The truth will always come out. This is a hard lesson that Fund Manager, Matthew D. Weitzman, just recently learned. He has been charged with investment adviser fraud, securities fraud, and wire fraud. If convicted he faces up to a maximum of 15 years imprisonment and over $5 million in fines.

Mr. Weitzman was co-founder of AFW, financial planning and investment management firm. AFW managed more than $190 million in assets at the end of 2008. According to reports in the North Country Gazette,, Mr. Weitzman converted investor money for his own use.

The Golden Goose is no more for Mr. Weitzman. His misdeeds caught up with him and now he must face the music for his crimes. Hopefully, the Investors in AFW will seek legal counsel to discuss how they can get their stolen funds back.

The Eleventh Circuit Court of Appeals, which covers Florida, is a "manifest disregard" circuit. In Montes v. Shearson Lehman Hutton, the court found that a closing argument in an NASD arbitration that acknowledged the law, but encouraged the arbitrators to ignore it, was evidence of manifest disregard of the law. The arbitrators agreed and Shearson won the case.

On a motion to vacate, ultimately decided by the 11th Circuit, Shearson lost. The court found that the test is that the arbitrators were aware of the law and chose to ignore it. Montes may be the only case decided on this basis for the movant. In other words, in establishing "manifest disregard" as a basis for vacating an arbitration award, Shearson lost.

Over time, and mergers, Shearson became part of Citigroup Global Markets. That entity, Citigroup, recently lost a FINRA securities arbitration award to a woman from Texas. Citigroup thought it had a good argument, that the arbitrators manifestly disregarded the law. The trial court agreed. The Fifth Circuit did not.

In Citigroup v. Bacon the Fifth Circuit said that "manifest disregard of the law" is no longer available as grounds to vacate an award. The court based its decision on a recent US Supreme Court decision in Hall Street Associates v. Mattel. The US Supreme Court in Hall Street found that "manifest disregard" is not part of the statute allowing vacatur of arbitration awards. The Court pronounced for the entire nation that "manifest disregard" does not exist any longer. (Other circuits, by the way, have found their way around this ruling.)

Florida currently is a "manifest disregard" state, but the 11th Circuit said that Montes is the only case it has found worthy of that moniker. In fact, in Harbert v. Hercules Steel,, the 11th Circuit warned that sanctions may be appropriate for weak motions to vacate arbitration awards based on "manifest disregard."

There you have it. Citigroup has managed to establish that "minfest disregard" is and is not a basis for vacating an arbitration award. For those of you non-lawyers who read this, I can't explain it other than to say, that's the way the law is sometimes.

That's the view from The Law Planet - Jupiter, Florida.

I have been handling securities arbitrations for over 20 years. Every once in a while, the arbitrators saw the other side's case for what I believed it was -- nonsense. This has happened a few times over the years.

I heard about a case that was being tried before FINRA in Boca Raton. The premise of the claim seemed flimsy to begin with. Money had been stolen by a broker and returned by the brokerage firm, Merrill Lynch to the customer. The claim appears to be for, in part, lost investment opportunity. The broker did not appear during the arbitration hearings. At a point in time, she said she was not appearing because she was "awaiting sentencing." Those are usually not helpful words.

But it appears that Merrill did the right thing and paid back the customer the money that was stolen. But in something that I cannot recall ever seeing before, there is a nearly two page recitation of the procedural issues in the case. There are issues dealing with amendment of pleadings, appearance of witnesses and the possiblity of depositions. This case was war.

The arbitrators sided with Merrill Lynch and against both the Claimant and her broker. The panel awarded both the Claimant and Merrill Lynch their attorneys' fees against the broker. But that's not the unusual part.

The unusual part is the assessment of the arbitration costs jointly and severally against the Claimant and her lawyers. That is very rare. In case anyone reading the award thought that the panel was happy about this case, the assessment of costs against the lawyers pretty much puts that notion to rest.

Some days, the dog bites you and some days you bite the dog. I don't know who plays which role, but somebody got bit.

That's the view from The Law Planet, Jupiter, Florida.

The folks at FINRA are SOOO predictable. Some arbitration haters come out with a "study" about arbitration and conclude it's not fair. The securities industry releases its own study and says that arbitration is fair. So what does FINRA do? A "pilot" program. See the press release here.

What is the hubbub all about? The eggheads and some members of the plaintiffs' bar believe that the presence of an industry panelist creates a bias against the public claimant. Apparently, these people haven't sat in hearings where I've been. Typically, in cases that I've handled, the industry panelist is the one who is toughest on the securities industry. In a case where my firm represented a public customer, it was the industry arbitrator who was toughest on the opposition's expert.

So does this mean that panels will be free of bias? No. In fact, there is nothing in this program that prevents lawyers who typically represent customers from being on a panel. They are generally qualified as "public" arbitrators. But the program leaves someone like me, who represents brokerage firms and investors, from being on a panel. So now a panel can be dominated by a died-in-the-wool plaintiffs' lawyer with no counterpoint.

This, in my humble opinion, is a mistake. This is another example of addressing a "problem" that does not exist. The bigger problem is arbitrator competence. I once had a case where the chair was an interior designer! She had no business being the chair, but there were no lawyers on the panel, so she got the job. It was ridiculous. The new rules, which require a "qualified" chair, do much to address this situation. But a panel with no industry member? Talk about a stacked deck.

Remember, the industry member is only one of three. If the other two arbitrators are too weak to make up their minds, and the industry member is believed to drive the panel, then that is a problem with the arbitrator pool, not the process. I have always said give me three smart arbitrators and I will get a fair result 99% of the time. On the other hand, if you start tinkering with the process, and remove the industry panelist, I think that this will demonstrate only that FINRA has succumbed to undue political pressure.

That's the view from The Law Planet, Jupiter, Florida.

I recently wrote about FINRA's policy on expungements. Of course, FINRA has no control over what any individual state securities commissioner might do. In what appears to be a case of first impression, a state securities regulator has stepped in to try and stop a bargained-for expungement.

Melanie Lubin, the securities commissioner for Maryland, intervened in what is usually a milk-run expungement matter. In an attempt to keep the complaint on broker's record, Ms. Lubin objected to the expungement. At the trial court level she was denied the opportunity to intervene. The DC Appeals court ruled that she could intervene and sent the case back to the trial court.

Get ready boys and girls. Not only will this change the whole expungement atmosphere, it will change the wording of releases. If an expungement is a material part of the settlement, then what will happen if the state regulator intervenes and shouts "STOP!" More litigation, that's what. And for those of us that do litigation, that's good news. For those of you who pay the bills for litigation, this is not a good day.

This is going to become an even more sensitive issue as "product failures", such as Auction Rate Securities, are disclosed on a broker's CRD. Many brokers are already stating that they were just a conduit for the information (or misinformation) given to them by their firms. Does a state securities commissioner really want to stick his or her nose in that one? What a mess.

That's the view from The Law Planet - Jupiter, Florida.

I have recently received several inquiries regarding expungements of U-4 and U-5 information. I have said this more than once, but "in the old days" an expungement was a piece of cake. The parties agreed to it, whether it was a customer or industry dispute, and it was done.

Of course FINRA got wise to this and started slowly tightening the noose around expungements. I have done research on this issue before but wanted to share this one link I found which you, my 3 loyal readers, may find helpful. This page contains the be-all and end-all from FINRA regarding expungements.

There are two classes of expungements - customer and non-customer. Expungements of customer complaints require specific findings. If a U-4 or U-5 disclosure is not customer-related, then a different set of rules applies and the only finding that an arbitration panel needs to make is that the disclosure was defamatory.

There is also a procedural difference once the successful litigant has obtained an expungement Order. If it is customer-related, a court needs to sign off on the change to the U-4/U-5 and FINRA needs to be made a party to the action. If the expunged information is not customer-related, a simple finding of defamation is sufficient for FINRA to remove the information from the CRD system.

Now you're informed. That's the view from The Law Planet - Jupiter, Florida.

We've all seen them - the books and magazines that look like they feature a financial salesperson. In fact, NBC's Dateline program did an expose on annity sales practices. Several of the agents the show targeted had phony ghostwritten articles.

In FINRA Notice to Members 08-27, the regulators stated that using ghostwritten materials could violate a number of rules, including NASD Rules 2110, 2120 and 2210 and Incorporated NYSE Rule 472. Frankly, the use of the word "could" is fairly silly. How about "does" unless, in a conspicuous place, the financial representative discloses that the only connection he had to the article was possession of a credit card and a digital picture?

This is one of those common sense kind of moments. Others call it the "Wall Street Journal" test. Do you want your behavior displayed on the front page of the "Wall Street Journal"? Generally, no.

FINRA's Notice to Members addresses a recent theme, aggressive sales tactics used in connection with seniors. FINRA has issued pronouncements regarding "free" lunch seminars, the use of certifications that are nothing more than mail order multiple question tests and, now, the use of phony news articles. All of these are good steps to protect those who can least afford to make financial mistakes.

That's the view from The Law Planet - Jupiter, Florida.

In another installment of the incompetent/malevolent broker/dealer guidebook, Barclays Capital partially prevailed on a Motion to Vacate Arbitration Award filed against one of its former employees. In Barclays Capital Inc. vs. Elizabeth Bing Shen, 2008 N.Y. Misc. LEXIS 2327, a NY Supreme Court judge (the lowest level trial court, interestingly enough) found that the ruling in Rosenberg v. MetLife barred recovery of punitive damages.

Rosenberg, as those who have been following this issue will recall, held that incorrect statements on a U-5 Termination Notice were absolutely privileged. In my opinion, regardless of whether you represent a firm or the broker, this is a wrong-headed decision that was decided by judges who ignored the impact on a broker's life a U-5 can have. There has been some discussion by commentators that there are ways "around" Rosenberg. Certainly, one of them is to avoid New York law in contracts. There are others as well, but if I shared them I'd have to shoot you.

Back to Ms. Shen. She was apparently owed a bonus and her U-5 was found to be erroneous by the arbitrators. By the description in the court's opinion, she does not qualify for "Employee of the Year" status by any means, but the arbitrators clearly felt that she didn't deserve the disclosure she received. They awarded her punitive damages.

The court found that the punitive damages could only have been for the U-5 defamation claim and, therefore, vacated that part of the award. We are currently representing brokers whose U-5s, we believe, are defamatory. We are not concerned about the New York choice of law provision because we feel that there are valid arguments against it when the the broker is in Florida. Nevertheless, this creates more stress and anxiety and creates a "free defamation zone" for broker-dealers, honorable and not.

That's the view from The Law Planet - Jupiter, Florida.

In an email from FINRA, formerly NASD, dated April 14, 2008, the agency announced that the arbitrators' procedures on damages and closing the hearing will be changing. This is, ostensibly, to unify the scripts between NASD and NYSE arbitration codes.

The first change has to do with damages. In an effort to have the percentage "win" rate more accurately reflect what was sought at hearing, the arbitrators will be asking for a summary of the "final request" for damages. It is off of this amount that the statisticians calculate customer "win" rates and percentages. Since the statisticians use the amount sought as described in the award, this amount will now be based upon what the party asks for at hearing.

Frankly, I don't see how this will make a difference. If it makes FINRA feel better, so be it.

The next change is more interesting. The NASD script always ended with the chairperson asking the parties if they had a "full and fair opportunity to be heard." Every once in a while a party would say "no." Interestingly, there's nothing that I recall from the chair's script that tells the arbitrators what to do in the case of "no." Basically, it causes a fire drill. Or the chair says that the objection is not relevant or necessary. I once used the threat of a "no" in a case where I felt the arbitrator was being unfair in the allocation of time to present my case. The arbitrator, an otherwise fair-minded individual, changed course and I was given the opportunity to present my client's case in full (successfully, as well).

The new script will ask the following "Do the parties have any other issues or objections that you would like to raise that you have not previously raised?" This was, I think, the intent of the prior question anyway. But there is a big perceived difference between "full and fair" and "any other issues or objections."

FINRA states that "full and fair" is nowhere to be found in its arbitration codes. Given some of the results I've received, "fair" certainly isn't in there.

These are hardly earth-shattering changes. But ever since I attended my first arbitration (when dinosaurs roamed the earth) I have heard the "full and fair" language. I'll miss it.

That's the view from The Law Planet - Jupiter, Florida.

FINRA, the securities regulatory agency governing all stockbrokers, has announced its approval of a new expungement rule in a press release dated December 14, 2007. This is further evidence of regulatory scrutiny of a long-standing practice of obtaining expungements in the settlement of customer claims.

Many moons ago, when my hair was more plentiful and darker, the warring parties in a securities arbitration could simply agree to have the customer complaint removed from the broker's record, get the arbitrators to sign off on it and the deal was done. NASD got wise to this practice and enacted a series of ever-tightening rules regarding expungements. First time around, the arbitrators had to grant the expungement and the award was required to be confirmed by a court, unless the defamatory U-5 filing was the subject of the arbitration, in which case no court confirmation was necessary.

The NASD then enacted standards that must be met regarding the expungement of customer complaint information. Arbitrators were to apply certain standards in granting expungements. Additionally, NASD was to be notified when a broker sought a court confirmation of an expungement order. It appears that these standards and practices were not enough. Much settlement money changed hands and arbitrators were still granting expungements.

This new rule, as proposed, tightens the noose further. An evidentiary hearing is required and the terms of the settlement with the customer must be disclosed. This raises an interesting question. If the brokerage firm pays the money and the customer gives a separate release to the broker, which release is relevant to the arbitrators' inquiry?

FINRA's concern about expungements is understandable. As the custodian for CRD, which is relied upon customers and regulators as the broker's record, expungements can skew a broker's history. At the same time, a broker should have a right to have frivolous items removed.

That's the view from The Law Planet - Jupiter, Florida. Happy holidays to one and all.

The Securities Industry and Financial Markets Association (SIFMA), the securities industry's trade group, has been remarkably silent in the arbitration abolition wars. First, the distorted report from Daniel Solin and Edward O'Neal came out which said arbitration was unfair, simply based upon won/loss rates. Then the Feingold-Johnson bill is proposed - to ban all "consumer" arbitrations. Even PIABA, the trade group for securities claimants' lawyers, came out against arbitration and, separately, proposed removing the industry panelist from all arbitration panels.

In a recent article from The Investment News, SIFMA is described as fighting back. Of course, the naysayers will portray SIFMA's study as self-interested, but noone seemed to accuse Mr. Solin or PIABA of the same self-interest. But I digress.

A review of the SIFMA study shows that a lot of thought went into debunking the horse-droppings that were left behind by the Solin study. SIFMA correctly points out the number of garbage cases that were filed by people who were incapable of accepting that the market simply went down. This is not to say that every case was garbage, but my own experience was that there were a lot of people who wanted to take the risk and that ultimately led to their financial distress.

Read the report. It provides the other side of a coin that was not previously turned over. Now, I'm sure, the battle heads for Congress. Long live arbitration!

That's the view from The Law Planet - Jupiter, Florida.

The newly-minted securities regulator, FINRA just fined Morgan Stanley $12.5 million for failing to produce emails in its possession. To make this even more heinous, Morgan Stanley hid behind the 9/11 tragedy as the reason for its failure to produce. As it turns out, this representation was just wrong and Morgan Stanley knew it.

This problem came to light in a very public way when Morgan Stanley tripped over itself, numerous times, in Palm Beach County Circuit Court litigation with Ron Perelman. Mr. Perelman's lawyers pressed and pressed the firm for emails. And, magically, emails started popping up all over. Eventually, the judge decided that Morgan Stanley couldn't be trusted and shifted the burden of proof to Morgan Stanley to prove that it wasn't liable to Perelman.

We have litigated against Morgan Stanley. In all cases but one, the company fought production of obvious items, produced incomplete documents and stated that documents didn't exist, and then produced the documents when forced. In one case, we were told no documents existed and a witness showed up at a hearing to testify with a big stack of paper that was in a file outside his office.

Litigation is a battle. But there are rules and expectations of lawyers and clients to abide by those rules. Morgan Stanley was fined for more than an oversight and it was deserved. Perhaps this will serve as a warning to other firms who play games in discovery.

That's the view from The Law Planet, Jupiter, Florida.

Electonic Data Discovery, and other areas relating to electronic data storage, are hot topics in litigation and arbitration, whether in the securities field or other commercial disputes. There have been many articles written about the new sections of Rule 26 of the Federal Rules of Civil Procedure. What is not often discussed is the practical advantages of reducing the amount of paper being carried around and the amount of stress (when the computers are working) that is removed through proper usage of electronic media.

Here is a recent example of how some planning and Adobe Acrobat can make your life easy. My partner and I were defending a securities client in an arbitration brought by a group of unhappy non-clients of our client. We had litigated the same underlying issue with the same law firm two years ago. We had agreed with that law firm that the documents from the prior case could be used in this case, so that we did not have to produce the same universe of documents twice. Among the documents from the prior case was a list of clients of the broker, who went to jail for what he did.

We advised the arbitrators that this list was produced in the prior case and that counsel should have a copy among the (disorganized) papers he had in his possession. He wanted proof that we had produced the document in the prior case. Before we left the office, Debra and I both used the Microsoft Windows Offline Files function to synchronize all of the documents, pleadings and discovery, to our laptops. When the issue came up, I was able to locate the subject document in seconds. But we had a problem -- we wanted to maintain confidentiality of the contents and wanted to denote on the document that it was produced in the current case, not just the prior one.

While sitting at the counsel table, I opened the document, a PDF, in Acrobat and added a footer with all of the case identifying information and the confidentiality warning. Then, using the HP portable printer that is almost always with me at hearing, I printed out the document and gave a copy to opposing counsel, all the while listening to his examination of my witness. The witness was ordered to review the document over lunch, which he did, and his testimony was over within a few minutes of returning to lunch.

Think about this story the next time you are loading up boxes and boxes of paper discovery documents into your car or onto the messenger's truck. And think about the fact that the prior case had an equally large number of documents. Yet we did not bring a single box of production documents, from either case, to the hearing, only our exhibit notebooks.

The electronic document management train is leaving the station. If you're going to compete, you need to get on, but there's no room for storage boxes of documents in the overheads!

That's the view from The Law Planet - Jupiter, Florida