New York Securities Law Blog

Recently, Deutsche Bank reviewed its current pay practices, particularly those regarding executive bonus compensation, in order to bolster profitability and decrease its overall costs by $5.8 billion. After a 100-day evaluation conducted by the firm's new co-chief executive officers, Juergen Fitschen and Anshu Jain, Deutsche Bank is expected to implement changes to its expense management measures. In a statement released on September 11, 2012, Deutsche Bank confirmed that it hopes to revamp its financial plan in which it noted, amongst other schematic changes, its intent to transform its current compensation practices. See the Deutsche Bank 9/11/12 Statement here. Deutsche Bank stated that, in the event of a reduction in profit or an instance of transgression, employee bonuses will be suspended. This policy will apply to chief executives and will amend the current payment schedule for deferred bonus payouts from part-payment throughout the span of three (3) years to payment after five (5) years. There has been a great deal of industry and media attention surrounding this anticipated announcement, since it is a primary concern for the entire investment banking industry and regulators. Indeed, several European banks are being scrutinized by investors, politicians and regulators, most of whom believe that employee accountability for actions resulting in lost profits should be more closely linked to their yearly bonuses. This type of bonus policy was first introduced by UBS Financial Services, Inc. ("UBS") in 2008 after it announced its decision to "clawback" employee bonuses. Such "clawback" provisions allow for the employer to either reduce or fully eliminate the deferred parts of bonuses that have not yet been paid out to employees. A recent example of this growing practice is espoused in JPMorgan's July 2012 announcement that it intends to "clawback" executive bonuses from executives involved in a $5.8 billion loss originating in its London office and related to the London "Whale" blunder.  At Lax & Neville LLP, we represent individuals, securities industry employees and securities industry companies seeking representation in employment matters and securities-related and commercial litigation. Please contact our team of attorneys for a consultation at (212) 696-1999.

Earlier today, the United States District Court for the Southern District of Florida ("District Court") denied Bank of America Merrill Lynch's ("Merrill Lynch") petition to vacate a Financial Industry Regulatory Authority, Inc. ("FINRA") arbitration panel award. See Order Denying Petition to Vacate Arbitration Award, Merrill Lynch, Pierce, Fenner & Smith, Inc., vs. Smolchek, et. al., No. 12 Civ. 80355 (S.D.Fla. Sept. 17, 2012). Merrill Lynch had publicly stated it was confident that this arbitration award would be vacated. This is a significant decision and could affect thousands of Merrill Lynch advisors who either left Merrill Lynch recently or who are thinking about leaving in the future. As a result of the District Court's decision, Merrill Lynch will be required to pay $10.2 million to two former financial advisors, both of whom were denied deferred compensation. Similar to many other brokers who left Merrill Lynch after its merger agreement with Bank of America in September 2008, Meri Ramazio and Tamara Smolchek ("Claimants") brought an arbitration claim against Merrill Lynch seeking disbursement of their duly owed deferred compensation. Claimants' request for damages was based on the theory that the acquisition of Merrill Lynch constituted a "good reason" for collecting their deferred pay. The $10.2 million FINRA arbitration award rendered by the panel in April 2012 included a commensurate total of $5,150,000 in compensatory damages for a breach of contract related to the brokers' deferred compensation awards and unpaid wage, as well as a sum total of $5,000,000 in punitive damages on the basis that Merrill Lynch has "intentionally, willfully and deliberately engaged in a systematic and systemic fraudulent scheme to deprive Claimants of their rights and benefits under [Merrill Lynch's] Deferred Compensation Programs." See Tamara Smolchek and Meri Ramazio v. Merrill Lynch, Pierce, Fenner & Smith, Inc., FINRA Case No. 10-04432. After the award was rendered in April, both parties filed competing petitions seeking to confirm and vacate the arbitration award. Merrill Lynch asserted that: (1) the chairwomen's failure to disclose certain facts suggested the possibility of a bias and created an evident partiality; (2) the panel's decision to limit Merrill Lynch's presentation of its case and to impose certain sanctions against it is demonstrative of the panel's misconduct; and (3) the panel exceeded its powers. In its order denying Merrill Lynch's petition to vacate the arbitration award, the District Court concluded that Merrill Lynch "has not sufficiently demonstrated evident partiality on the part of the panel or that the panel engaged in misconduct or exceeded its powers." In addition to the class action brought by nearly 1,400 aggrieved brokers, which was recently purported to settle for $40 million and is currently awaiting approval from a federal court judge in Manhattan, Merrill Lynch also faces more than 1,000 similar claims in the FINRA arbitration forum. See Scott Chambers et al v. Merrill Lynch & Co., Inc., et al, No. 10 Civ. 7109 (S.D.N.Y). If you are a financial advisor who has any issues related to your employment at Merrill Lynch, or if you are thinking of changing your employment, please contact Lax & Neville LLP at (212) 696-1999 to discuss your potential matter. At Lax & Neville LLP, we represent securities industry employees nationwide seeking representation in employment matters.

In 1986, the British Bankers' Association ("BBA") created the London Interbank Offered Rate ("LIBOR") to assist BBA members to set corporate loan interest rates. LIBOR is an average interest rate that determines the cost of inter-bank lending, sets the average rates banks pay to borrow from one another and is very influential in the marketplace as it establishes the benchmark for interest rates in the financial system. LIBOR is determined by the largest London/Wall Street banks submitting estimated rates. The highest and lowest four estimated rates are disregarded, and the remainder of the rates are averaged which sets the LIBOR. The LIBOR is published daily by Thomson Reuters.

In June 2012, a LIBOR manipulation scandal erupted when it was revealed that the banks were inaccurately inflating and deflating rates in order to generate a bolstered impression of their creditworthiness and generate profits. Several reports began to surface which alleged that LIBOR manipulation had transpired by the largest banks since the early 1990s. On June 27, 2012, Barclays Bank entered into an agreement with the United States Department of Justice and admitted to LIBOR manipulation. Barclays Bank was fined $200 million by the United States Commodity Futures Trading Commission ("CFTC"), as well as $160 million by the Department of Justice for its involvement in the LIBOR manipulation. The Department of Justice stated in its statement of facts that, "the manipulation of the submissions affected the fixed rates on some occasions." See Statement of Facts, United States Department of Justice, June 26, 2012, available a http://www.justice.gov/iso/opa/resources/9312012710173426365941.pdf (last viewed September 10, 2012). Since Barclays Bank has admitted to its wrongdoing, regulators including the CFTC and the Securities and Exchange Commission, have launched investigations into LIBOR rigging with various other financial institutions. Moreover, regulators are contending that the BBA failed to maintain the reliability of LIBOR. Obviously a manipulation involves multiple parties, so many are watching to see what other large financial institutions will be investigated by regulators, and which investigations will result in fines.

Moreover, investors, small lenders, municipalities and hedge funds are beginning to sue various financial institutions alleged to have been involved in the LIBOR manipulation claiming that they suffered losses based upon the rates affecting bonds, loans, derivatives and mortgages. For example, on July 25, 2012, the Berkshire Bank, a small New York based lender, filled a class action lawsuit against the larger banks involved in setting LIBOR, including but not limited to, Bank of America Corporation, Barclays Bank PLC, Citigroup, Inc., Credit Suisse Group AG, Deutsche Bank AG, HSBC Bank PLC, JPMorgan Chase Bank, Royal Bank of Canada and Royal Bank of Scotland. See Index No. 12-cv-5723. The class action complaint alleges that the LIBOR scandal affected interest rate payments to it and several investors, and is seeking an undetermined amount of compensatory and punitive damages. Various other suits have been filed nationwide by small lenders and investors against the larger Wall Street Firms that are heavily involved in setting LIBOR. If you believe that you have suffered losses as a result of the LIBOR scandal, please contact Lax & Neville LLP for a consultation at (212) 696-1999. Our firm has extensive experience and knowledge representing victims of investment fraud nationwide.

The Securities and Exchange Commission ("SEC") has alleged that MiddleCove Capital LLC, a Connecticut based investment adviser firm, and Noah Myers, its founder, engaged in fraudulent allocation of trades from October 2008 through February 2011 when Myers made block purchases of securities through a master account and waited to allocate those trades until late in the day, or the next day, after he knew whether there was a gain or a loss on the trade. According to the SEC administrative order, Myers would sell a security and allocate that day-trade profit to his personal and business accounts, if the security increased in price the day it was purchased. Pursuant to the SEC order, Myers generally allocated the trade to a client, if the security's price failed to increase the day it was bought. The SEC order stated that "the securities on which Myers was disproportionately making money were the same securities on which his clients were disproportionately losing money." Reportedly, Myers made $460,000 for himself, while losing $2 million for his clients. In addition, the SEC found that the fraud involved the use of leveraged exchange-traded funds ("ETFs"), which are investments that attempt to deliver returns that represent a multiple or inverse of a particular stock index's return. Leveraged ETFs can be volatile and risky and should be used only by sophisticated investors. The fraud was reportedly first detected by an internal program at Charles Schwab & Co. Inc., the custodian for MiddleCove client accounts and for the master account Myers used for the block trades. In a November 2011 interview with the SEC, Myers admitted to using a day-trading strategy in a personal account that was profitable 95% of the time, "but he did not offer a plausible explanation for his stellar day-trading performance." The SEC administrative order institutes civil proceedings against Myers. If found liable, Myers could face fines and the SEC can demand disgorgement of profits plus interest from him and his firm, MiddleCove.

If you have suffered losses from investments with MiddleCove, Myers or any other investment adviser firm or brokerage firm, and believe that you are a victim of sales practice abuses, please contact Lax & Neville LLP for a consultation at (212) 696-1999. Our firm has extensive experience and knowledge representing victims of investment fraud nationwide.