     ***  Current Rule 3010(b)(3), requiring “heightened office inspections” for offices that generate 20% or more of a business unit’s revenue will be completely deleted. Instead, the new Rule 3110 provides a more principles-based approach that requires a firm to have written procedures reasonably designed to “prevent the inspection from being lessened in any manner due to any conflicts of interest.”

     ***  Current Rule 3040 (regarding private securities transactions) will be deleted, and incorporated into new Rule 3110. The proposed rule removes any distinction, for supervisory purposes, between private transactions for which an associated person is compensated and those for which no compensation is paid. Moreover, the new Rule provides a qualified exemption for firms from the supervisory rules regarding private transactions with regard to associated persons who complete the transaction as part of their separate employment by a bank, so long as the member firm is notified of the activity and receives written assurance from the bank that it has reasonable supervisory procedures for such activities.

     ***  New Rule 3110 clarifies that firms must institute written procedures for written customer complaints, dropping the NYSE’s inclusion of procedures for oral complaints. 

     ***  New supplementary material to the rule clarifies, among many other things, that member firms are to follow the previous NYSE Rule 342.21 requirement that firm’s insider trading policies contain specific procedures for reviewing and investigating trades effected for the firm’s account and the accounts of firm employees and family members.

The new CFP Standards highlight the increasing convergence, from a regulatory standpoint, between the once clearly distinct worlds of broker-dealers and investment advisors. Many registered securities representatives, particularly experienced reps, have earned and use the CFP designation in their practice. Many of those same CFP-certified reps also have their own Registered Investment Advisor firm, or are investment advisor representatives of a RIA or a dually-registered securities firm. As the CFP itself states, the new Standards apply to every CFP-certified financial professional, regardless of that professional’s licensure under the B-D or IA schemes, or both.

So what do the updated standards do? Although the CFP strengthened a number of its standards related to data gathering, disclosure, analysis, and monitoring, the bottom line is that the standard of care has been significantly ratcheted up: whereas the CFP required before, at minimum, a standard of “reasonable and prudent professional judgment” it now states that a CFP certificant “shall at all times place the interest of the client ahead of his or her own.” In other words, a fiduciary obligation.

Not surprisingly, advocates from the B-D world see this as a further erosion of the distinction between the obligations and business models of broker-dealers and investment advisors; the Financial Services Institute, for example, has urged its independent broker dealer members to raise concerns with the CFP Board regarding the standards.

Groups like the FSI will and should fight hard to insure that standards and legal requirements make sense for firms, representatives, and clients. However, the trend is clear. State securities regulators will continue to press for a fiduciary obligation for B-D firms and representatives. There is movement at the federal level for significant change in the financial services regulatory scheme, with the Treasury Department’s recent “Blueprint for a Modernized Financial Regulatory Structure" the clearest example. Dual-registration will increase, and traditional broker-dealers will continue to expand “hybrid” platforms to serve both B-D and IA models. Nobody can say for sure where this is going, but it is clear that the next few years will see substantial changes in the way securities firms are regulated.

This model is especially common at smaller firms, and senior compliance personnel are called upon often to act in dual capacities: compliance overseer, and, frequently, as the person designated to approve the opening of new accounts and to grant approval with respect to the sales of certain products, such as variable annuities. While we may all appreciate the expediency and necessity of the need to wear multiple hats in a smaller shop, these latter functions may be interpreted by FINRA as line supervisory duties, and cause the compliance officer to be viewed as a business supervisor for regulatory purposes. 

In a pure and ideal world, Compliance is not a line-function, compliance officers are objective and impartial in their assessments and recommendations, and their evaluations are not tied innately to revenue considerations. While the failure to factor in the impact of compliance decisions on the fate and fortunes of the company is a luxury most compliance officers (and their firms) can ill-afford, traditionally, compliance has been used as a tool to identify problems or issues which must be remedied by the business unit responsible for the revenue activity. In that model, compliance is called upon later to examine and report on the performance of these managers. 

However, when the compliance officer is cast in the role of both cop and “perpetrator,” the oversight chain loses its tensility. In essence, who is left to oversee the function when the compliance officer is carrying out dual roles: compliance officer and supervisor? The end repercussion is that the compliance officer creates potential failure to supervise liability for him/her self, and may be called to task by a regulator or arbitration panel for failing to perform either of his/her assigned duties to industry standards.  The logical and ultimate repercussion may be a charge of a failure to supervise or similar dereliction of duty allegation.

So, how does the compliance officer/supervisor build firewalls under these circumstances? In the first instance, the head of the particular business unit with the greatest stake in the transaction at issue should not be isolated from the decision making process . Rather, exceptions to firm policy may be forwarded to him/her for resolution, although if this person is consistently faulty or lax in granting approvals, this may ultimately not help the compliance officer avoid sanction for failed supervisory effort. 

Perhaps a better alternative is to establish a Compliance Committee consisting of compliance and senior business unit personnel to address “exceptions” and sensitive intra-firm compliance issues. Under this scenario, the Committee would meet at least monthly, but more frequently if necessary. To be effective, clearly defined standards must be established by the firm with regard to the appropriateness of certain activity. For instance, with regard to sales of variable annuities, no sales would be permitted to retirement accounts or to customers over a designated age or in amounts that would appear excessive based on the customers identified financial circumstances. Exceptions may not be unilaterally granted by the compliance officer who is asked to review and approve an annuity application. Rather, the request for an exception would be submitted to the Compliance Committee for review, consideration, and approval. Thus, the business unit leaders with, in theory, the highest level of expertise would sit in judgment of the request for an exception, and it becomes a group rather than individual decision of either the compliance officer or the one business person who stands to gain the most from the transaction if it is permitted to go forward regardless of its merits. Once established, the Compliance Committee may provide a number of additional valuable benefits to the company, enabling senior management to both learn of and address myriad problems at an early stage, and to take as necessary pro-active steps to interdict the problem before it spins out of control. 

The benefit to the compliance officer who is wearing multiple hats is obvious: he or she potentially limits personal regulatory exposure. But the firm benefits too, and if its actions are later cited as inadequate, the group decision making concept, unless the Committee is simply a rubber stamp, allows for the argument that business judgment, not disinterest or disregard of the rules, dictated the decision.  Firms are still permitted, in the exercise of their business judgment, to make mistakes or reach different decisions than a regulator who judges the events after the fact. If the Committee decisions are well vetted and reasonable under the circumstances, significant defenses may be available to address later second-guessing by a regulator or an aggrieved investor.

Jonathan M. Harris
Lindquist & Vennum P.L.L.P.
Minneapolis, Minn.
(612) 371-2492
jharris@lindquist.com

In a March 31, 2008 investor alert, FINRA discussed the impact the collapse of the ARS market has had on investors. Significantly, a large portion of its discussion concerned the liquidity of the securities and how "due to recent developments in the credit market—including downgrades in the credit ratings of bond issuers and bond insurers—a significant number of auctions have failed, leaving some investors who counted on immediate access to their funds wondering about their options." FINRA also recently sent a survey to brokerage firms specifically inquiring about who the firm sold ARS to (i.e. retail individual, high net worth individual, non-professional institutional, or professional institutional customer) and whether the firm was willing to offer margin loans to customers using ARS as collateral. And in Regulatory Notice 08-17, effective April 1, 2008, FINRA added "three new product categories for use by member firms in reporting customer complaints relating to auction rate securities."

Taken together, these actions leave little doubt that firm ARS sales and supervision may come under the lens of regulatory inquiry for the foreseeable future and likely remain one of the main topics of inquiry for 2008, given the fact hundreds of billions of dollars of ARS were sold.

Commissioner Lori Richards revealed the SEC’s “Top 10 Compliance Issues for 2008” during the general session at the 40^th annual SIFMA national conference yesterday in Orlando, Florida.  According to Ms. Richards, the top 10 areas of scrutiny in SEC board exams in 2008 will be:

1. Valuations.
2. Firm controls over non-public information.  In particular, the SEC is interested in whether the firm has identified the type and sources of non-public information to which it is privy, and whether the firm has implemented and properly tested procedures for protecting that information.
3. Retail sales practices – with an emphasis on protecting seniors.
4. Supervision. 
5. Net capital/internal controls (which will receive increased focus given recent developments).  Ms. Richards noted that 20% of the exams last year uncovered errors in net capital calculation.
6. Trading.
7. Fixed Income.
8. Rating agencies.
9. Conflicts of interest.  The “hot list” for this area includes payments by advisors to broker dealers to appear on “recommended advisor lists,” and broker-dealers who sell interests in affiliated hedge funds.
10. Anti-money laundering.
11. Information/account security (refusing to be limited to just 10 areas, Ms. Richard actually named 11 key areas of scrutiny for 2008).  The SEC is particularly interested in whether broker-dealers have adequate control over their customers’ assets and information, and what controls broker-dealers adopt when they outsource regulating activities.  According to Ms. Richards, the SEC will focus on midsized firms this year. 

Short selling involves sales of borrowed shares, in the hope of repurchasing them later at a lower price. Naked short selling involves sales without first borrowing the shares or making an "affirmative determination" that the shares can be borrowed.

The SEC adopted Regulation SHO four years ago in an effort to curtail short-selling abuses. However, the SEC’s enforcement powers under Regulation SHO are limited. Stating the obvious, SEC Chairman Christopher Cox explained, “Reg SHO can’t be effective without enforcement.” According to Mr. Cox, the SEC's new proposed rule is designed to give Regulation SHO “teeth.” Under the new proposal, the SEC would create an antifraud rule specifically targeting targets sellers who intentionally deceive broker-dealers or purchasers about their ability to meet delivery deadlines. 

The SEC is seeking public comment on its proposal.

Boiled down, Torkelsen had told various courts that he was an independent expert, yet certain law firms that hired him did so on a contingent fee basis and then concealed the payment arrangement from the courts. According to a Department of Justice litigation release, in furtherance of the scheme, the firms would then "submit to courts requests for reimbursement of fees already paid to Torkelsen when, in fact, the fees had not been paid and would not be paid unless the court awarded fees to the law firms; cause Torkelsen to submit declarations in which he falsely stated under oath that he had been retained on a non-contingent basis when, in fact, he had been retained on a contingent basis; cause Torkelsen to write-off fees he had incurred in class actions in which the law firms did not obtain a successful result; and cause Torkelsen to submit inflated fee requests in other class actions, billing for work that Torkelsen did not actually perform, in order to allow Torkelsen to make up for fees he did not recover in unsuccessful class actions."

Dishonesty has no place in the courtroom. At the end of the day, plaintiffs and defendants alike, as well as their counsel, are well-served by removal of such elements.

A detailed discussion of this case can be found on the Department of Justice's website at www.usdoj.gov/usao/cac/pressroom/pr2008/020.html

Reaction to Mr. Lerach’s sentencing has been predictably both passionate and mixed. The Wall Street Journal’s Law Blog quotes T.J. Rodgers, the founder and chief executive of Cypress Semiconductor as stating: “He’s getting what he deserves. I once likened Lerach to low life form, somewhat below pond scum. Thank goodness he’s met my highest expectations.” On the flip side, the Law Blog quotes Ralph Nader as stating: “Given the corporate crimes that Mr. Lerach has brought to justice during his long career, his crimes pale by comparison. His success is partially a reflection of the repeated failure of government enforcement agencies to protect millions of defenseless investors from fraud.”

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.

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.”

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.

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 ...

Q: I work for a major firm, which constantly pressures us to move our clients' assets into managed wrap accounts. We're being sent subtle, — and not-so-subtle — reminders about why these programs are in our clients' best interest. My manager regularly says large positions in one stock are best liquidated and invested in the firm's managed money program over the long-term. I hate this approach; it's expensive. The performance is nothing great, and I lose a little bit of control over the client relationship. Is this pressure the same at all the majors? How do I avoid this approach without getting myself fired?

A: There's no question the street was revolutionized by the asset manager/fee-in-lieu business model as an alternative to one driven by transactions and commissions.

The rationale behind this new model makes superficial sense. First, the fee-based model annuitizes revenue for the firm and broker, and makes it less susceptible to the markets — more predictable and less dependent on turnover. Second, in theory, it eviscerates incentives for churning (i.e. trading excessively), arguably removing churning as a weapon for plaintiffs' lawyers. And third, at a time when financial products are getting more complex, it's unrealistic to expect a broker to become equally conversant with all segments of the market. By putting the rep in charge of gathering assets, which are then turned over to third-party managers with specialized expertise, a higher level of professionalism (at least in theory) may be achieved.

The fee-in-lieu model has been adopted by virtually all wirehouses, and is now part of a larger strategy to control all the customers' financial affairs from womb to tomb, wedding him or her inextricably to the firm through financial relationships. From the firm's perspective, if it manages the customer's banking, brokerage and insurance needs through fee-based relationships, it becomes more difficult and less advantageous for the customer to sever the relationship with the institution. In essence, he or she becomes the firm's customer, not the broker's. That way, if the broker were to leave the business or join the competition, the firm has a better chance to retain the business for itself.

To specifically address your question, I haven't heard of any firms doing a universal housecleaning of the “dinosaurs,” i.e. those resistant to the new business model. Instead firms are encouraging fee-business in more subtle ways: through reduced-commission payouts or higher charges, and other costs for transactionally-driven advisors and clients. The bottom line is that you should anticipate a continued effort to promote the asset gathering/fee-in-lieu model.

But the lemming-like rush to certain products, such as managed accounts, does not come without risk to the firm or the broker. Alleged instances of “reverse churning” — getting buy-and-hold customers to opt for a managed account on a fee-basis, even though they rarely (if ever) turn over the portfolio, when a commission account would likely be cheaper for this client — are growing. Regulators have opined there's no compelling reason to put buy-and-hold clients into a fee-based program, and firms have been cited for this practice.

Try to walk the line between your style and the firm's. If the customer's needs and interests are being served while creating respectable revenue for you and the firm, you're doing your job well. Not every customer is suitable for a wrap account — or even interested in establishing one. If the situation at your shop becomes intolerable, you may have to find a firm more accommodative of your business mix and practices. They do exist, although they're becoming ever rarer, especially among the wirehouses and bank-owned firms.

Fads and business practices come and go. Maybe the wrap account is a better idea; maybe it's not. Time will tell. The firm is trying to position itself to retain the business, even if you are not there to serve it.

Jonathan M. Harris
Lindquist & Vennum P.L.L.P.
Minneapolis, Minn.
(612) 371-2492
jharris@lindquist.com

A sign of things to come? Notably, hedge fund reporting requirements, in general, have been a topic of regulatory inquiry in recent months. This case suggests the SEC may continue to focus on hedge funds but has enlarged its net so as to pursue individuals at the issuers allegedly willing to pay kickbacks to hedge funds to bolster stock price at the expense of investors. 

In somewhat tongue and cheek fashion, the Commission notes that "with one exception, the defendants actually paid the promised kickback after the hedge fund bought the stock defendants were promoting." The Commission also stated that its investigation is still ongoing. 

Heading into 2008, it looks like hedge funds and securities fraud will continue to be at the forefront of regulator attention.
 

Like the Allianz and American Equity lawsuits, Minnesota’s complaint against Midland National alleges that the company failed to ensure that annuities were suitable for the senior citizens purchasing them. The complaint focuses on the sale of long-term deferred annuities to seniors who cannot afford to have their money tied up for that period, as well as steep surrender charges for early withdrawal.

Allianz settled its suit with Minnesota in October, agreeing to put into place a restitution process for over 7,000 affected seniors, and to change its practices in connection with suitability determinations.  Midland National now joins the non-glorious lawsuit ranks with American Equity, whose case is also pending in Hennepin County District Court. 

1. The claim, allegation, or information is factually impossible or clearly erroneous;
2. The registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation, or conversion of funds; or 
3. The claim, allegation, or information is false.

The rule was designed to meet the varying and often competing interests of the regulators, the brokerage community, and investors.

Last week the Public Investors Arbitration Bar Association (PIABA) urged the SEC and FINRA to prohibit arbitrators from recommending the expungement of customer dispute information from the Central Registration Depository (CRD). According to PIABA president  Steven B. Caruso, review of more than 200 stipulated or settled customer awards issued in 2006 revealed that in 71% of the stipulated arbitration awards, arbitrators recommended the expungement “without any indication of an evidentiary hearing having been held.” Caruso asserted that critical information investors need to know is being “improperly concealed.”

But must an arbitrator conduct an evidentiary hearing to be able to make an affirmative finding that the claims and allegations are false or clearly erroneous, or that the registered person was not even involved in the alleged wrongdoing? Can’t such an affirmative finding often be determined simply based on the pleadings, the often exhaustive exhibits attached thereto, or the terms of the settlement agreement? Compelling arbitrators to conduct evidentiary hearings before ever recommending expungement will increase arbitration costs, reduce the number of settlements, and force the parties to reach a settlement on the amount of cooperation claimants will give during the evidentiary hearing.

• unsuitable product recommendations to seniors
• use of misleading "senior" designations and credentials
• high-pressure sales tactics aimed at seniors
• red flags when dealing with persons with diminished capacity and suspected financial abuse of seniors

With respect to suitability, the Notice focuses on several products previously noted as posing suitability risks for seniors, namely deferred variable annuities, equity indexed annuities, variable life settlements, and home mortgage investments.  The Notice also highlights the need for care when using retirement savings to make high-risk investments, and cautions firms that a customer's net worth alone is not determinative of whether a particular product is suitable -- even for "accredited" investors.  

Related to FINRA's suitability focus is its emphasis on misleading sales tactics aimed at seniors, such as brokers' use of titles that convey expertise in senior issues (i.e., "senior specialist", "certified senior adviser", "retirement specialist") where such expertise does not exist.   FINRA also cautions against the use of  "free lunch" seminars aimed at seniors where high pressure sales tactics promote products that may not be suitable for all persons in attendance. 

The Notice discusses regulator examinations of broker-dealers designed to protect senior investors, and makes clear that such regulatory focus will continue and will likely increase.  This makes sense, since it is anticipated that over the next 25 years the number of folks aged 65 years and older will double.  www.census.gov/prod/2006pubs/p23-209.pdf  Firms are well served to review and, if warranted, enhance their policies and procedures,  taking into account the common issues to senior investors identified by FINRA . 

With mounting pressure from the SEC and other regulators for increased transparency in operations and reporting, several failed hedge funds and their managers have been sanctioned and forced to repay millions to investors. This has sparked what appears to be a growing trend - complaints against former hedge fund counsel for allegedly giving "bad advice."

In one of the most recent examples, former Veras hedge fund managers James McBride and Kevin Larson have commenced a lawsuit against Akin Gump Strauss Hauer & Feld LLP, Veras' former law firm for alleged bad advice regarding the propriety of the practice of  "late trading" - trading shares of mutual funds after the 4:00 p.m. market close.  Among other things, McBride and Larson allege they explained to Akin Gump attorneys that brokers were engaging in this practice, inquired whether this practice was permissible, and their attorneys told them that it was legal on several occasions. Larson and McBride seek damages in the amount of $4.4 billion.

Akin Gump has since denied the allegations and brought a motion to dismiss multiple counts of the complaint against its attorneys.

Only time will tell the significance of what appears to be a growing trend, but for the moment it would appear that law firms have become the new "deep pockets" for their failed hedge fund clients.