Category: Perspectives

New Tax Disclosure Requirements for Federal Contractors

Posted on by Liam Mennitt

You are receiving this notice because you are a client or friend of our practice who has a business or other professional interest in doing business with the United States Department of Defense, the General Services Administration or NASA.

On Friday, December 4, 2015, the federal government released an interim rule, effective February 26, 2016, prohibiting the Federal Government from entering into a contract with any corporation having a federal tax liability or a felony conviction under any federal law. The contracting agency is enabled by the interim rule to make exception if two requirement are met:

  1. The agency has considered suspension or debarment of the corporation; and
  2. The agency has made a determination that suspension or debarment of the corporation is not necessary to protect the interests of the government.

The rule requires that all offerors responding to federal solicitations make a representation as to whether the offeror is a corporation with a delinquent tax liability or felony conviction under federal law.

When an offeror indicates it is both a corporation and owes federal taxes or has a felony conviction, then the contracting officer is required to both request additional information from the offeror and notify the agency official responsible for initiating debarment or suspension action. At that point, the CO is disabled from awarding the contract to the offeror unless and until the agency had considered suspension or debarment and decided against it.

A federal tax delinquency is treated elsewhere in the FARs  as greater than $3500 and meeting both of the following conditions:

(i) The tax liability is finally determined. The liability is finally determined if it has been assessed. A liability is not finally determined if there is a pending administrative or judicial challenge. In the case of a judicial challenge to the liability, the liability is not finally determined until all judicial appeal rights have been exhausted.

(ii) The taxpayer is delinquent in making payment. A taxpayer is delinquent if the taxpayer has failed to pay the tax liability when full payment was due and required. A taxpayer is not delinquent in cases where enforced collection action is precluded.

See, FAR 52.209-5.

The new rule also includes a certification requirement for agencies entering into certain contracts worth over $5 million. Generally speaking, if a contract falls under the rule, the agency must receive certain tax certifications.

This rule is the distillation of the issues underlying the inquiries of Congress concerning federal contractors who do not pay their taxes.

If you are facing a federal contracting issue, review these new federal tax compliance requirements and consider the suspension or debarment exposures associated with the associated new disclosure requirements.

This note is intended as a general summary of legal principles and is not intended as legal or tax advice. You should discuss your specific circumstances with a qualified professional before taking an action.

Should All Financial Advisors Bear the Obligations of Fiduciary Duty?

Posted on by Liam Mennitt

As of today, in the retirement and savings plan matters, money managers are not required to register as fiduciaries. The Department of Labor (“DOL”) is about to clarify the situation by wiping out the difference that exists between financial advisors and broker dealers in regard to their responsibilities in retirement advices.

A fervent debate is currently on regarding whether the fiduciary duty should be applicable to broker dealers. Under section 3(21)(A)(ii) of the Employee Retirement Income Security Act (“ERISA”), a fiduciary advisor is a person who “renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan … .” In other words, the fiduciary advisor has to act solely in another party’s interests. The main corollary of this principle, for the fiduciary, is to avoid any conflicts of interest between itself and its clients.

Recently, the United States Supreme Court clarified the scope of the fiduciary duty under ERISA – Tibble v. Edison International, No. 13-550 (U.S. 2015). The Supreme Court expressed that a fiduciary “has a continuing duty to monitor trust investments and remove imprudent ones. This continuing duty exists separate and apart from the fiduciary’s duty to exercise prudence in selecting investments at the outset.”

Some financial services providers do not seem concerned about the possibility of a higher standard – i.e., they already support these basic safeguards in their work policy. Others who are under the pressure of their executives demanding large profit-return, seem to “forget” some of these principles and claim that they will not be able to serve their clients or stay in business if such a rule came into effect.

Who Takes the Lead?

Although initially the Securities and Exchange Commission (“SEC”) regulated broker dealers and investment advisors, it has delegated a large part of its prerogatives related to the broker dealers to the Financial Industry Regulatory Authority (“FINRA”). Nevertheless, when investment advice and securities transactions are related to savings and retirement plans the DOL also has a say in the matter.

Industry groups have widely expressed their concerns with the idea of a fiduciary standard commitment for broker dealers. The fact that the DOL is conducting the project understandably makes the financial services industry skeptical as the connection between them and the DOL is much less privileged than with the SEC or FINRA.

Financial services providers would welcome a consistent and coordinated interpretation of this new standard by the DOL and SEC; divergence between regulators would not serve anyone and would confuse both providers and clients. Trustees believe the industry and investors would be better served if the SEC took the lead and the DOL incorporated the standard guidelines in its interpretation of ERISA.

The Crisis Aftermath

Investment advisors – who provide investment advices – undertake to strictly respect the fiduciary duty. The objectives and interests of their clients must be their priorities when they suggest securities acquisitions. Any conflict of interest must be avoided or at least fixed in the Clients favor.

As opposed to advisors, broker dealers – who only execute securities transactions – have so far not been required to follow the fiduciary duty principle. However, as they suggest the purchase of securities, they are held to submit suitable products to their clients in regard to their financial situation and investment objectives. However, FINRA “suitability” standard does not mean that the products sold must be the best in respect to the purchaser profile.

During the latest financial crisis, many people learned the hard way that, even though those brokers were managing their savings, they were not fiduciaries and, consequently, were not held by the fiduciary duty. Thereafter, Congress adopted the Dodd-Frank Wall Street and Consumer Protection Act, with the intent to have the SEC examine the need of a new uniform federal fiduciary rule both for brokers and advisors. The SEC did so, and in 2011 released that a uniform standard would be appropriate.

At the same time, the DOL – which enforces among others the ERISA – implemented its own set of regulations in this matter with the intent to put some safeguards in place regarding retirement and savings accounts. In its new regulations, it focuses mainly on the conflict of interest facet of the fiduciary duty in respect to retirement accounts.

Two Week Extension

In 2010, the DOL wished to expand the definition of Fiduciary Duty under the ERISA but, eventually, overwhelmed by the industry pressure, had to withdraw it. In February 2015, President Obama asked the DOL to move ahead on its fiduciary rule.

Although Senators from both sides asked the DOL to extend the comment period, arguing that the matter is too complex to be commented in 75 days, the latter extended the period only for two weeks. Rule makers bode that a longer extension of this period could be prejudicial for their project.

http://newoak.com/wp-content/uploads/Defining-Fiduciary-POV-F3.pdf

https://www.grantthornton.com/~/media/content-page-files/financial-services/pdfs/2013/BD/130905_Secuirities_Adviser_Newsletter_October2013_130925%20FIN.ashx

http://www.forbes.com/sites/ashleaebeling/2015/04/14/dol-issues-proposed-fiduciary-rule-2015-version/

https://www.asppa.org/News/Browse-Topics/Details/ArticleID/4515

http://www.investmentnews.com/article/20150515/FREE/150519925/dol-extends-comment-period-on-fiduciary-duty-proposal

Investment Banking: How to Protect the Success Fee

Posted on by Liam Mennitt

The terms of the investment banking engagement letter are critical to the protection of the issuer in any deal.  Often overlooked, however, is that the investment banker’s fee is often protected or lost by those same terms – particularly in small deals for micro-cap or under capitalized companies.  Generally, an investment bank charges two different fees: the retainer fee, which has to be paid as soon as the banker starts his assignment, and the success fee, which has to be paid when the deal is closed.

Although the investment banker could waive this retainer fee in case of a surefire deal, it is usually a lump sum and oftentimes it is paid on a monthly basis. It can also be paid out at the beginning and might eventually be credited against the success fee.

The success fee, however, is most commonly a percentage of the final deal. Depending on the bank philosophy, the fee can be declining – e.g. the Lehman system – or the opposite, progressive, which can better incentivize the banker not to hurry in the transaction and motivate him to close a deal that exceeds the initial goals.

The time to pay the success fee is also a key point to be determined by the parties. It is evident that the bank wants to be paid at deal close and it should not be a problem with a cash sale. It can be much more complicated when the deal involve other payment options such as capital adjustments or deferred payments.

Often with smaller companies, there is a primary secured lender that has significant control over the issuer.  When an investment banker is successful, and raises debt or equity, (or some combination thereof) the bank and banker are entitled to this fee.  With a secured lender that controls the issuer in some form, or has the ability to foreclose on the assets, the investment banker is at risk if the bank is not paid at closing – if the deal is funded and sometimes thereafter the issuer faces economic trouble, the investment banker’s success fee can be swallowed up by a bankruptcy or asset foreclosure. 

Thus, we propose that where practical, and where leverage allows, the investment bank insists that the secured lender or those lenders with the ability to foreclose and take the issuers assets, either indemnify, or better yet, guarantee the investment banker’s fee in the event that the issuer cannot pay it due to the actions taken by the lender.

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http://www.axial.net/forum/investment-banking-fee-structures/

http://thismatter.com/money/stocks/investment-banking.htm

http://www.axial.net/forum/how-to-structure-the-investment-banking-engagement/

http://www.lexology.com/library/detail.aspx?g=84675f88-e4c0-492e-8535-954518c0c7f5

High Frequency Trading Law

Posted on by Liam Mennitt
Recent Developments in High Frequency Trading Law

Last year the Federal Court of New York was stormed by investors alleging that exchanges, banks, and broker dealers created an unfair marketplace through high frequency trading (“HFT”). All suits were inspired by Michael Lewis allegations, author of the best-seller “Flash Boys: A Wall Street Revolt”, who argued that the stock market is rigged in favor of exchanges, big banks and high-frequency traders.

Case Dismissed

By dismissing a three class-action on April 30 – Lanier v. BATS Exchange Inc et al, Nos. 14-cv-03745, 14-cv-03865 (S.D.N.Y. 2015) – Judge Katherine Forest of the U.S. District Court for the Southern District of New York placed her imprint into the debate to know whether the Security Exchange Commission (“SEC”) is the only competent entity to receive a complaint involving exchanges.

Harold Lanier, the aggrieved investor who initiated the suit claimed that several major U.S. exchanges, including among others, NASDAQ, NYSE and BATS, scammed ordinary investors by selling faster access to market data to high-frequency traders and therefore broke their initial duty as market regulators. Furthermore, the claimant added that they violated the nondiscrimination and fairness provisions enclosed in the subscriber agreements issued by the exchange which details both parties’ commitments.

The plaintiff rightfully called into question the competence of the SEC as it formerly approved the practices of HFT. But according to the Federal Judge, the Exchange Act provides that any conflict should be brought before the SEC, as a two-tiered procedure is already in place in case of a violation of its rules by an exchange. In any case, if the aggrieved party seeks to go further, only Federal Court of Appeals can review the SEC order. The Judge contested anyway that the allegations of the agreement violation were sufficient to state a claim.

The market regulators “absolute immunity” question is nonetheless still unanswered as the case has not been followed up. Defendants argued that, as self-regulatory organizations, they should benefit an absolute immunity from civil lawsuits intended to get damages in connection with their regulatory responsibilities. Hence only the SEC should hear investors’ complaints.

Pension Funds Joined the Battle

The class action led by the City of Providence and Rhode Island – City of Providence, Rhode Island et al v. BATS Global Markets Inc et al, Nos. 14-cv-02811, 14-MD-2589 (S.D.N.Y. 2015) – is however still ongoing as the motions to dismiss laid recently were set aside by Federal Judge Jesse Furman. The State-Boston Retirement System and three other funds located in Stockholm, Alexandria and the Virgin Islands joined the battle. Here, in addition to public exchanges such as BATS, CHX, NASDAQ and NYSE, Barclays LX dark pool is also targeted by the plaintiffs.

As dark pools are private exchanges without either quotations or subscribers noticeable, only large investors can deal on these platforms. Alternative trading systems are more and more coveted by investors and their part of the market doubled in the last five years. Nowadays around a third of the trades are being conducted through dark pools in the United States.

Although individual investors should not have access to these venues, mutual or pension funds might. Therefore, individuals can be harmed indirectly in dark pools which are much more vulnerable to HFT predators than public exchanges. The plaintiffs will nonetheless have to demonstrate clear and specific damages to win their case, which in this complex and obscure market, will need a very high level of expertise.

Hazy Dark Pools

In July 2014, individual investor Barbara Strougo brought her grievances to the New York District Court – Strougo v. Barclays, No. 14-cv-05797 (S.D.N.Y. 2015) – against Barclays and its executives of covering up aggressive high frequency trading operations on their Barclays LX dark pool.  In addition to that, she claimed that Barclays gave crucial non-public information to hostile traders.

In essence, Rule 10b-5 of Securities Exchange Act of 1934 deems illegal any behavior aimed to deceive people involved in securities transactions in an exchange. Would this mean that investors should be entitled to know the presence of HFT when trading in the venue?  Indeed, if the exchange owner is aware about HFT predators, not to disclose it would be breaking the law. Knowing the potential risks of his or her investment is a fundamental right to any investor.

The rules that regulate dark pools depend whether they are registered as national securities exchanges or broker dealers and also about their activities and trading volume. If recognized as broker dealers, they perform under a different set of regulations than public exchanges and the Exchange Act is not applicable in the same way. As a result, the SEC review does not apply and complainants can head straight to district court.

Barclays’ dismissal bids were turned down by the Federal Judge as questions about the integrity of its alternative trading system are still unanswered. The Judge expressed her concern about specific misstatements – i.e., touting the safety of the LX platform while, on the other hand, allowing aggressive behavior.

Barclays maintains that it would deny access to any trader who operates aggressively on its platform but the plaintiff assure that the platform was infested by high speed traders who used their technology to make profit at the expense of common investors.

David Against Goliath

While big financial companies struggle against investors to defend themselves and try to minimize the impact of HFT on the market, Goldman Sachs is determined not to let go off anything against one of its former computer programmer. Serge Aleynikov left his employer to join startup Teza Technologies, bringing with him the trading algorithm he had set up while working there. The stolen code in question was initially an open source code barely modified under the pressure of the bank to reach quick results.

Notwithstanding that Mr. Aleynikov had been cleared of all federal charges after having spent one year behind bars, Manhattan District Attorney Cyrus R. Vance Jr. took over the case and filed and a new suit against the programmer – New York v. Sergey Aleynikov, No. 004447/2012 (N.Y.C. Crim. Ct.).

Here again, on the first step of the judicial procedure, Mr. Aleynikov was found somewhat guilty of stealing the codes –i.e., the jury, confused faced of the complexity of the matter, reached a mitigate decision founding him not guilty of unlawful duplication of computer-related material, guilty of unlawful use of secret scientific material and deadlocked on another unlawful use charge. Even though the conviction stands, he is unlikely to serve any more time in prison.

Although outlandish, the Aleynikov case is not isolated in the High Frequency Trading history. Other programmers were arrested by Mr. Vance to whom intellectual property theft should be seen as physical property theft.

The District Attorney to say: “When an employee takes software to create his own company, anybody would classify that as “stealing” or “theft”; under existing state law, however, stealing valuable printer toner out of an office supply closet is a more serious offense than stealing valuable computer source code.”

Jason Vuu, Glen Cressman and Simon Lu, all in their mid-twenties, were arrested and prosecuted on similar counts – People v. Simon Lu et al., No. 03869/2013 (N.Y.C. Crim. Ct.). Vuu and Cressman were former employees of the Dutch trading house Flow Traders. All three ducked prison for pleading guilty and were fined and put under probation.

Kang Gao, former analyst for hedge fund Two Sigma Investments was however sentenced ten months in jail – New York. v. Kang Gao, No. 00640/2014 (N.Y.C. Crim. Ct.) –, a time that he had already served waiting for his judgement.

http://www.law360.com/articles/646881/ex-goldman-coder-gets-split-verdict-in-2nd-ip-trial

http://www.law360.com/assetmanagement/articles/647721?utm_source=rss&utm_medium=rss&utm_campaign=section

http://www.theotcspace.com/content/stock-exchanges-call-dismissal-hft-lawsuit

http://www.wsj.com/articles/high-frequency-trading-leads-to-lawsuit-against-exchanges-1410192793

http://www.reuters.com/article/2014/11/04/us-highfrequencytrading-lawsuit-idUSKBN0IO1O420141104

http://dealbook.nytimes.com/2014/09/08/pension-funds-join-lawsuit-on-high-frequency-trading/?_r=0

http://www.wsj.com/articles/lawsuit-against-exchanges-over-unfair-advantage-for-high-frequency-traders-dismissed-1430326045

https://au.news.yahoo.com/world/a/27461992/exchanges-win-dismissal-of-u-s-high-frequency-trading-lawsuits/

http://www.law360.com/articles/649198/exchanges-win-dismissal-of-high-speed-trading-cases

http://www.nytimes.com/2015/05/02/business/dealbook/ex-goldman-programmer-found-guilty.html

http://www.bloomberg.com/news/articles/2013-10-07/former-flow-traders-employees-indicted-for-software-theft

http://www.law360.com/articles/624067/ex-flow-traders-worker-ducks-prison-for-source-code-theft

http://www.law360.com/articles/624573/ex-two-sigma-analyst-cops-to-ip-theft-faces-deportation-

FINRA Arbitration Not Always Mandatory

Posted on by Liam Mennitt

For the Moment, FINRA Arbitration with Customers is Not Mandatory, So Say Two Federal Appeals Courts

In August 2014, the Court of Appeals in the 2nd Circuit (i.e., NY and CT) joined its brethren in the 9th Circuit (i.e., CA, NV, OR, WA, MT, ID, AK and HA) in holding that a FINRA member firm and its customer may agree to settle disputes in court and not in FINRA arbitration.  Meanwhile, the Court of Appeals in the 4th Circuit (i.e., MD, WV, VA, NC and SC) ruled the opposite in 2013 under similar facts.  Resolution of this circuit split would have to come from the U.S. Supreme Court – not a certainty.

BACKGROUND:

FINRA Rule 12200 provides as follows:

Parties must arbitrate a dispute under the Code if:

  • Arbitration under the Code is either:

    (1) Required by a written agreement, or
    (2) Requested by the customer;

  • The dispute is between a customer and a member or associated person of a member; and
  • The dispute arises in connection with the business activities of the member or the associated person, except disputes involving the insurance business activities of a member that is also an insurance company.

[Emphases added.]

In 2013, the 4th Circuit rejected efforts by units of Citigroup and UBS (FINRA member firms) to block arbitration of auction-rate bond-related claims brought by Virginia-based Carilion Clinic. UBS Fin. Servs., Inc. v. Carilion Clinic, 706 F.3d 319 (4th Cir.2013).  Carilion had hired UBS and Citigroup to underwrite and broker its auction-rate bond offerings starting in 2005.  Carilion alleged that UBS and Citigroup misled Carilion by neglecting to mention that they had a practice of placing supporting bids in such auction, so as to prevent the failure of such auctions.  When such auction markets collapsed in 2008 and the brokers withdrew their supporting bids, Carilion lost millions of dollars when it was forced to refinance its debt at much higher rates.  Carilion filed statements of claim against UBS and Citigroup in FINRA arbitration in 2012, and UBS and Citigroup quickly filed in federal court to block same.

First, UBS and Citigroup effectively argued that Carilion was too sophisticated to be a “customer” under FINRA rules.  The 4th Circuit disagreed, finding Carilion to be a “customer” under FINRA rules.

Next, UBS and Citigroup argued that the forum selection clauses in the agreements with Carilion clearly said that district court in New York City would be the forum for disputes under the agreement.  The 4th Circuit held that FINRA arbitration rules mandating FINRA as the forum for disputes with customers trumped such forum selection clauses, especially since there was no specific waiver by Carilion of its right to arbitration.

In March 2014, the 9th Circuit essentially disagreed with the 4th Circuit’s holding in Carilion.  In an auction-rate security case, the court held that “the forum selection clauses superseded Goldman’s default obligation to arbitrate under the FINRA Rules and that, by agreeing to these clauses, Reno disclaimed any right it might otherwise have had to the FINRA arbitration forum.”  Goldman, Sachs & Co. v. City of Reno, 747 F.3d 733 (9th Cir.2014).

In August 2014, the 2nd Circuit followed suit in yet two more auction-rate security-related cases, and took the unusual step of stating “We thus disagree with the contrary conclusion reached by the Fourth Circuit in Carilion Clinic.”   Goldman, Sachs & Co. v. Golden Empire Schools Financing Authority, No. 13-797-cv and Citigroup Global Markets Inc. v. North Carolina Eastern Municipal Power Agency, No. 13-2247-cv (August 21, 2014).  The 2nd Circuit held that, “Under our precedent, the forum selection clause at issue in these cases is plainly sufficient to supersede FINRA Rule 12200.”

CONCLUSION:

These circuit splits mean that mandatory FINRA arbitration is alive and well in some parts of the country, but not others (including, as of August 2014, the important jurisdiction of New York).  These decisions remind both firms and their clients not to gloss over the standardized template language at the end of their agreements, especially forum selection clauses and integration clauses.

What the courts do not mention (nor need to, for their purposes) is FINRA IM-12000, which essentially gives FINRA enforcement power to pursue any member firms that “fail to submit a dispute for arbitration under the Code as required by the Code.” FINRA IM-12000(a).  It remains unknown as of this writing whether FINRA is investigating the above member firms for violations of FINRA Rule 12200, or will do so.  Firms like the ones above that fight FINRA arbitration as a forum for disputes with customers, do so at their own peril.

2nd Circuit to Madoff Fraud Victims: Winners Keepers, Losers Weepers

Posted on by Liam Mennitt

If you invested money with Bernard Madoff, were a net investment “loser” with him in his Ponzi scheme, but had hope to claw back some of your losses from other Madoff victims who were net “winners,” you just lost again.

In a decision proving yet again that justice is indeed blind, the 2d Circuit Court of Appeals this week affirmed an earlier decision by SDNY Judge Jed Rakoff in ruling that victims of Madoff who were profitable in the balance need not hand back their profits (a.k.a., suffer a “clawback”) for the benefit of other victims who had losses in the balance.

Madoff trustee Irving Picard had sued net profitable victims for their profits, so as to return them to other victims who were net unprofitable.  The decision in In re: Bernard L. Madoff Investment Securities LLC turned on whether Madoff’s Ponzi payouts (which came after he took in investors’ money into his broker-dealer, never invested it, and then distributed some of it back out to investors on demand) amounted to “a transfer made by [a] . . . stockbroker . . . in connection with a securities contract,” which is excepted under Section 546(e) of the Bankruptcy Code from clawback. Clawback defendants successfully argued to the Court that their account opening documents (customer agreement, trading authorization and options agreement) amounted to such a “securities contract,” even though no securities were ever bought by Madoff with the funds provided him by clawback defendants.

The Court agreed with the Madoff trustee (the plaintiff in the case) that the purpose of Congress in enacting such an exception to the Bankruptcy Code was to safeguard markets from suffering a domino effect and make them unstable, should completed and cleared securities transactions in the markets suddenly be called into question.  The Court also generally agreed with the trustee that no such risk existed here since no trades were actually effected.  However, the Court emphasized the expansive reach of the wording in the above clawback exception, going to the dictionary to discuss the broad meaning of terms like “any,” “similar” and “connection” that were found in the relevant sections of the Bankruptcy Code, and thus finding that the broad language of the statutory exception applied to this fact pattern (no matter how unfair it may seem to some).

Interestingly (and perhaps with no small amount of purposeful irony on Judge Rakoff’s part, given his legal battles with the SEC), the court cited various SEC-related decisions to support its decision.  It cited a series of cases where defendants were held liable for SEC Rule 10b-5 fraud (which requires the fraud to be “in connection with the purchase or sale of any security”) in cases where securities were never actually bought with victims’ money.

It is now up to trustee Picard if he wants to seek review by the U.S. Supreme Court of this decision.  Stay tuned….

From Forbes: Attention Inside Traders! These Wall Street Vets May Have the Tech to Nail You

Posted on by Liam Mennitt

As part of his punishment for what authorities call the most profitable insider trading scheme in history, Mathew Martoma consumed his Thanksgiving meal at FCI Miami—the prison that he checked into on November 20th. The former hedge fund manager for S.A.C. Capital Advisors had generated a $275 million profit in 2008, which New York federal judge Paul G. Gardephe called “hundreds of millions of dollars more than ever seen in an insider trading prosecution.” He’ll be serving nine years—that’s about an hour for every $3,500 he stole—unless released sooner for wholesome behavior.

In sentencing Martoma in September, the judge called his illegal trading edge “deeply corrosive to our markets,” and noted that “the conduct was well-planned and Mr. Martoma knew the amount of avoided losses or profits were likely to be staggering.”

But what if the S.E.C. and FBI had been able to utilize cutting-edge software that could have detected illegal trading at the company as it was starting to materialize in 2008? For one thing, Martoma wasn’t alone. Former S.A.C. trader Michael Steinberg was also convicted for inside trading, and the firm itself pled guilty and paid a $1.8 billion penalty for failing to prevent its employees from engaging in the illegal activity. Could all of this skulduggery have been spotted sooner?

In recent years, there’ve been gigabytes of chatter inside Wall Street’s compliance departments about the need for better surveillance technology (employed by the firms, or regulators—or both) to keep a closer tab on traders. FINRA, the country’s largest independent securities regulator, recently proposed a rule that would require the production of trading information on a granular level at financial service firms, including from customer accounts. There’s no question that the firms and regulators have access to ever-expanding mountains of data they didn’t have in the past, but creating software to sift through it all (especially on a real-time basis) and presenting the findings in a visually understandable format is the ultimate challenge.

Now a year-old startup called AIMPaaS, which develops trading execution platforms, has come up with what may be a viable solution: A comprehensive software system that appears to be unique in the financial services industry. It not only executes the stock orders, but it also employs sophisticated behavorial modeling of traders and portfolio managers that can detect insider trading and other nefarious or impermissable activities. Moreover, it ranks and rates analysts in a simulated environment that can also guard against insider trading. This three-pronged approach, combined with deep expertise on Wall Street, is the key thing that differentiates AIMPaaS from competitors.

AIMPaaS’s tech triggers alerts if patterns are altered that could indicate insider trading—for example, larger dollar trades; greater quantities of stock; buying more aggressively almost regardless of price; or perhaps suddenly trading in nontransparent venues such as dark pools.

The concept of behavorial variance tracking in and of itself is nothing new. Such modeling started nearly a decade ago in the fraud and financial crimes arena, with companies such as NICE Actimize, Oracle Mantas, Detica (BAE Systems), and IBM. All of them have some form of profile-driven monitoring of patterns in order to find abnormal activities. In geek-speak, such analytics are designed to detect unknown behaviors that are anomalous and deviate statistically from historical (or expected) activity—as opposed to algorithm-driven monitoring which is designed to detect a known behavior. “I call that a rifle shot, because they are targetted on specific, defined behaviors,” says James Heinzman, one of the industry’s top experts on regulatory compliance technology. (Heinzman developed compliance and money-laundering solutions for NICE Actimize, a leading player.)

In addition, firms such as Thompson Reuters have created a data feed that identifies the impact of news events on the price of publicly-traded securities that’s known as “directional news sentiment.” Put simply, for news stories that cover corporate announcements of, say, takeovers or clinical trials for drugs, they can determine the (positive or negative) impact of the stories on the stock price. They do this with algorithms designed to detect trading activity prior to that announcement that may have benefitted from the impact of the news article—a form of insider trading.

Read the full article here.

Originally Posted on Forbes.com on December 2, 2014

Richard Behar is the Contributing Editor, Investigations, for Forbes magazine. He can be reached at rbehar@forbes.com

Former Dissident Shareholder Becomes Qualstar’s Interim CEO

Posted on by Liam Mennitt

Former Dissident Shareholder Becomes Qualstar’s Interim CEO

Steven Bronson, the investor who took control of Qualstar Corp. after a proxy fight, has been named its interim chief executive and president, the company announced Monday.

Bronson, a member of Qualstar’s board, was appointed to replace Larry Firestone, who became chief executive of the Simi Valley data tape storage and power supply manufacturer in June 2012.

Bronson immediately closed a Qualstar office that Firestone opened in Denver and is terminating the executives working there. The move will result in a savings of about $1 million, according to the company.

In June, Bronson and four other candidates were elected to the Qualstar board after longstanding complaints that the money-losing company was underperforming. Bronson and BKF Capital Group Inc., his Boca Raton, Fla.-based investment firm, are the second largest investors in the company, with an 18 percent stake.

For there to be a successful turnaround of the company, Bronson said expenses need to be controlled and reduced.

“The board (of directors) will continue to take the appropriate actions to right-size Qualstar, support its current and future business, build a solid foundation and preserve its liquidity base,” Bronson said, in a prepared statement.

Bronson also is chief executive of Interlink Electronics Inc., a Camarillo manufacturer of touch pads and mouses for computers and other electronic equipment used in industrial and consumer applications.

Shares closed up 1 cent, or a fraction of percent, to $1.41 on the Nasdaq.

Los Angeles Business Journal

By Business Journal Staff Monday, July 15, 2013

 

NYS Court Limits Definition of Single Occurrence by Enforcing Non-Cumulation Clause

Posted on by Liam Mennitt

In an important recent decision in the toxic tort field, a New York appellate court decided in Nesmith et al. v. Allstate Ins. Co., 103 AD3d 190 (4th Dep’t 2013) that pursuant to a non-cumulation clause, Allstate Insurance Company was responsible for only one policy limit in connection with lead paint exposure claims asserted on behalf of multiple children who resided in the same apartment during separate tenancies nearly a year apart and during different policy periods.

Allstate insured the apartment building owner, Tony Clyde Wilson, from 1991 through 1994 under three consecutive one year insurance policies, each with a $500,000 per occurrence coverage limit.  During the second policy in 1993, two children were exposed to lead based paint in one of the apartments within Mr. Wilson’s building.  The family vacated the premises and subsequently commenced a lawsuit on behalf of the children against Mr. Wilson.  After the first family vacated the apartment, the Nesmith family commenced its tenancy within the same apartment within the building.  The Nesmith children were also exposed to lead based paint within the same apartment during the third policy period in 1994.  The Nesmith family commenced its own lawsuit on behalf of its children against Mr. Wilson.  While the Nesmith family’s lawsuit was pending, Allstate effectuated a settlement in the amount of $350,000 in connection with the first family’s lawsuit.  Subsequent to the settlement, Allstate asserted that the “non-cumulation” and “unifying” clauses in its policy confined its liability for all lead exposures in the subject apartment to a single policy limit of $500,000.  Accordingly, Allstate took the position that there was only $150,000 of available coverage as the $500,000 per occurrence limit had been diminished by the $350,000 settlement with the first family.  Allstate and the Nesmith family reached an agreement that the Nesmith family would receive the $150,000 balance if Allstate’s non-cumulation clause was upheld, but the Nesmith family would receive $500,000 if it was determined that the Nesmith claims arose from a separate occurrence.

In reaching its decision, the appellate court initially considered the well-settled contract principle that “unambiguous provisions of an insurance contract must be given their plain and ordinary meaning, and the interpretation of such provisions is a question of law for the court”.  Nesmith at 193 citing to White v. Continental Cas. Co., 9 NY3d, 264, 267.  Accordingly, the court considered the following provision from the Allstate policy at issue:

Regardless of the number of insured persons, claims, claimants, or policies involved, our total liability under the Family Liability Protection coverage for damages resulting from one accidental loss will not exceed the limit shown on the declaration page.  All bodily injury and property damage resulting from one accidental loss or from continuous or repeated exposure to the general conditions is considered the result of one accidental loss.

The court noted that the New York Court of Appeals had previously interpreted a nearly identical Allstate policy provision in Hiraldo v. Allstate Ins. Co. (5 NY3d 508, 512).  In Hiraldo, a child was exposed to lead paint over a three year period in an apartment that was insured by three consecutive one year renewable insurance policies.  The Court of Appeals in Hiraldo concludedthat the non-cumulation clause prevented the plaintiff from recovering under each of the three consecutive insurance policies.

The appellate court in Nesmith court adopted the reasoning in Hiraldo, but the Nesmith court also took the analysis one step further to consider whether the exposure to lead based paint by children residing within the same apartment during different tenancies can be considered a single occurrence.  In other words, the Nesmith court was evaluating whether each child’s alleged injuries were “resulting from one accidental loss or from continuous or repeated exposure to the same general conditions” as described in Allstate’s non-cumulation clause.  Ultimately, the court concluded that the children were exposed to the same lead paint even though they resided in the subject apartment at different times nearly a year apart.  In reaching its conclusion, the court relied upon another toxic tort decision in Mt. McKinley Ins. Co. v. Coming, Inc., 96 AD3d, 451, 452 (1st Dep’t 2012).  In Mt. McKinley, the court determined that “any group of claims arising from exposure to an asbestos … condition at a common location, at approximately the same time may be found to have arisen from the same occurrence”.   In Nesmith, the court applied similar reasoning when stating that “In as much as the claims arise from exposure to the same condition and the claims are spatially identical and temporally close enough that there are no intervening changes in the injury-causing conditions, they must be viewed as a single occurrence within the meaning of the policy.  The Nesmith decision appears to be another in a line of decisions that limit the number of occurrences in the toxic tort arena.  See, Ramirez v. Allstate Ins. Co., 26 AD3d 266 (1st Dep’t 2006) (lead paint matter involving multiple infant-plaintiffs residing within the same apartment who may have ingested lead paint determined to be single occurrence); Appalachian Ins. Co. v. General Elec. Co., 863 N.E.2d 994 (court denied aggregation of multiple asbestos related claims in order to insurance policy per-occurrence coverage limits because incident giving rise to liability was each claimant’s repeated or continuous exposure).

Accordingly, Nesmith continues the trend in New York of enforcing insurance policy non-cumulation clauses in order to limit the definition of occurrence in toxic tort personal injury lawsuits.  It appears that the courts are inclined to unify claims that are spatially identical and temporally proximate into a single occurrence regardless of the number of different plaintiffs.

Potential Impact of Marx v. General Revenue Corporation

Posted on by Liam Mennitt
Marx v. General Revenue Corporation:

The Supreme Court will hear arguments on November 7 for Marx v. General Revenue Corp. The grant of certiorari has been limited to a single question involving the right of a debt collector under federal law to recover its court costs if it wins a lawsuit against it over its collection practices.

Background:

The Plaintiff/Petitioner in the case is Olivea Marx, who defaulted on her student loan.  In September 2008 General Revenue Corp. (GRC) was hired to collect Ms. Marx’s account. Marx filed suit against GRC in October of 2008 for alleged violations of the Fair Debt Collection Practices Act (FDCPA). The Colorado district court found no violations of FDCPA and awarded costs to GRC in the amount of $4,543. Marx appealed both the finding of no FDCPA violations as well as the award of costs to GRC. Only the issue of costs has been granted cert.

The Language at Issue:

Two statutory provisions are at the root of this case:

  •   FRCP Rule 54(d)(1) provides that “[u]nless a federal statute, these rules, or a court order provides otherwise, costs—other than attorney’s fees—should be allowed to the prevailing party.”
  •   The FDCPA provides that, “[o]n a finding by the court that an action under this section was brought in bad faith and for the purpose of harassment, the court may award to the defendant attorney’s fees reasonable in relation to the work expended and costs.” 15 U.S.C. § 1692k(a)(3).
The Arguments:

Marx contends that the above provision of the FDCPA “provides otherwise” and as such costs may not be awarded to the prevailing party in cases brought under the FDCPA. Additionally, Marx argues that the FDCPA provision should be read to mean costs may only be awarded to a prevailing creditor/defendant upon a showing that the plaintiff brought the suit in bad faith and for the purpose of harassment.

GRC disagrees with Marx’s reading of the FDCPA, and argues the statute does not “provide otherwise” from FRCP Rule 54(d). GRC’s brief lays out their argument via analysis of the plain language, straightforward statutory construction, Congressional intent, as well as the purpose and history of not only the statute but also the precise provision at issue.  Additionally GRC counters Petitioner’s argument that affirming this holding would “chill enforcement” of the FDCPA – showing that even after the Marx decision, the number of cases filed by consumers in this district has been consistent.

What’s at Stake:

There is potentially a lot on the line for debt collectors. A SCOTUS opinion reversing the lower courts, and precluding innocent collection agencies from recovering costs absent a showing of bad faith and harassment would mean a lose-lose situation for debt collectors. GRC’s brief also looks at the potential of an unfavorable outcome in the context of an already pro-plaintiff ruling in Delta Airlines Inc., v. August. A result that, as GRC puts it, would mean defendant debt collectors would face FDCPA suits “with both hands tied behind their backs.”

Delta addresses FRCP Rule 68, which states that should a defendant offer to settle and the plaintiff declines, if that plaintiff is awarded less than the offered amount s/he is liable for costs incurred after the time the offer was made. The Delta opinion limits this rule to mean that if the defendant wins outright, such as the case here, Rule 68 is not applicable. Effectively this means that should the Supreme Court rule in favor of the petitioner, innocent debt collectors who are forced to defend meritless claims in court cannot be awarded costs through either Rule 54 or 68.

Statistics show consumer cases against debt collectors have been increasing and are continuing to rise. Without the small balance of allowing innocent defendants to be awarded costs, there is nothing to stop a slew of meritless attacks on the industry. GRC even points out that this was exactly what Congress intended to prevent in enacting the FDCPA.

Best Possible Outcome:

For both debt collectors and consumers, the best possible outcome for the long term would be for the Supreme Court to affirm the 10th Circuit’s decision, and to overrule Delta.

By affirming the lower court in this case it would send a clear message to plaintiff’s attorneys that the current trend of flooding the court houses and collection agencies with these law suits, regardless of the strength of their merit is not in the best interests of their clients. Additionally innocent debt collectors would have the peace of mind knowing they don’t have to give in to a meritless claim or suffer the entire cost of going to trial. It also encourages debt collectors to abide by the FDCPA and maintain good collection practices. When as in the case at hand you are a reputable and innocent debt collector, you will not be punished for successfully defending a meritless case against you. Otherwise, if these collectors lose money even when they win the case, debt collectors are not incentivized to adhere to the law. It becomes more cost effective to operate outside of the law when it seems you will lose money either way.

Furthermore, overruling Delta would encourage more legitimate settlement offers for plaintiffs. Encouraging consumers to settle claims if possible frees up valuable time and space in our crowded court systems. In many ways it is also better for the consumers as they most likely do not wish to expend the time and effort it requires to take the case all the way through court.