The FBI has announced that former key executive for Morgan Stanley, Darin Demizio, will serve 38 months imprisonment and three years of supervised release for conspiring to commit securities fraud and wire fraud and lying to the FBI. The trial took place in March before United States District Judge John Gleeson. United States Attorney for the Eastern District of New York, Benton J. Campbell announced the sentence.

Mr. Demizio routinely directed business from Morgan Stanley’s securities lending division to smaller brokerage firms for kickbacks that were paid to his father and Craig DeMizio, his brother. The amount of the kickbacks was over $1.6 million from 2000 – 2004. His brother was sentenced to 21 months after pleading guilty to commit securities fraud and wire fraud.

Investors can be assured that the FBI is taking bribery and kickbacks seriously in the securities business. The Demizio conviction is the 29th conviction stemming from an ongoing industry-wide investigation.

The trial for USA v Tzolov and Butler 08-370 started this week in New York's U.S. District Court for the Eastern District.

The case involves two former Wall Street brokers that worked for Credit Suisse Group AG, Eric Butler and Julian Tzolov. They were charged with fraudulently dealing in subprime mortgage-backed auction rate securities (ARS) for corporate clients who specifically requested much safer investments.

The trial seems to be a pass the blame for the defense. The prosecution's argument is that the brokers mislead clients about auction rate securities deals, because of greed in trying to earn millions of dollars in commissions for risky investments instead of much safer investments such as government-guaranteed student loans. The defense cites an entirely different argument, they attribute the losses of the investments to the collapse of the real estate market instead of GREED.

It is important to note that one of the brokers, Tzolov, saw the writing on the wall and recently struck a deal with the prosecution. Eric Butler, pleaded not guilty, and decided to try his luck with a jury. His former partner in crime, Tzolov, struck a deal after pleading guilty, and will be a witness for the prosecution. His testimony should really be interesting.

According to a recent article published by Reuters

"The defendant and his partner promised something better, a better opportunity," U.S. prosecutor Greg Andres said in opening arguments to the jury.

"They did not honor that promise. They invested in securities the clients didn't ask for and didn't want."

This is an important trial to watch regarding investment fraud. The defense is trying to blame the market for the loss of the investors, instead of what seems to plague many Wall Street brokers and others accused of Securities and Investment fraud: GREED.

This makes me think of a statement from the famous fictional villain, Gordon Gekko, in the Oliver Stone movie Wall Street, "Greed is Good". I imagine that people such as Bernie Madoff, Michael Milken, Robert Allen Stanford, Arthur Nadel would all agree that "Greed carries a high price tag".

What will happen in the USA v Tzolov and Butler 08-370 case and the fate of former broker Eric Butler's fate? Time will tell...

Stay tuned...

As prior readers of The Law Planet Blog know, I have a strong dislike for Equity Index Annuities. I think they are lousy products and, to the extent they are sold, should be sold by someone who has proven at least a modicum of securities knowledge. Insurance salesman, without a Series 6 or 7 license, have not proven this knowledge. Yet they were allowed to sell complicated, market-based products.

I cheered last year when the SEC announced Rule 151A which would bring these products under their purview. It would also require licensing of salespeople and registration with a broker-dealer. All of these are good things. The Insurance and Annuity industry did not agree with me. It was nothing personal, I’m sure.

The industry took their case to court, in the case American Equity Investment Life Insurance Company v. Securities and Exchange Commission (July 21, 2009-6) on Petitions to argue that the Rule should not be enforced. The industry won, and lost.

There should be no joy in Mudville here. The District of Columbia Court of Appeals has told the SEC what it did wrong and what it needs to do right. On the other hand, the Court told the insurance industry that these products can be regulated as securities. For me, that’s the important part.

The court wrote “In this case, the SEC has adopted an interpretation that is based in reason. By their nature, FIAs ‘appeal to the purchaser not on the usual insurance basis of stability and security but on the prospect of ‘growth’ through sound investment management.’” This is what I’ve been saying all along. This is a market-based product. It is a security. It should be sold by qualified securities salespeople. Now it’s up to the SEC to make the requisite findings regarding its rulemaking and give it another try.

Stay tuned…

The Public Investors Arbitration Bar Association has proposed a rule directly to the SEC that would effectively eliminate the “industry” arbitrator from the arbitration panel. The paranoia exhibited by this organization, without any true empirical basis, knows no bounds.

As a lawyer who represents both industry and investor clients, I have a unique position to assess this proposal (although I am not alone in representing both types of parties.) PIABA remains critical of the presence of a person experienced in the industry on an arbitration panel. Personally, having experienced arbitrations where the industry panelist was marginally affiliated and the public arbitrators knew next to nothing about securities, I suggest that we should all be afraid of PIABA’s proposal.

PIABA continually refers to the industry panelist as an advocate for the industry. There is no basis for this. The organization cites flawed research that states that claimants in arbitration win less than they “should.” But how does PIABA know that these cases would have fared better either in court or with an all-public arbitration panel? It doesn’t. I have stated before and I will say it again, that cases that go to hearing tend to be self-selecting. Those cases which can’t settle because the Claimant wants too much or the Respondent won’t pay enough are the ones that go to hearing. Therefore, these are the more difficult, or bad, cases depending on one’s point of view.

I have been involved in a number of cases where it was obvious that the industry panelist did not agree with the Respondent’s position. There is no evidence that the industry panelist serves as a patsy for the brokerage firms. Just because a flawed analysis finds that the “win rate” is down, does not mean that the system is bad. In arbitration, each case stands on its own. Two cases cannot be compared as every person’s situation is different.

PIABA has come up with some good ideas in the past. This is not one of them.

Rule Change Petition presented to the SEC from the Public Investors Arbitration Bar Association

The top Accounting Officer at Beazer Homes USA, Michael Rand, has been charged with fraud and misleading company auditors by the Securities and Exchange Commission.

An SEC complaint filed in federal court, alleges that Michael T. Rand, Accounting Officer for Beazer Homes, deceived investors by fraudulently recorded improper accounting reserves during 2000 and 2005. This little creative accounting decreased Beazer's reported net income considerably.

According to Robert Khuzami, Director of the SEC's Division of Enforcement:

"Michael Rand orchestrated an old-fashioned 'cookie jar' earnings management scheme where he hid from view over $60 million in so-called reserves. Then when Beazer's business declined, he fraudulently reversed those secret reserves and appeased financial analysts, enticed new investors, and most importantly earned himself an undeserved lucrative bonus."

The SEC complaint against the Beazer Chief Accounting Officer, Michael Rand explicitly gives details on how he masterminded this Accounting scheme and profited personally. He personally sold stocks valued at $3 million and earned $1.7 million in bonuses. Was it worth it, to lose everything and risk going to jail? I guess only Mr. Rand can answer this question. I am certain that the Beazer investors are not happy about being duped by these false earnings statements. Time will tell if there were others involved in this scheme.

As part of FINRA’s ongoing effort to consolidate and reconcile the former NASD and NYSE manuals, changes are in the works. FINRA recently filed a proposed rule change that is going to make changes to FINRA suitability rules, as we have known them, noticeably different.

FINRA’s proposed rules governing Suitability and Know Your Customer Obligations will expand the obligations of registered representatives when recommending securities or investment strategies­ to customers. This is interesting because it looks like FINRA is moving towards codifying a fiduciary standard, or at least a modified fiduciary standard.

In the past, a fiduciary duty in a non-discretionary account related to only the execution of trades and custody of assets. Now, if an investment strategy encompasses assets away from the firm, that strategy falls within the proposed rule. For instance, the recommendation to retain stocks in an account at another brokerage firm may be considered recommending an investment strategy as may the recommendation to hold, and not sell, a particular stock.

This represents a significant change in the relationship a broker has with his/her client and will broaden the areas of responsibility when making suitability determinations.