The New York Times

Jury Largely Sides With Bank in Madoff-Related Case

A Hartford jury said Wednesday that the Connecticut bank that was custodian for two investors in Bernard Madoff’s Ponzi scheme was not liable for their losses.

I wrote about the Alice-in-Wonderland-style trial in a story for The New York Times on July 8. The bank’s former president said he didn’t know what due diligence the bank might have done to be sure the customer’s assets existed, and didn’t know how the bank maintained accurate records. The president, who’d been in the banking business for 36 years, had a degree in finance from Georgetown University.

Another doozy in the trial was the bank’s former custodial manager, who said he would get three or four “very thick envelopes” of trade confirmations from Madoff some weeks. He put them in a file drawer and never reviewed the documents. (Except that he occasionally took a peek because he was curious about what Madoff might be buying or selling, but not curious enough to do any checking on behalf of the bank’s customers.)

The Hartford trial began in June as a consolidation of three lawsuits with similar allegations. But two of those cases settled for $7.5 million just before the jury began its deliberations, leaving the jury with only the case of two elderly Florida investors to decide. You can read my story about the verdict today for The Times here. Take a lesson from this: When a financial outfit tells you it is your custodian, don’t make the mistake of assuming that means they have custody of your money.

Custodians don’t always take custody: investors beware

Custodial banks typically earn their fees based on a percentage of the value of the assets they’re holding for you. But do they have any obligation to confirm whether there are any assets there in the first place?

A Hartford jury is deliberating over that and other questions in a case brought by former customers of Bernard Madoff. Westport National Bank was custodian of the investors’ accounts. But, as it turns out, when the bank took over the accounts in 1999, no assets existed, and the bank didn’t bother to check.

The custodial issue is becoming ever-more important as investors increasingly put “alternative” investments such as hedge funds in their retirement accounts. Pricing those investments can be dicey, and you shouldn’t expect that your custodian is doing any analysis to ensure that the prices they show on your statements are realistic.

I attended several days of the trial against Westport National Bank in Federal court in Hartford in June. Here’s a story I wrote about it for The New York Times.

How to be a problematic broker with a good record

Don’t believe everything you read – or don’t read — when you check up on your stockbroker.

Brokers and Wall Street executives with black marks on their public records are working hard to get those blemishes deleted, a topic I got into in my story for The New York Times last week.

In “A Rise in Requests From Brokers to Wipe the Slate Clean,” I summed up some of the more egregious examples of Wall Street employees persuading arbitrators at the Financial Industry Regulatory Authority (Finra) to recommend expungement of their peccadilloes.

Kimon P. Daifotis, for example, managed to get arbitrators in eight different cases against him to recommend expungement since last August – a remarkable feat considering that on July 16, the former Charles Schwab executive had agreed in a settlement with the Securities and Exchange Commission to be barred from the business and to pay $325,000 in penalties and forfeited profits related to his role the Schwab Yield Plus fund, in which investors had lost millions of dollars.

He didn’t admit or deny wrongdoing in that case and will be allowed to reapply for Finra membership in 2015.

Brokers have to take their expungement recommendations to court to be approved once an arbitration panel has recommended deletion, and Pasadena, California broker Debra Reda-Cappos will be doing exactly that on August 15. Investors Howard and Karen Snyder accused Reda-Cappos of breach of fiduciary duty and fraud in a complaint filed with Finra on October 12, 2010, and the two sides told the panel on October 3, 2012 that they had settled.

Neither Reda-Cappos nor her lawyer Kasumi Takahashi responded to my email queries. But in granting a recommendation that the Snyder case be expunged, the arbitrators noted that the claim was “false” and that the couple “did not prove their claim.”

It’s a no-brainer that they would not have proven their claim: There was no hearing to prove or disprove it.  So it’s more than a little weird that the arbitrators would use that as a way to justify cleaning up a broker’s record.

The Snyder case settled for $116,000, according to Reda-Cappos’ Finra records.

Before those arbitrators recommended the expungement, a lawyer for the investors, Leonard Steiner, told the panel that his clients were willing to say under oath that everything in their claim was true, according to the arbitrators’ award. But the panel didn’t ask the Snyders to do that, and gave the go-ahead on the expungement anyway, Steiner says.

Plaintiffs lawyers have been getting steamed that brokers are strong-arming investors to endorse expungements before they’ll settle. There’s a “disturbing trend” of firms routinely asking investors to agree that they won’t oppose expungement, says lawyer Brett Alcata of San Mateo California.

Those arrangements put the plaintiff’s lawyer in a box. They have an obligation to get the best settlement possible for their clients, but cringe at the idea that the next investor who comes along won’t get the full story on the errant broker. Finra shouldn’t allow settlements to include provisions that the customer won’t oppose expungement, says Steiner.

Sometime this summer, Finra will propose new rules that will make it even easier for brokers to expunge their records. Brokers have been irritated by a Finra rule enacted in 2009 that forces them to reveal complaints even when they are not named in a lawsuit. So if John Smith’s firm is sued because of fraud that Smith allegedly committed, the broker now has to list that on his BrokerCheck even if he isn’t a defendant.

Under pressure from the industry, Finra is expected to propose  a new “expedited” process to clean up black marks: The broker would be able to ask a panel for expungement at the end of an arbitration hearing, and the arbitrators would have the power to approve – but not deny – the request. Should that not work, the broker could take another stab at getting an expungement in a separate proceeding.

The proposals were mapped out in a Dec. 6 Finra memo to members of its National Arbitration and Mediation Committee. “We cannot comment on Board deliberations or confidential memos to Finra committees,” Finra spokeswoman Michelle Ong told me in an email.

After Boom-Boom Room, Fresh Tactics to Fight Bias

The headline-grabbing sex-harassment charges against Wall Street firms in the 1990s are a thing of the past, but not necessarily because things are better for women at financial firms.

In my story today for The New York Times, I discuss the progress — and lack of progress — since “The Boom-Boom Room” lawsuit against Smith Barney became synonymous with lurid behavior at brokerage firms.

Fast-forward 17 years, and such landmark cases are not as prevalent. Wall Street’s women are more aware of their rights and are not so timid anymore, says Linda D. Friedman, a partner at Stowell & Friedman. Still, she says her firm does a lot of work these days behind the scenes, assisting women who face discrimination but are reluctant to pursue litigation because of the repercussions it would have on their careers.

 

You may not be reading about these problems in your favorite newspaper or blog, but they’re still part of life for women who work in finance. You can read my story here.

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