Elderly Investor Recovers Losses Tied to UIT

After a four day hearing, a panel of FINRA arbitrators awarded $130,000.00 in compensatory damages to our clients.  The damages were for losses incurred by an elderly woman with Alzheimer’s disease whose funds were invested primarily in high-risk securities, including a Claymore Unit Investment Trust (“UIT”).

UITs are similar to mutual funds, but there are some big differences. Unlike many mutual funds, the trustee of a UIT does not manage the holdings in the portfolio. If the manager of an actively managed mutual fund decides that the prospects for a particular holding are poor, he or she can sell and replace it. UIT trustees, however, may be able to sell poor performing holdings, but they generally cannot replace them. Another difference is that mutual funds can continue into perpetuity, but UITs have built-in expiration dates. When the expiration date hits, the securities in the UIT are sold, and the proceeds are distributed to investors. This means that the UIT trustee may have to sell its positions during a deep decline in the market. This can be calamitous if the UIT’s holdings are concentrated in a sector that falls out of favor. On the other hand, mutual fund managers can selectively trade securities whenever they feel the time and price is right.

While UITs and mutual funds both hold baskets of securities, there is no evidence that UITs perform any better than mutual funds. To the contrary, UITs generally carry very high fees and expenses which reduce their yield to investors. Those UITs that own mutual funds are weighed down by the double burden of their own expenses plus those of their mutual fund holdings.

At bottom, there are not many good arguments for buying UITs, but there is one big incentive for those who sell them—very high sales charges (i.e., 2.5 to 3%). The broker who sells a UIT typically gets a substantial chunk of this charge, which is good for him, but not so good for you. And since the UIT will terminate at a specified date, the broker has a built-in opportunity to sell his client a new UIT, with yet another sales charge.

Many UITs don’t charge a commission up front; instead, they impose what is referred to as a contingent deferred sales charge (“CDSC”). This means that if you want out of your UIT before its termination date, you may have to pay a sales charge. The CDSC is typically based on the value of the UIT when you bought it, not when you sell it. This means that if you paid $100,000 for a UIT which has a 3% sales charge, and the UIT has lost 50% of its value when you want to sell, it will cost you $3,000 (6%) to get out of a poorly performing investment. Talk about adding insult to injury! In contrast, many of the best performing mutual funds are no-load, meaning they have no sales charges.

UITs are not favored by sophisticated investors or those who understand securities markets. In fact, Jane Bryant Quinn, one of the country’s foremost financial writers, describes UITs as “Absolutely Awful Investments” in her book Making the Most of Your Money Now (Simon and Schuster, 2010).

The only good news for those who have been duped into buying money-losing UITs is that it may be possible to recover your losses through the arbitration process. In fact, Smiley Bishop & Porter LLP recently handled a FINRA arbitration for an 87 year old Alzheimer’s victim whose Wachovia/Wells Fargo broker invested 70% of the money she needed for assisted living in a single UIT. After a hotly contested FINRA arbitration hearing, the arbitrators awarded the client all of her losses back.

Smiley Bishop & Porter LLP represents individual and institutional investors in securities arbitration and business litigation. The firm focuses on cases involving defrauded investors, suitability claims, and mismarketeted investment products. Smiley Bishop & Porter LLP is available for a free initial consultation. Please visit us at www.sbpllplaw.com to obtain additional information or call us at 770-829-3850 or toll-free (800) 697-4514.

Wells Securities is a Norcross, Georgia based broker-dealer which makes most of its revenue from selling Real Estate Investment Trusts (“REITs”) and direct participation agreements. FINRA, which regulates broker-dealers, has just fined Wells $300,000 for using misleading marketing materials in selling its real estate funds. As is typical in regulatory settlements, Wells paid the fine but “neither admitted nor denied liability.”

The story behind the settlement should be an eye-opener for investors. FINRA charged that over a two year period, Wells Securities approved 116 misleading advertising and sales materials for the Wells Timberland REIT which invested in timber-producing property. The firm’s promotional materials indicated that Timberland would qualify under federal tax laws as a REIT by December 31, 2006. In reality, however, it did not qualify until the end of 2009-almost three years later. This misled investors into believing that Timberland qualified for the favorable tax treatment the IRS allows for REITs.

In addition to deceiving investors about the tax status of Timberland, FINRA alleged that sales materials falsely implied that Timberland would make distributions and redeem shares at times when it was prohibited from doing so by virtue of agreements with its lenders. FINRA also asserted that Wells made unwarranted and exaggerated claims that Timberland’s holdings were diversified when it actually only owned one property.

This case is notable because it involves an increasingly problematic investment called non-traded REITs. Non-traded REITs do not trade on the New York Stock Exchange or any other organized market. Although non-traded REITs must make SEC filings that disclose important details about their financial condition, unlike traded REITs the lack of an organized trading market makes it hard to understand their real value and harder still to liquidate them at good prices. Non-traded REITs are also plagued with high front-end fees, which basically pay the brokers who sell them and rob investors of yield.

And if high costs and low liquidity are not enough reason to avoid non-traded REITs, consider also the fact that some of the distributions they make to investors may be made with borrowed money or even a return of the investor’s own money. The bottom line on most non-traded REITs is they are great for the brokers who sell them and bad for those who invest in them.

If you have sustained losses as a result of investments in non-traded REITs which were not properly represented to you or were not appropriate for your investment needs and objectives, please contact us for a free initial consultation.

» Read the whole article on Bloomberg

• Inspired by the financial meltdown of 2007-2010
• Home market collapsed: total home equity in US dropped from $13 trillion in 2006 to  $8.8 trillion by  mid-2008, foreclosures
• Over 100 mortgage lenders  went bankrupt in  2007-08
• Money market funds experience mass withdrawals ($144.5 billion in a week, compared to $7.1 prior week)
• Major financial institutions fail, go bankrupt or have shot gun mergers: Lehman Bros. Bear Stearns, Washington Mutual, AIG, Fannie Mae, Freddie Mac and Merrill Lynch,
• Dow Jones fell from over 14,000 in Oct. 2007 to 6,600 in March 2009
• US and European Banks lost nearly $3 trillion from bad loans and toxic assets (CDOs etc)
• TARP (signed by Pres. Bush in Oct. 2008) allowed US Treasury to  buy or insure up to $700 billion in troubled assets

Dodd Frank at 1 Year Plus

• The Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010) , was signed July 21, 2010 by President Obama
• Dodd Frank requires lots of studies and hundreds of enacting regulations to be enacted by federal agencies.  This process has been slow.
• “Federal regulators, badly behind schedule for enforcing the Dodd-Frank financial regulatory overhaul, are now gradually stepping up their rule-writing efforts…Under the Dodd-Frank Act, regulators are required to write some 300 new rules for Wall Street, touching everything from the $600 trillion derivatives market to dubious lending practices.” 9/6/11 NY Times Dealbook

Major Titles of the Act

Title I:       Financial Stability

Title II:      Orderly Liquidation Authority

Title III:     Transfer of Powers from OTS to FRS, FDIC, OCC

Title IV:     Regulation of Advisers to Hedge Funds & Others

Title V:      Insurance

Title VII:     Improvements Reg. of Bank/S&L Holding Cos.

Title VII:     Wall Street Transparency and Accountability

Title VIII:    Payment, Clearing and Settlement Supervision

Title IX:      Investor Prot. & Improvements to Sec Regs

Title X:      Bureau of Consumer Financial Protection

Title XIV:    Mortgage Reform and Anti-Predatory Lending

Title I – Financial Stability Act of 2010

• The Financial Stability Oversight Council is charged with identifying threats to the financial stability of the United States, promoting market discipline, and responding to emerging risks to the stability of the United States financial system.
• The Voting Members of the Council include the Secretary of the Treasury (who serves as Chair), Comptroller of the Currency, Chairs of the SEC, Federal Reserve, FDIC, CFTC, NCUA, Directors of the Federal Housing Finance Agency and Bureau of Consumer Financial Protection and an independent member appointed by the President.

Title II – Orderly Liquidation Authority

• Dodd-Frank creates a way to liquidate certain financial institutions where Congress felt the Bankruptcy Code would not protect the economy and taxpayers from collateral damage.
• It provides for special liquidation procedures for Covered Financial Companies, which are those that derive most of their revenue from financial activities and are designated as systemically important. The definition excludes banks, which are already subject to FDIC liquidation procedures.
• FDIC acts as Receiver. The Receiver can borrow money from the US Treasury to fund the receivership, but the funds must be repaid in 60 months. Also the Receiver is to remove managers and directors deemed responsible for the company’s condition, who breached fiduciary duties or who engaged in unsafe or unsound practices with the company. The Receiver can initiate suit against officers and directors for gross negligence or intentional misconduct.
• “Living will” provisions requires “systemically significant” financial institutions to provide the Fed , FDIC,  and the Financial Stability Oversight Counsel with  a plan for the rapid and orderly resolution of their business in the event of material financial distress.

Title III – Transfer of Powers to the Comptroller, the FDIC, and the Fed/ Change in FDIC Insurance Coverage

• The “Enhancing Financial Institution Safety and Soundness Act of 2010″ is designed to streamline banking regulation.   It abolished the Office of Thrift Supervision  (a weak regulator of savings banks and S&Ls) and merged its powers into other bank regulatory agencies.
• The Act also permanently increases deposits insured by the FDIC and National Credit Union Share Insurance Fund from $100,000 to $250,000. All funds in a “noninterest-bearing transaction account” are insured in full by the Federal Deposit Insurance until  December 31, 2012.

Title IV – Regulation of Advisers to Hedge Funds and Others

• Increases regulation of  & reporting by hedge funds
• Funds w/over $150 mill in assets must register w/SEC and disclose investment/ business policies and hire compliance officer
• Amends definition of accredited investor under Reg D of the 1933 Securities Act, which provides that certain securities offerings are exempt from the Act’s registration requirements. Prior to the Act, natural persons were deemed accredited if they had recent annual income of $200,000 individually or $300,000 joint and a net worth of over $1,000,000. Section 413 of the Act revises the definition of “accredited investor” to exclude the value of a natural person’s primary residence when calculating their net worth.

Title V – Insurance

• The “Federal Insurance Office Act of 2010“ establishes the Federal Insurance Office in the Treasury Department.
• Till now insurance has traditionally been regulated by the states.
• The Federal Insurance Office’s duties include:

◦  Monitoring all aspects of the insurance industry (excepting  health insurance, long-term care insurance, and crop insurance), in order to identify problems that could contribute to a systemic crisis

◦  Monitoring the extent to which traditionally underserved communities and consumers, have access to affordable insurance

◦  Making recommendations to the Financial Stability Oversight Council about insurers which may pose a risk, and to help any state regulators with national issues

◦  Administering the Terrorism Insurance Program

◦  Coordinating international insurance matters

◦  Consulting with the States regarding insurance matters of national importance and prudential insurance matters of international importance;

• The Insurance Office can require insurers to provide information or data.

Title VI – Improvements to Regulation

• Title VI , the “Bank and Savings Association Holding Company and Depository Institution Regulatory Improvements Act of 2010, amends the Bank Holding Company Act of  1956 by  imposing  financial limits on the ability of  certain banks and related entities to  participate in proprietary trading or investing in hedge funds. This is the so called “Volcker Rule“.
• It limits a covered entity’s investment in proprietary trading (trading securities, derivatives etc for its own account rather than for those of customers) to no more than 3% of the firm’s regulatory capital.  The Act also limits firms’ ability to sponsor and invest in hedge funds and private equity funds.

Title VII – Wall Street Transparency and Accountability

• The “Wall Street Transparency and Accountability Act of 2010”   concerns regulation of derivatives including credit default swaps markets.
• Title VII gives the Commodities Futures Trading Commission and the SEC authority to regulate the swaps market.
• The purpose of these provisions is  to reduce risk, increase transparency, and promote market integrity within the financial system by, among other things:  (1) providing for registration and regulation of swap dealers and large end users, termed “major swap participants;” (2) imposing clearing and trade execution requirements on  OTC derivative products; (3) creating recordkeeping and reporting requirements; and (4) imposing margin, capital, and position limits requirements on market participants.
• No federal assistance may be provided to any swaps entity, except to insured depository institutions that limit their swaps activities to hedging and other risk reduction actions.

Title IX – Investor Protections and Improvements to the Regulation of Securities

• Sections 901 to 991 broadly cover a number of areas including:

(a)  The structure and authority of SEC

(b)  Conduct of credit rating organizations

(c)  Brokerage firms and investment advisers and

(d)  Executive compensation and corporate  governance for public companies

Title IX – Fiduciary Standard For Stockbrokers

• Section 913 required the SEC to study whether there should be a fiduciary duty for brokers when they offer “personalized investment advice to a retail customer.”
• Investment advisors are already under this standard of care which requires putting the client’s interest first.
• The SEC issued a study in January 2011 that recommended a uniform fiduciary standard for brokers and investment advisors.

Title IX- Mandatory Arbitration

• Section 921 gives the SEC authority to limit or ban mandatory arbitration between customers and securities brokers (Section 1414 prohibits mandatory arbitration in mortgage and home equity loans).

Title IX – Whistleblower Bounties & Protection

• Sections 922 and 748 gives monetary incentives for whistleblowers who voluntarily report securities or commodities violations. (If information leads to sanctions over $1 million, SEC pays bounty of 10-20%).
• Can be paid even if the whistleblower is a violator unless they are criminally convicted.
• The Act gives whistleblowers protection from retaliation. These include back pay, damages, reinstatements and legal fees and costs.
• Section 1057 prohibits making employee arbitration a whistleblower claim.

Title IX-Credit Rating Agencies

• Subtitle C of Title IX, entitled “Improvements to the Regulation of Credit Rating Agencies,” institutes reforms in the regulation, oversight and accountability of nationally recognized statistical rating organizations (“NRSROs”).
• Creates Office of Credit Ratings in SEC
• Requires transparency of ratings
• Reduce conflicts of interest
• Reduces required reliance on ratings per laws & regs
• Allows SEC to bring fraud cases against NRSROs
• Raters must consider info from sources besides ratings

Title IX – Executive Compensation

• Subtitles E and G contain regulations of executive compensation and corporate governance for public companies.
• Shareholder “advisory” votes on comp. every 3 years for top officers
• Rulemaking may require detailed disclosure of golden parachutes
• Claw back of CEO/CFO comp earned in year before restatement of earnings due to misconduct
• Requires independence of compensation committees

Title X – Bureau of Consumer Financial Protection

• Title X establishes the Bureau as part of the Federal Reserve, but it operates independently.
• The Bureau is supposed to protect consumers from abusive practices in the financial services market—practices like predatory lending which Congress believed that bank regulators had overlooked.

Title XIV – Mortgage Reform and Anti-Predatory Lending Act

• This is to be administered by the Bureau of Consumer Financial Protection. It calls for setting standards for originating mortgages, prohibiting predatory lending practices and regulating high cost loans.  Key provisions include:

◦  Requiring that borrowers meet “ability to repay” standards which are verified  in good faith by lenders

◦  Requiring lenders to retain at least 5% of the risk of mortgages they write unless the mortgages are deemed “qualified”

◦  Requiring  new disclosures for home mortgages

◦  Prohibiting certain onerous loan provisions, including prepayment penalties on some loans

◦  Prohibiting  high cost mortgages from having balloon payments  that are more than twice the average of earlier scheduled payments

◦  Setting  standards for certain appraisals, including a physical visit to the property

Will Dodd Frank Avert Another Disaster?

History says no. So does human nature.

• “The world of finance hails the invention of the wheel over and over again, often in a slightly more unstable version. All financial innovation involves, in one form or another, the creation of debt secured in greater or lesser adequacy by real assets.” John Kenneth Galbraith
• “The four most dangerous words in investing are, ‘It’s different this time.’” Sir John Templeton
• When Wall Street tells you that it has invented a better mousetrap, just remember that you are the mouse.

Investors should never make a decision just by looking at an investments return but should also make sure they understand what fees are involved and how the investment works, said Gerri Walsh, FINRA’s vice president for investor education.

For instance, investors in structured retail products could end up with securities plagued by hidden costs, lack of liquidity and credit risk, according to FINRA. These products are most often unsecured debts whose payoffs are linked to a variety of underlying assets. For a more detailed description of several types of structured products on the market, look at the Investment Products section of our website.

FINRA identified several types of products that are cause for concern:

     High-Yield Bonds: Allocating a small portion of one’s fixed income holdings to higher yield bonds could make sense in some portfolios. But clients don’t always understand that the higher interest rate comes hand in hand with greater risk in the form of lower credit ratings and a bigger chance of default.

    Floating-Rate Loan Funds: These are investments in loans made to institutions with below-investment-grade credit. These funds may be marketed as being less vulnerable to fluctuations in interest rates and safer from inflation, says FINRA, but in fact the underlying loans have significant risks that affect liquidity, value and credit.

    Structured Retail Products: These tempt investors with promises of some degree of principal protection in addition to a chance for higher returns, but there are drawbacks. One type of structured product links returns to the steepness of the yield curve. Investors may sign on because of high rates of fixed interest that aren’t, in fact, a permanent part of the deal. The numbers often convert to floating rates that change along with the yield curve. Also, these investments typically take longer to mature and could be illiquid on the secondary market. In addition, the issuer is in some cases able to “call” the investment and buy it back before it matures, leaving the investor with funds to invest at a much lower rate.

    Leveraged Products: These use derivatives to allow investors to boost their yield in relation to a specific benchmark (one example is the so-called “leveraged ETF”). For example, these kinds of products might be designed to double the daily returns of the S&P 500, meaning that if the S&P rose by 2%, the leveraged ETF would go up 4%. There are also inverse leveraged products which seek to give investors the opposite yield of a certain benchmark or index. What investors often don’t understand is that in many cases these products “reset” their returns on a daily, not long term, basis. The yield on a yearly or even weekly measure might differ significantly from the performance of the specified index or benchmark during that same period of time.

    Bond Mutual Funds and Exchange Traded Funds: The value of these investments is tied not only to interest rates but also to the number of other investors who choose to remain in the fund. If too many of them opt out, the fund manager could be forced to liquidate the holdings at a loss.

FINRA’s warning list includes other products such as preferred stock, hedge funds, private equity and reverse exchangeable securities.

In addition to the products described above, FINRA warns that buyers looking to up their yields should be on the lookout for deals that are simply fraudulent, including high-yield investment programs promoted by unlicensed marketers who often promise two things that never mix: safety along with unsustainable high rates of return. Many of these are simply Ponzi schemes.

If you’re considering a change in investments, FINRA suggests you should ask:

• What are the fine details of the way the investment works? In some cases, your returns might come in some form other than cash. The list of unpleasant surprises could include exit fees, loss of principal and a lack of liquidity.
• What are the costs and fees? Some of these investments come with a double whammy: higher costs in addition to greater risks. Hedge funds and structured products are among the high-cost options. Some of the costs are built into returns, making it hard for customers to see how much they’re paying.
• Can the issuer redeem the investment before it reaches maturity? When this happens, buyers often have trouble finding a similar investment with the same kind of rate.
• Is there fraud going on here? The answer is most likely “yes” if you’re being promised returns of 30 percent a year or more without taking any risk on losing principal. Always verify that you’re dealing with a licensed seller.

Details are important in making sure that promises of more don’t lead instead to less. “The grass isn’t always greener,” says FINRA in warning investors to take a hard look at chasing high returns.

Customers who’ve moved to higher risk investments without being fully informed of the risks or were sold products that were unsuitable for them may have cause for legal action. If you have already invested in a product that promised but has not delivered high yield with protection of principal, you may may be entitled to recover your losses.

Smiley Bishop & Porter LLP represents individual and institutional investors in securities arbitration and business litigation. The firm focuses on cases involving defrauded investors, suitability claims, and mismarketeted investment products. Smiley Bishop & Porter LLP is available for a free initial consultation. Please visit us at www.sbpllplaw.com to obtain additional information or call us at 770-829-3850 or toll-free (800) 697-4514.

Reverse convertible notes are complicated structured debt instruments. The amount of principal which is paid when the notes mature is tied to the performance of a particular stock or index, like Dell or the NASDAQ-100. If the price of the stock or index falls below a certain level when the note matures, the investor may get less than all of his principal back. As we have previously written:

It is difficult to imagine the kind of investor who is suitable for a reverse convertible note. Investors who want the safety of bonds generally fear the stock market’s volatility, and thus are not good candidates for a product whose value is tied to stocks. Secondly, the general premise of this product is questionable at best. Investors who want the security of bonds and the growth of stocks would be wiser to simply make separate and diversified investments in stocks and bonds.

It appears that elderly brokerage firm clients who rely on their investments to meet their monthly income needs may have been particular targets for unsuitable and improper sales of reverse convertible notes. Many were not told about the serious risk that they would not receive a full repayment of their principal.

If you believe you have suffered losses in reverse convertible notes that were sold to you, please contact Smiley Bishop & Porter LLP to discuss your rights at 770-829-3850 or toll-free (800) 697-4514. Smiley Bishop & Porter LLP represents individual and institutional investors in securities arbitration. The firm focuses on cases involving defrauded investors, suitability claims, and mismarketeted investment products. Smiley Bishop & Porter LLP is available for a free initial consultation. Please visit us at www.sbpllplaw.com to obtain additional information.

» Read the whole article on Bloomberg

The controversy arose when the Plaintiffs obtained what was supposed to be a “free” cell phone from AT&T, but were charged a sales tax of $30 on the full retail charge for the phone. The Plaintiffs sued in federal court in California, where their case was consolidated with a class action alleging that AT&T had engaged in a campaign of false advertising and fraud concerning the free phone promotion. Class actions have traditionally been used where thousands of consumers have lost relatively small sums of money.

AT&T moved to compel the Plaintiffs to arbitrate their dispute on the basis of the standard customer agreement they had signed. It provided that all disputes had to be arbitrated and further that claims could only be brought on an individual basis, not as a member or representative of a class. The Plaintiffs successfully defeated the motions to compel arbitration by convincing the court that the arbitration clause was “unconscionable” because it did not allow for class actions and thus did not provide an adequate substitute for the deterrent effect of class actions. The Court of Appeals for the Ninth Circuit affirmed the district court, but AT&T sought and was granted review by the U.S. Supreme Court.

The U.S. Supreme Court reversed the Ninth Circuit. The decision was penned by Justice Scalia, who was joined by Justices Roberts, Thomas, and Alito with the swing vote coming from Justice Kennedy. In upholding the arbitration provision, the majority rested on the strong public policy in favor of arbitration embodied in the Federal Arbitration Act (“FAA”).  However, that policy is tempered by Section 2 of the FAA, which permits arbitration agreements to be declared unenforceable “upon such grounds as exist at law or equity for the revocation of any contract.” The lower courts had ruled that one of those legal grounds, unconscionability, invalidated AT&Ts’ no-class-actions clause.

According to the majority, the kinds of grounds that allow courts to invalidate an arbitration clause cannot be ones that are hostile to the basic characteristics of the arbitration process. Rather, the legal grounds for voiding the arbitration clause must be legal defenses that would apply to any contract. This means that a court may strike an arbitration clause that was signed under duress (for example, by threat of physical injury to the signer), because duress is a ground for invalidating any contract, not just those dealing with arbitration. On the other hand, Justice Scalia wrote that a court may not declare an arbitration clause unenforceable because it does not afford the parties procedural protections that are judicial, as opposed to arbitral, in nature. As examples, Justice Scalia suggested that a court could not void an arbitration clause because it did not require that there be a panel of twelve arbitrators or judicially monitored discovery, since requiring either of these protections would be tantamount to holding that the claim could not be handled with the kinds of procedures that are typical in arbitration. Based largely upon the majority’s concept of what is the norm in arbitration, the Court concluded that class actions are too complex, too time consuming, and too likely to impact the rights of third parties to be consistent with arbitration’s goals of informal and expeditious dispute resolution.

Justice Scalia’s analysis is striking in the extent to which he viewed the benefits of arbitration from the perspective of the defendant:

…[C]lass arbitration greatly increases risks to defendants. Informal procedures do of course have a cost: The absence of multilayered review makes it more likely that errors will go uncorrected. Defendants are willing to accept the costs of these errors in arbitration, since their impact is limited to the size of the individual disputes, and presumably outweighed by savings from avoiding the courts. But when damages allegedly owed to tens of thousands of potential claimants are aggregated and decided at once, the risk of an error will often become unacceptable. Faced with even a small chance of a devastating loss, defendants will be pressured into settling questionable claims.

The dissenting Justices (Breyer, Ginsburg, Sotomayor, and Kagan) pointed out that the lower court’s reason for invalidating the contract as unconscionable did not discriminate against arbitration since California law treated class action waivers an unconscionable no matter whether the waiver appeared in court or arbitration. They also correctly noted that the majority’s view of arbitration gave short shrift to the fact that (a) the American Arbitration Association (“AAA”) has specific rules for class action arbitrations, and (b) that large companies frequently arbitrate multi-million dollar claims with each other. The dissenters also made the practical observation that preventing consumers who lose nominal sums from collectively asserting their rights in class actions is functionally the same as telling them that they had no rights, since no lawyer would or could bring a suit for $20 or $30.

Without a doubt, AT&T Mobility LLC v. Concepcion represents a huge endorsement of arbitration by the Court. Only federal legislation limiting arbitration—which is not likely in an era of legislative gridlock—can turn back the clock. This will, in turn, keep the pressure on the organizations that sponsor arbitrations (such as the Financial Industry Regulatory Authority “FINRA” and the AAA) to make certain that their rules provide for procedures that are not only economical and expeditious, but fair to all parties. As lawyers who have represented clients in all manner of arbitrations for over twenty-five years, we hope that the arbitration forums are up to the challenge.

FINRA reports that “con-artists” are engaging in “pump-and-dump” schemes to inflate the stock of companies that allegedly sell products that will be in high demand in the wake of the Japanese tragedy. These unscrupulous stock promoters obtain blocks of stock of small, thinly-traded companies and then wage fraudulent PR campaigns through press releases and the internet in order to convince unwitting investors to start buying shares. When the stock price rises, the insiders sell out. And when the stock price falls, as it will when the truth comes out, the investors are left with worthless stock. While pump-and-dump schemes are deplorable, they are just a subset of the types of fraudulent representations that can be used to generate sales of a particular company’s shares.

In its alert, FINRA offered several examples of what it called “suspicious claims” by companies whose stock was being promoted. These included representations that the companies had developed new kinds of radiation detectors, superior radiation clean-up technology, and earthquake-proof buildings. These claims were either untrue or highly exaggerated.

A spokesman for FINRA said, “Unfortunately, a nation’s tragedy is being used as just another pretext to part investors from their savings …. As we saw with Hurricane Katrina and the Gulf Oil Spill, disasters provide a perfect opportunity for the unscrupulous to steal money from the unwary.”

FINRA identified several useful “red flags” to help investors detect stock scams, including:

• Unsolicited phone calls, faxes, e-mails, text messages, tweets, and strategically placed “opinions” in blogs and message boards about low-priced stocks
• Price targets or predications of quick and explosive growth
• Mention of connections with governments that bolster a company’s products
• References of connections to well-known companies
• Claims that they’re the next “big thing”
• Products that are only in the developmental stages or ones that claim to be “working prototypes” but have no actual products on the market
• Pressure to invest immediately

FINRA also offered some good advice on how to avoid being conned by fraudulent stock tips. These include recognizing that people with genuine inside information are not going to offer it up for free to thousands of potential investors. If they really have a “hot tip” and they don’t want to be charged with insider trading, they will not trade on it. If they are willing to break the law, they would keep the information to themselves and trade anonymously. What this means is that you should simply assume that someone is lying if he urges you to buy stock on the basis of hot information that is not public.

If the allegedly hot news about the company is already public, it should be reflected in the company’s SEC filings. Here, FINRA recommends that you check the SEC’s EDGAR database to find out whether the company files with the SEC. If so, it suggests that you check the reports and verify any information you have heard about the company.

FINRA wisely advises that you make sure that whoever is trying to pursuade you to buy stock have the required licenses from the SEC, a state securities regulator, or FINRA. We would add that, while many unscrupulous and/or incompetent people have licenses, the lack of a license is a serious red flag. Brokers can be checked out online through FINRA’s BrokerCheck, which also contains some information about prior investor or regulatory complaints. Investment Advisors can be looked up through the SEC’s Investment Adviser Public Disclosure website.

There is more information about securities fraud on our website, as well as an outline of the FINRA arbitration process in which investors may be able to recover losses.

If you believe that you have been the victim of investment fraud, please contact Smiley Bishop & Porter LLP at (800) 697-4514 or (770) 829-3850.