Tag: Joseph Pastore

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.

Motion to Strike Successful

Posted on by Liam Mennitt

Pastore & Dailey recently brought a successful motion to strike in Connecticut Superior Court against a former employee of a client (a major world-wide insurance company).  The Court’s decision included a finding that the former employee failed to articulate facts sufficient to support a claim of a fiduciary duty by an employer to an employee for a long-term incentive plan (“LTIP”).

PROCEDURE – The former employee sued the client over a year ago for further payments pursuant to the LTIP (the employee had already received several years of payments under the LTIP).  Pastore & Dailey first sent the former employee’s counsel a Request to Revise the Complaint, as we perceived the pleadings to be legally insufficient as written.  Opposing counsel for the former employee objected to the Request to Revise, but the Court overruled all of same, agreeing with Pastore & Dailey that the former employee needed to revise the Complaint per Pastore & Dailey’s Request to Revise.

The former employee’s counsel then revised the Complaint, but Pastore & Dailey filed a Motion to Strike with the court, again alleging that the pleadings in the Complaint were legally insufficient, as revised.  The parties had oral argument with the court a few months ago.

RESULT – Just recently, the court issued its decision, striking one of the counts per Pastore & Dailey’s motion, and indicating that another count is likely to fail, if Connecticut state law is found to apply.

In the count that was stricken, the Court stated that a mere “conclusory allegation” that the employer owed the employee a fiduciary duty under the LTIP was insufficient to overcome the Motion to Strike that count in the Complaint.

Regarding the count for an allegation of breach by the employer of an implied covenant of good faith and fair dealing, the Court stated such claim would also fail, should the Court ultimately determine that Connecticut law is the applicable law in this case.  (The Court stated that the choice of law question was not yet “ripe” at this stage of the proceedings.  But both the client and the employee are domiciled in Connecticut.)

Only a breach of contract claim otherwise remains in the Complaint.

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….

Defeated Emergency Motion to Stay

Posted on by Liam Mennitt

Pastore & Dailey recently defeated an emergency motion by a client’s competitor in the financial services industry (including a FINRA member firm) to stay our client’s lawsuit in NYS Supreme Court (New York County) against the competitor and its principals while a related FINRA arbitration was in process.  (Our client is suing the competitor and its principals for tortiously interfering with our client’s contracts with its ex-employees, among other things.)

Pastore Appointed to Pace Board of Visitors

Posted on by Liam Mennitt

Joseph M. Pastore III has been appointed to the Pace University School of Law Board of Visitors by the unanimous vote of that board.  Similarly, Susan Bysiewicz, the former Secretary of State of Connecticut and a former U.S. Senate candidate who leads the Firm’s Glastonbury office, has served on the Duke University Board of Visitors for the past year.  The Pace University School of Law Board of Visitors already includes among its many distinguished members Congresswoman Nita Lowey and Westchester County District Attorney Janet DiFiore.  Pastore & Dailey is honored to have two of its leading attorneys serving the law school community in such an important and vibrant way.

Mr. Pastore is a 1991 graduate of Pace University School of Law, where he served as the Managing Editor of one of the school’s distinguished Law Reviews.  He attended the law school on a Law Trustee Scholarship, and had the great privilege of learning from the school’s world class faculty, including at the time the former Chief Judge of the New York Court of Appeals, the highest court in New York.

Pastore & Dailey is honored to serve both Duke and Pace Law Schools.  Mr. Pastore has been named a Super Lawyer for New York and New England for the past several years and a top national attorney by a leading law firm publication. Pastore & Dailey is growing national law firm, founded in 2012, with offices in New York, Connecticut and Florida.

Pastore & Dailey LLC Secures Over $60 Million for Clients

Posted on by Liam Mennitt

Pastore & Dailey LLC is pleased to announce that the Firm has, to date, secured over $60 Million in grants and low-interest loans for Connecticut businesses through various programs with the State of Connecticut Department of Economic and Community Development.

Through the work of Attorney Susan Bysiewicz, a former Secretary of the State of Connecticut and former candidate for the United States Senate, the Firm has enabled Connecticut business owners to create over 425 private-sector jobs in manufacturing, precision engineering, green and renewable energy, and many other industries.

Pastore & Dailey LLC credits these successes to the Firm’s client-centered approach and comprehensive application process. To date, all clients that have applied for assistance through these programs have received funding. Assistance packages range from $60,000 to $48 Million. Loan packages include various levels of loan-forgiveness and carry interest rates as low as 2%.

For more information, contact Atty. Susan Bysiewicz in the Firm’s Glastonbury office: 860.266.6870 or by email, sbysiewicz@psdlaw.net.

Nathan Zezula Joins Pastore & Dailey LLC

Posted on by Liam Mennitt

Pastore & Dailey LLC welcomes Nathan Zezula as Counsel in the Firm’s Stamford and Glastonbury offices. Nathan is well-versed in commercial litigation, including breach of contract claims, unfair trade practice claims, real estate disputes, and fraud and breach of fiduciary duty claims. Nathan has extensive experience in securing pre-judgment relief, including temporary injunctions and restraining orders. He has represented clients in federal patent infringement disputes and bankruptcy adversarial proceedings.

Nathan has been named a “Rising Star” by Connecticut Super Lawyers, and is a veteran of the United States Army, having spent four years on active duty in Germany and Kosovo, leaving with the rank of Captain. He is a 2007 graduate of Pace Law School, where he graduated Magna Cum Laude while working as managing editor of the Pace Law Review.

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