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    Investor's Guide to Loss Recovery: Rights, Mediation, Arbitration, and other Strategies
    Investor's Guide to Loss Recovery: Rights, Mediation, Arbitration, and other Strategies
    Investor's Guide to Loss Recovery: Rights, Mediation, Arbitration, and other Strategies
    Ebook406 pages5 hours

    Investor's Guide to Loss Recovery: Rights, Mediation, Arbitration, and other Strategies

    By Louis L. Straney

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    About this ebook

    Essential guidance for recovery of lost assets through arbitration, mediation and other forms of conflict resolution

    Since the discovery of the Madoff fraud and investment scandals associated with the global credit crisis, investors have become aware that they can fight back and demand both justice and monetary recovery. To date, the only reliable resources on securities arbitration have been either sensationalized accounts of how to sue Wall Street or legal references, which provide no practical application. Filled with expert guidance showing investors how arbitration works, Investor's Guide to Loss Recovery fills that gap by providing a focus on all of the investor's options when a conflict arises.

    • Includes charts showing the major areas of litigation as well as empirical evidence of enhanced awareness of investment misconduct
    • Proprietary research by the author, demonstrating arbitration results
    • Analysis on how newly enacted regulatory reforms will impact the process and options for financial fraud victims
    • Personal interviews with securities attorneys, experts and investors
    • Detailed scripts of initial attorney interviews, mediation and arbitration

    New financial regulations are impacting the options available to investors looking to recover assets. Investor's Guide to Loss Recovery is must-have reading for every investor, financial advisor, and attorney.

    LanguageEnglish
    PublisherWiley
    Release dateAug 10, 2011
    ISBN9781118142936
    Investor's Guide to Loss Recovery: Rights, Mediation, Arbitration, and other Strategies

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      Investor's Guide to Loss Recovery - Louis L. Straney

      Introduction

      While living I want to live well.

      Geronimo (1829–1909), leader of the Chiricahua Apache

      Unlike the novelist who artfully orchestrates the collision of characters and plot, the author of nonfiction should never suffer from writer's block. After all, in a fact-based approach, organization is far more important than inspiration. Nonfiction organizes concepts and facts while the novel attempts to create new visions. If the novelist is an artist, the author of nonfiction is a journeyman scheduler.

      In this, my third book on securities fraud, as in the past, I make every possible attempt to stick to a proven regimen of submitting to my editors an agreed-on number of pages or chapters on a predetermined schedule. For example, this month, after reaching the midpoint in this project, I committed to submit a chapter plus the book's Introduction. With the chapter in its final editing stage, I turned to the Introduction. But unfortunately, I got distracted.

      On the day that I planned to pull together some thoughts for this Introduction, I made a terrible mistake that would set back my schedule by several days. The error was innocent enough, consisting of a decades-old habit: I read the Wall Street Journal. Actually, since I usually begin with the sensational tattler stories on page 1 of section C, I never got past the first article that caught my attention: Regulator Is Slowed by Budget Impasse. After several relentless months of post-Madoff public criticism of U.S. criminal investigators and securities regulators, my initial assumption was that the article would report on Britain's Financial Services Authority (FSA) or a financially strapped Canadian provincial securities regulator. But after the first five words in the article, I realized that rather than London or Quebec, the impasse was much closer to home. The problem was on my doorstep:

      The Securities and Exchange Commission is slowing the pace of some investigations and routine inspections as part of a belt-tightening caused by a budget impasse in Congress. Agency officials recently postponed gathering testimony from witnesses in a number of probes into potential wrongdoing. . . .¹

      Who would have guessed? After checking to make certain that I had not picked up a two-year-old edition of the Journal, I decided that any perceived delay in financing the world's most important securities regulator was, at worst, a scheduling issue. Obviously, there were things at play that pushed more critical state or federal legislation to the top of the deliberative agenda. I was certain that with some quick research, it would be clear that this so-called impasse was simply a matter of tweaking an exciting schedule of exciting new initiatives.

      First, in my search for clarity, I made certain that there were no loose ends from the custom-tailored bipartisan Financial Crisis Inquiry Commission that was charged with identifying the culprits and causes in the recent credit market meltdown. Content was thin with this ad-hoc group. After months of hearings, the Commission's final report was a less-than-insightful nine pages of observations split down party lines. The lack of useful narrative from this committee could fill volumes. Nevertheless, since it was not a standing committee, with only quasi-official status, perhaps I expected too much. I forged ahead with my search.

      Arguably, individual states play an important role in regulating financial traffic, so it is logical to examine some interesting grassroots issues that would bring harmonic coordination to the global regulation of investment markets and professionals. Maybe it was an issue of incomplete media accounts, but I struggled to see how many of the states’ issues would have tangible impact. For example, I realize that the world currency markets are fast paced and certainly figure into the global economy, but when Mike Pitts, a Republican state representative in South Carolina, proposed legislation that would ban federal currency in his state, replacing it with gold and silver coins as legal tender, I thought that he might be slightly out of sync with paint-by-numbers financial advice. For years, any number of TV and Internet marketers of precious coins have been peddling $40 of gold for three monthly payments of $150 per month. But I knew that beyond a jerry-rigged commission and local politicians who felt that the United States was dangerously close to following in the steps of the former Soviet Union or Atlantis, I felt confident that the real thought leaders and policymakers in Washington would bring things back into focus.

      The U.S. Senate Committee on Finance seemed, at least by its name, like a good place to start. Senate and Finance in one title—now that is power and scope. While the Committee's web site listed some riveting financial initiatives on Haitian relief and Peruvian trade, most of the legislation was directed to one side or the other of healthcare legislation. For this committee I discovered that virtually no Wall Street reform or consumer advocacy proposals were listed as priorities. It must be me. Possibly I expected too much from the terms Senate and Finance.

      But I had one last trick up my sleeve. I would finally get to the bottom line. With the terms reform and protection in its title, the newly enacted Dodd-Frank Wall Street Reform and Consumer Protection Act, I imagined, would address my concerns. During 2010, there had been a great deal of speculation on how the Dodd-Frank legislation would get the train back on the track and make certain that it ran on time. Despite my optimism, after laboring through the 2,300 pages of the new Act, I discovered that instead of being mandated by law, many of the more important elements of the legislation met a sad fate—they were assigned as research projects for new committees, bureaus, agencies, commissioners, task forces, and consumer roundtables. There is nothing like a political committee or bureaucratic agency for quick and effective solutions.

      I suppose that I may have missed the point and need a lesson in political expediency and how things work in this global financial village. The incoming chairman of the House Financial Services Committee offered an interesting comment that was insightful when he suggested that, in Washington, the view is that the banks are to be regulated, and my view is that Washington and the regulators are there to serve the banks.²

      Now I get it. I had it all twisted around. Luckily, based on the chairman's comments, it would be easy to adjust my priorities from consumer advocacy to corporate advocacy. I just needed to switch one C-word. When I read about the delay in getting funding for the SEC investigation of financial crimes, I should have been overjoyed to learn that petty political bickering was more productive than the integrity of our financial markets and the prosecution of those who commit economic terrorism.

      What could I have been thinking? I had neglected to recognize that what we needed was a rollback to 1920s corporate privilege. But I needed some time to ponder this new paradigm. Once I put things in perspective, and got around to writing this Introduction, I had learned a valuable lesson: in preparation for writing nonfiction, at all costs, avoid current events. Clinging to benign ignorance encourages focus. Going forward, I must keep the truth isolated from nonfiction. It was a curious concept, so I would have to work at it.

      But in the event that my original reaction to the Journal article merits consideration, this book is being offered as a straightforward guide for personal reorganization and asset recovery. In many ways, it's a Preamble for an investor's Bill of Rights. After being victimized by investment misconduct or securities fraud, there are alternatives that have never been previously discussed. These options are described in this book, which is divided into nine chapters, each requiring just over an hour in reading time. Victims’ rights for recovery, both in and out of a hearing room, will be examined. Even though it is designed to appeal to a wide audience (including individual investors, fiduciaries, investment advisers, members of the legal community, policymakers, regulatory professionals, and students), in no way should this be considered legal advice. No text can replace the guidance of a trusted counsel. However, even though it is an ambitious goal, this book should make the process of exercising rights as a victim far more approachable and effective.

      In Chapter 1, the first considerations of reorganization and recovery for victims of investment misconduct are explored. Admittedly, in many respects, the process is daunting. The theory that several options are available is, well, theoretical. Even though there is a hint of expanded alternatives under the recently enacted Dodd-Frank reform act, any change in additional advocacy for victims, if eventually adopted, will be painfully slow. For months to come, possibly years, we will be forced to play with the hand that we have been dealt.

      Even though dispute resolution is most often associated with an investor's allegations against a brokerage firm and its agents, that is only one of the five major categories associated with arbitration. Chapter 2 will outline the perspectives and anticipated goals of each of these constituencies.

      Chapter 3 is best described as the identification of litigation resources and strategies. Many will suggest further analysis, yet even more importantly, it will be demonstrated that many strategies are dangerously ineffective.

      With a solid foundation in place for identifying benchmark issues that may lead to a formal complaint, Chapter 4 addresses the procedure for filing a claim and the expected results of this decision. Just as importantly, the possibility of not seeking damages is also considered.

      One of the more daunting tasks of securities litigation is probed in Chapter 5. A central task in securities litigation is reviewing and organizing the massive amount of documents that must be exchanged between parties. This chapter helps make sense of the avalanche of small print, critical documents, and worthless redundancy.

      Runaway cars seldom travel in a straight line. The same is true for securities litigation. Chapter 6 presents several likely scenarios, including settlement offers and proposed mediations that may short-circuit the arbitration process.

      Chapter 7 provides a narrative and a scripted performance for a multisession arbitration hearing. After going through this exercise, no participant should be surprised with either the sequence of events or subtext to case strategies or testimony. Always respecting a historical perspective, Thoth, the ancient Egyptian god of wisdom, justice, and arbitration, will be introduced. Both metaphorically and realistically, this multidimensional figure mediated the power of good and evil, which is exactly what unfolds in the final stages of dispute resolution.

      Reaching beyond the boundaries of a single opinion, Chapter 8 includes comments and guidance from several securities litigation experts and counsel. Many of these professionals have extensive corporate and litigation experience valuable to anyone interested in multiple perspectives. From backgrounds such as former attorneys general, U.S. attorneys, investment bankers, and securities commissioners, they offer several worthwhile topics for further consideration.

      Chapter 9 pulls together the many moving parts of victims’ rights and asset recovery through securities litigation. Even though it concludes this book, in the fast-paced world of dispute resolution, by no means is it the last word. In the spirit of keeping the content of this book current, cases and relevant issues will be regularly updated on my web site, www.securitiesfraudresearch.org. All examples and personal pronouns referenced in this book are intended to be gender-neutral. No assumptions whatsoever as to age, gender, national origin, or level of investment sophistication should be drawn from the names, descriptions, or characterizations.

      At all stages in exercising victims’ rights for recovery from investment misconduct, inspiration can be drawn from the legendary Native American leader, Geronimo, as quoted at the beginning of this Introduction. The challenge for all of those who have been victimized is to choose and defend their personal definition of living well. If, through the words of this book, investors and those who protect their rights are able to reach a personal understanding of this deceptively simple phrase, then I have been successful.

      NOTES

      1. Jean Eaglesham and Victoria McGrane, December 14, 2010.

      2. Quoted by Paul Krugman, Wall Street Whitewash, New York Times, nytimes.com, Op Ed, December 17, 2010.

      Chapter 1

      Road to Recovery

      The law does not pretend to punish everything that is dishonest. That would seriously interfere with business.

      Clarence Darrow (1857–1938), country lawyer and civil libertarian

      A SHARP STICK

      From school playgrounds to Wall Street, on every continent, some individuals, without apparent provocation, want to poke you in the eye with a sharp stick. In the financial markets, the attack takes the form of investment misconduct and fraud. The perpetrators are bullies or sociopaths. Perhaps they are strangers, but often they are employees or trusted friends. Through greed, a sense of entitlement, or outright evil, they sharpen the stick, carefully plan the assault, and stalk their prey. Often without any remorse whatsoever, they are joyful in the disfigurement or destruction of innocent victims. This sordid set of facts is the reason I wrote this book.

      We are constantly reminded that there is an abundant supply of financial miscreants ever-willing to apply acute focus to a singular purpose (myoptical singularis) and drive that sharp stick of financial misconduct solidly into the eye of their victim.¹ In a world where protective measures often fail and an innocent victim suffers monetary damages, recovery is often possible. The process begins with rejecting the status quo. Abandoning a belief in the inevitable is necessary. It is a tedious process and you will be tempted to waffle. Others count on that for their success. But keep in mind, justice can be incredibly satisfying, and monetary relief is a decent outcome as well.

      Assuming that being the target of investment misconduct or fraud is distasteful, and an experience that you want to avoid, there are two options: avoid the bullies and sociopaths by staying off the playground, or adopt defensive measures. On occasion, these proactive defensive tactics are effective, but they are not always foolproof. If counterterrorism strategies were altogether successful, then there would be little need for a guide to recovering from investment misconduct. Con artists and schemers are adept at finding a workaround. Financial terrorists are skilled in their craft; therefore, this book is necessary.

      As recently as two years ago, recovering from investment misconduct would have been discussed in a very different manner. Even though our society finds value in issuing report cards to first-graders and auto manufacturers, somehow we never held the integrity of our financial markets to the same standard. If we had, the results would have been dismal with failing grades in nearly every area of oversight. However, through a combination of outrage and the recognition that the nation's financial survival was at stake, a benevolent guardian put our failing system on probation with an assignment of remedial work. The opportunity to bring order to consumer advocacy and our financial markets is reflected in part in recent demands for overall fairness. Two years ago, any project related to investment conduct would have focused on a severely flawed industry, under the influence of many individuals lacking any sign of an ethical compass, and regulated by laws and agencies with underwhelming insight and abilities.

      DODD-FRANK: THE ENGINE THAT COULD

      In the past 24 months, many things have changed, and the next two years, propelled by the engine of Dodd-Frank and uncompromising public sentiment, have the potential to be even more revolutionary. Highly visible individual cases such as Madoff Securities, Marc Drier, and R. Allen Stanford have introduced many consumers, otherwise uninformed, to the red flags related to investment misconduct. Federal and state investigations into product-related investments that were marketed through brokerage firms or agents have intensified and will likely lead to fines, sanctions, and possibly criminal prosecution. And the world of class action suits is no longer confined to medical products and firearms. Large settlements related to securities and investments, launched by experienced legal teams, have been effective.

      Even with an undeniable shift in the visibility of investment misconduct, the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection legislation is designed to usher in sweeping changes and have a long-lasting impact. The Dodd-Frank moniker, like most congressional efforts, will soon fade from the headlines, but it has the potential to be the catalyst for much-needed change. Along with analyzing the current options for recovery from investment misconduct it is essential to review the impact, and in some cases the absence of impact, of Dodd-Frank.

      Much like the benchmark securities acts of the 1930s, there are things in this legislation that financial institutions can do, must do, and cannot do. Through Dodd-Frank, new bureaus, agencies, task forces, advisory groups, and commissioner positions were crafted as watchdog custodians of the process. After a predictably controversial review period, Dodd-Frank has paved the way for much-needed reform.

      Along with the new controls, compliance metrics, and consumer advocacy programs, Dodd-Frank has put in motion the mechanism to nullify the clauses in consumer account agreements that limit disputes to arbitration and bar them from civil adjudication. This aspect of Dodd-Frank will be discussed in detail throughout this book. But it must be noted now that this potential development, if ultimately adopted, will be nothing short of revolutionary. As history consistently reminds us, a revolution is often marked by unforeseen challenges. This leads to landmark decisions being made with limited background data, and that disturbs me. Relying on conventional wisdom trumpeted through limited data yields disastrous results.

      It is nearly impossible to resist the temptation to jump to the bottom-line conclusion for recovering from investment misconduct. But that temptation, as much as it may abbreviate the process for some, is a disservice to many others. Unfortunately, I often find what I will refer to as the Hawaiian Muu-Muu Syndrome, where one size fits all. Just as in the investment advisory process, there is no common denominator that can be applied globally for a one-size-fits-all solution to victimization. Even though you will soon observe that I admittedly have a strong bias related to the best recovery strategy for the majority of victims, I am an avid proponent of full and fair disclosure of all possible options for monetary relief.

      Metaphorically, think of recovering from victimization as a duel. You get to choose your weapon. I may have a preference, but I am not the person in the duel, so you need to make the choice. Granted, I know a lot about the weapons and have even employed several, but that does not necessarily mean that I have a monopoly on clarity. It is your neck on the line.

      For informed decisions, complicated issues demand a robust examination. Even though the thrust of this book will focus on the most prevalent form of financial dispute resolution, in the spirit of building a firm foundation for all victims, other options will be briefly reviewed.

      In approximately 10 hours you will have completed a journey through the odd kingdom of investment misconduct. If the plot unfolds as planned, you will be much better prepared to respond, recover, resist, or possibly retaliate. But first you must take a pledge, the oath of non-acceptance.

      REJECTING ACCEPTANCE

      Even though estimates are notoriously inexact, the monetary and emotional damages of securities fraud are massive. The aftermath of the deception is more than a minor nuisance. On even the smaller of monetary scales, investment misconduct can destroy businesses and families. And on the level of destruction that we have become all too familiar with, by any reasonable measure, there is a global pandemic of economic terrorism—bullying at its finest. It is a zero-sum game of losers and winners. Indeed for every gain through fraud, there is a realized loss. There is no so-called self-insurance. Every loss related to securities fraud is passed along to someone as a higher cost of goods or services, reduced benefits, or an attack on the financial markets. No individual, country, or community is spared. It is a widespread and costly disease.

      As a defining premise, I refuse to accept the notion that anyone had it coming, or in some cases, they should have known better. During my career as a consulting and testifying expert, I have been engaged by both Claimants (typically investors or employees of brokerage firms) and Respondents (often a brokerage firm or employee).² I firmly believe that the only universal truth is that there are no universal conclusions inherently associated with all claims. I have had personal experience with frivolous and unreasonable allegations and responses from both sides of the dispute. Thankfully, most advisers, firms, and clients are sincere and honest participants in the all-important process of shared interests.

      But in a financial system with tempting access to vast amounts of assets, things do get off track. And in a global society where hundreds of millions of individuals are only a phone call away from banks, securities exchanges, and the potential for unearned riches, for some, investment misconduct is an irresistible temptation. Often lacking any apparent reason other than an overwhelming sense of entitlement, companies and individuals victimize others.

      Regardless of motives or naïveté, I have yet to meet someone who proclaims, Take that sharp stick and poke me in the eye. If you ignored the red flags associated with investment misconduct and mistakenly made an appointment with financial disaster, this book is the next step in shaking off the disorienting numbness and getting reorganized.³ This reorganization may include monetary damages and even much-deserved justice. Or perhaps it will define the recovery process in a manner that will help you forever avoid making the same investment mistakes again.

      In a much more sinister scenario, if you were the unwitting target of blatant fraud and someone made that appointment with disaster for you, you have even more options. But passing time is an enemy of justice. In this circumstance of indecision, recovery is problematic. Memories become less precise. Documents are misplaced. Costs rise as the litigation process drags on.

      Without question, the emotional toll of a crisis has a cumulative effect. As a victim, it is critical to shake off the disorientation, reject the inevitability of bad things happen to good people, and commit to recovery.

      Regardless of the catalyst, reorganization begins with a rejection of the inevitability of victimization. There is nothing fair or inevitable about loss by intentional theft or deception. Through investments connected with some form of security such as common stock, a bond, or a futures contract, if you feel that you have been deceived or manipulated, I hope to provide you with a blueprint for recovery. If there is a financial demon in the room, this book was written for those who are interested in an exorcism.

      THE INCALCULABLE THRESHOLD

      There is a monetary damages threshold for the practical application of this guide, but it is not altogether quantitative or rigid. In the Association of Certified Fraud Examiners 2010 report on global fraud, the fuzzy nature of fraud metrics is evident:

      Measuring the cost of occupational fraud is an important yet incredibly challenging endeavor. Arguably, the true cost is incalculable. The inherently clandestine nature of fraud means that many cases will never be revealed… . Consequently, any measurement of occupational fraud costs will be, at best, an estimate.⁴

      In terms of losses related to U.S. securities fraud, there is a range of estimates from respected organizations such as the North American Securities Administrators to university studies such as Stanford's Class Action Clearinghouse. These sources suggest that annual damages from securities fraud are from $40 billion to $600 billion. But once again those are estimates based on a number or variables and assumptions.

      Nevertheless, if a study conducted in 2007 by the Canadian Securities Administrators/Auterité canadienes en valeurs mobilières (CSA/ACVM) can be a surrogate for all of North America, the conclusion is very disturbing. The Canadian study concluded that 1 in 20 Canadians are victims of investment fraud, with only 17 percent reporting their victimization. In other words, approximately 5 percent of Canadian citizens are victims of some form of investment fraud.⁵

      Extending that finding to the United States, the implication is that each year 15 million Americans (equivalent to the population of Los Angeles) are victims of securities fraud. That breaks down to one serious financial crime occurring every 2.1 seconds. Think about it another way: if you complete this chapter in one hour, by the time you finish, more than 14,000 individuals (possibly including you, your business, or family) will have been victimized by serious investment misconduct.

      Based on my experience, monetary losses from misconduct vary greatly. But using a conservative $50,000 of damages per victim, the results equate to a staggering $750 billion price tag—roughly the budget for U.S. forces in Iraq and Afghanistan.

      Losses due to investment misconduct can conceivably be as low as $5,000 or less and as steep as hundreds of millions or even billions. To the benefit of the victim, the recovery system is flexible. There are options at all levels of loss. An alternative to limiting our focus is to accept the following premise: If the assets you lost in an investment scheme were important to you, your family, or your business enterprise, then this book will help you understand and evaluate various methods for resolution and recovery.

      DEALING WITH THE DEMONS

      You will soon become familiar with criminal and civil procedures, class actions, mediation, settlement agreements, arbitration, and the often-overlooked gesture of cutting losses and the litigation version of throwing in the towel. Capitulation? That is correct. Litigation is not always the best

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