Investor Advocacy Clinic Students Successfully Mediate Case Telephonically

Georgia State Law students participating in the Investor Advocacy Clinic represent investors in all aspects of Financial Industry Regulatory Authority (FINRA) arbitration proceedings, from initial client interviews through arbitration hearings, including telephonic mediation.

The terms of the standard agreement between brokers and their customers requires investors to arbitrate most claims before FINRA. The forum offers parties in active arbitration cases free or low-cost telephone mediation for claims of $50,000 or less.

Under the supervision of assistant clinical professor and clinic director Nicole G. Iannarone, students were preparing for an arbitration hearing when they learned they would be part of a telephonic mediation. Though the nontraditional medium was out of the norm, they were up for the challenge.

“We prepared the way you would for any trial,” said Michael Williford (J.D. ’17). “We figured if we prepared for an arbitration hearing, we couldn’t be unprepared for mediation.”

The students created trial notebooks on the facts of the case, damages calculations and roughly 500 pages of documents including tax returns, industry reports, broker disciplinary reports and other supporting documents. After preparing the notebooks, they fully understood all aspects of the case, but they realized conducting mediation over the phone would present unique challenges to advocating for their client, Iannarone said.

“When you are face-to-face you have more of an opportunity to build a relationship with the mediator and paint a picture of your client and their case,” said Kelly Robinson (J.D. ’17). “Another bigger issue was that the mediator wasn’t in the room to examine the information that was outlined in the documents. While we were able to send a short memo about the story of the case, we couldn’t include all 500-plus documents that we were relying upon the mediator referencing.”

Despite the challenges presented by the format, the students adapted and adjusted their strategies to the situation at hand.

“The takeaway for me, aside from developing some valuable skills, is that you have to prepare, prepare, prepare, and even then you have to be able to shift your strategy on the fly as things unfold,” Williford said. “It is not a static or entirely predictable environment, but that’s what makes it exciting.”

Robinson believes her experience will help her become a better lawyer.

“The clinic does a great job emulating a firm environment. We are responsible for determining the next steps from potential client intake to closing the case,” she said. “When I started the clinic, the idea of calling a client and asking about their case was terrifying. Now, I’m completely confident when speaking with clients and have even gained experience arguing with opposing counsel over discovery disputes, something I never thought I would able to do my second year of law school.”

Iannarone commended her students for how they handled the case.

“They did an excellent job for their client,” she said. “The client’s interaction with the students when the case ultimately ended says it all: the students offered the client a handshake, which was refused in favor of a hug.”

SEC Legal News: Form ADV

By Michael Williford, Fall 2016 Student Intern

Rules promulgated under the Investment Adviser Act of 1940 include a requirement that investment advisers deliver to each client or prospective client something called a Form ADV. The part of the form often referred to as the “Brochure Rule,” contains some basic information the law requires investment advisers to disclose before or at the time the adviser enters into an investment adviser contract with a client. The Brochure Rule compels an adviser to disclose to clients information about potential conflicts of interest, even if the adviser believes the conflicts will not affect the advice the adviser provides to clients. The rule also requires advisers to disclose information about how the adviser is compensated.

We all know the joke about the government— “there’s a form for that.” But, the form ADV is a powerful tool investors can use to assess an adviser with whom they may consider doing business. The Securities and Exchange Commission adopted some changes to the form last month that are worth pointing out. The changes to the form are designed to increase the quality of the information available to customers by increasing the degree of transparency in the information required. Continue reading

Why Join the Investor Advocacy Clinic?

By Michael Williford, Fall 2016 Student Intern
My experience in the Investor Advocacy Clinic has provided me the greatest joy when I get to interact with clients. The Clinic setting provides the unique opportunity to apply law school lessons to real-world legal issues. Interacting with the client reminds me that the practical experience students covet has consequences for regular citizens. Clients don’t turn to the IAC because everything has gone according to plan in their retirement investments; they turn to the Clinic because they’ve lost a portion of what they’ve worked hard to earn. It’s a pleasure to help them recoup some of those losses.

Investor Alert: Boiler Room Scams

By: Michael Williford, fall 2016 student intern

In a previous post I’ve discussed how fraudsters use telephone scams to prey on senior citizens. Recently, FINRA issued another investor alert focused on a very specific type of telephone scam: Boiler Rooms.

Sales calls are not an uncommon tactic by which securities are sold, but the Boiler room-style calls are a different creature. Characterized by high pressure tactics in which sales people promise high returns on securities they promise are “sure things.” The securities are frequently the kind of penny (or microcap) stocks involved in “pump-and-dump” schemes in which the sales people are paid promoters who raise the value of an otherwise worthless stock by creating a buying frenzy based on false or misleading promises about the health of the underlying company. Once investors are lured into purchasing the stock, the scammers sell shares they own, collapsing the price of the worthless stock collapses, leaving investors holding the proverbial bag.

The latest round of boiler room calls identified by FINRA are frequently not even from FINRA registered broker-dealers, meaning the calls are likely part of an outright fraud designed to take investors’ money without providing even the nearly worthless stock the sales person is hawking. To perpetrate the scam, FINRA says the callers often use fake credentials or disguise their phone numbers to appear to be legitimate dealers.

Unfortunately, the examples are numerous. FINRA identified several incidents in which investors were scammed. In one, an elderly couple was conned into buying nearly $900,000 of a worthless penny stock. In another, a senior citizen purchased $500,000 of a stock while on the phone with the caller. In a third, a retiree was convinced to mail $2,500 checks to a mail drop box that was not associated with any business at all.

If you receive a boiler room-type call, FINRA advises that you simply hang up the phone. More generally, if you are contacted by someone claiming to offer a deal that sounds too good to be true, do yourself the favor of doing some basic homework before you hand over any money. Utilize the free Broker Check service, available through FINRA’s website to learn more about the broker or the firm for which he or she works. To learn more about the latest boiler rooms, check out the original alert, here. To educate yourself about the kind of cold-calling tactics utilized in boiler room scams, view the SEC’s primer on cold-calling. If you receive a cold call from a boiler room, contact FINRA’s Securities Helpline for Seniors to report it.

Clinic Comments on FINRA Proposal to Require Electronic Portal for Proceedings

As part of its mission of serving regular investors, the Investor Advocacy Clinic reviews FINRA rule proposals and submits comments after fully evaluating the proposal.  Earlier this week, the clinic commented on FINRA SR-2016-029, a proposal that would require all parties who are represented in a FINRA proceeding to use FINRA’s electronic Party Portal to “file initial statements of claim and to file and serve pleadings and other documents on FINRA or any other party” and “to file and serve correspondence relating to discovery requests.”

The clinic’s comment, drafted primarily by fall 2016 student intern Michael Williford, praised FINRA for taking steps to increase access and efficiency by requiring represented parties to use the Party Portal as opposed to filing paper copies of pleadings and other materials.  Though the proposal is a step in the right direction, the clinic identified two potential problems with the proposal and asked FINRA to institute changes to correct each.

First, the clinic noted that claimants in smaller cases may not have the capability to remit payment for filing fees electronically, a reality that might lead some parties to initiate a claim without counsel to evade the rule’s electronic filing requirement.  Additionally, the electronic filing requirement might also result in lawyers turning down smaller cases and more claimants attempting to file cases without representation.  Thus, the clinic believes that proceedings where the claimant seeks damages less than $100,000 should be exempted from the electronic payment provisions.

Second, the clinic identified serious concerns with the proposal because it does not require parties to protect the personal confidential information of parties in simplified arbitration proceedings.  While parties in proceedings requesting more than $50,000 in damages must redact information that could be used by identity thieves, the redaction requirement has not been extended to these “small” claims even though those claims must now be filed electronically if a party has representation.  The clinic reiterated its earlier comments on the redaction rule and noted the particular importance of redacting personal confidential information if a proceeding is filed electronically.

Click here to read the Clinic’s comment letter in its entirety along with other comment letters on the proposal.

Former Cavaliers Football Player was Allegedly Cavalier with $10 Million of Investors’ Money

By Michael Williford, 2016 fall student intern

The SEC has charged a former University of Virginia and Philadelphia Eagles football player with defrauding investors of approximately $10 million. The SEC alleges that Merrill Robertson, Jr. and his partner, Sherman C. Vaughn, Jr. used their the company they co-owned to prey on senior citizens, Robertson’s former coaches at UVA, and alumni—more than sixty people in all—by pitching investments in unregistered debt securities they promised would generate annual returns of up to 20%, all “while providing safety and security for [their] investors.”

The company’s website boasted of having numerous funds managed by experienced investment advisers. The reality was that the company was “functionally insolvent” due to bad investments in restaurants that had all failed by 2014. Instead of disclosing the truth to potential investors, the pair allegedly relied on the goodwill and trust Robertson had accrued as a result of his professional athletic career and the trust he enjoyed with former coaches and UVA alumni. According to the SEC, the two men spent lavishly on themselves to the tune of $6 million, using $4 million they convinced later investors to pony up to pay early investors, in what the SEC complaint alleges was basically a Ponzi scheme. The SEC and FINRA have repeatedly warned investors generally, and senior citizens in particular, of the dangers associated with relying on personal relationships and the reputation of the broker in deciding whether or not to invest.

In the case of Robertson and Vaughn, neither had much investment experience. According to BrokerCheck, the website that allows anyone with an internet connection to do a basic background check on a broker, Robertson had only one year of investment experience, Vaughn was not registered at all, and their company, Cavalier Union, does not appear anywhere in FINRA’s databases. This simple tool could have potentially saved investors millions of dollars had anyone bothered to look.

The take-away for investor should be that they must do their own homework before investing; that there are simple tools available that can shed a lot of light on a broker’s claim; and that if an investment sounds too good to be true, it probably is.

Robertson, Vaughn, and their company used an important term in perpetrating the fraud on their customers: “investment adviser.” In a future post, I’ll explore that term in more detail—the legal requirements investment advisers are subject to, why those requirements should be of paramount importance to investors seeking financial advice, and why an investment adviser is not necessarily the same thing as a broker. Stay tuned.

The SEC complaint can be viewed here. Federal prosecutors in Virginia have announced Robertson will also face criminal charges in connection with the fraud.

Wednesday’s Word: Fiduciary Duty

By Michael Williford, fall 2016 student intern

Some of you may have seen John Oliver’s recent segment on the importance of getting your financial advice from a professional that owes his or her clients a fiduciary duty. If not, and you can stomach some “blue” language, you can watch the full report here, or read about it here and here. As a reminder, this very blog has touched on the issue in the past. That post is worth another read.

In a nutshell, after explaining what a fiduciary is, Oliver advises viewers to make sure that any investment advice they pay for comes from someone with a fiduciary obligation. More traditional organizations like the Financial Industry Regulatory Authority (FINRA) and the Consumer Financial Protection Bureau, have attempted to explain what a fiduciary is and why it might be important to the average investor attempting to save for retirement. So, what’s the buzz about? Who owes a fiduciary duty and what is it? Continue reading