Articles Posted in FINRA

In today’s business climate we cannot seem to go a few weeks without the next big company fraud that has been foisted upon the public. The current scandal du jour is Volkswagen and tomorrow it will be who knows. At some point however, either as a result of a whistleblower or anonymous tip, a corporation will conduct an internal investigation to (1) uncover the facts surrounding the current problem and (2) advise management, including the board of directors, of the potential liability and suggest a course of action. It is a “best practice” that when conducting an internal investigation, that a company retain an outside law firm specifically for the investigation to show that the directors of the company are zealously discharging their fiduciary duties to investigate suspected wrongdoing. While these outside attorneys will undoubtedly have access to all company documents and emails, including servers, a large part of the investigation will center upon these attorneys and their interviews with company employees.

If you find yourself in the situation where you are about to be interviewed in connection with a company investigation you need to ask yourself two questions. Do I need a lawyer? Who pays? If you truly played no role in what the company is investigating you don’t need a lawyer. However, if you are a key insider who has information that will shed important details on what transpired you certainly would want to retain your own lawyer. There are many reasons why and I will address them below.

First, consider that earlier this year the Department of Justice set forth a Memorandum that identified that it would go after the individuals responsible for corporate wrongdoing and work its way inward towards the corporate hub. In addition, Justice conditioned any corporate cooperation credit that a corporation could hope to receive would be conditioned upon the disclosure of all corporate wrongdoings and all of the individuals that performed them. Think about this for a second. If the company you are working for is the subject of an investigation and wants in effect what is leniency in its “corporate sentence,” it must turn you over to Justice.

Second, before any interview begins, you must understand that the lawyer is NOT YOUR LAWYER. The lawyer is the company lawyer and therefore there is no guarantee that what you say will remain confidential. To avoid an employee raising an allegation that the interviewing attorney has a conflict of interest because the employee believed that the attorney was also representing him, all interviews begin with the Upjohn Warning.

The Upjohn Warning originated from a case before the United States Supreme Court. The Court found that while there is an attorney client privilege covering communications between counsel and the employee, the privilege belongs to the employer and not the employee. Therefore, the employees or key insiders always run the risk that the company will waive the privilege and share the results of the interview with government investigators and/or prosecutors. In fact, based upon the recent DOJ Memo discussed above, you can almost be certain that what you say will be turned over to the appropriate authorities.

In 2009 the ABA White Collar Crime Committee produced a sample Upjohn Warning. It reads as follows:

I am a lawyer for or from Corporation A. I represent only Corporation A, and I do not represent you personally.

I am conducting this interview to gather facts in order to provide legal advice for Corporation A. This interview is part of an investigation to determine the facts and circumstances of X in order to advise Corporation A how best to proceed.

Your communications with me are protected by the attorney-client privilege. But the attorney–client privilege belongs solely to Corporation A, not you. That means that Corporation A alone may elect to waive the attorney-client privilege and reveal our discussion to third parties. Corporation A alone may decide to waive the privilege and disclose this discussion to such third parties as federal or state agencies, at its sole discretion, and without notifying you.

In order for this discussion to be subject to the privilege, it must be kept in confidence. In other words, with the exception of your own attorney, you may not disclose the substance of this interview to any third party, including other employees or anyone outside of the company. You may discuss the facts of what happened but you may not discuss this discussion.

Do you have any questions?

Are you willing to proceed?

Now, very simply put, if you are a key employee and receive this warning placed in front of you and are asked to sign it, don’t you think you might want your own attorney present during this interview?

Obviously retaining your own independent lawyer can be expensive. However, in certain instances the company may or even be required to advance you the attorneys’ fees you incur. For instance, the company by-laws might require the advancement of your legal fees if you are an officer or director subject to repayment if it is found that you committed fraud. Other times such advancement of legal fees might be required under your employment agreement. Understandably it is certainly better to have an advancement of legal fees subject to repayment rather than a reimbursement of legal fees after a determination that you did not commit fraud. Whether or not you have one outcome or the other may very well depend on if you had competent counsel assisting you at the times these documents were created.

There are countless more issues to consider that are beyond the scope of this short article. If you should find yourself in the situation where you are going to be interviewed in connection with a company investigation, please feel free to call Doug Leavitt at Danziger Shapiro & Leavitt, P.C. We would be happy to discuss your situation and develop a plan to minimize your exposure.

This entry is presented for informational purposes only and is not intended to constitute legal advice.



Well this doesn’t happen every day – or does it? The SEC finds itself being investigated for improper financial holdings. According to a November 2013 Reuters post, federal prosecutors and the office of the inspector general of the SEC contacted employees in the SEC’s New York office about trading in companies that are under SEC investigation. This is a direct violation of internal SEC rules. While the report indicates that it does not appear to be a widespread issue, it is another black eye for the SEC that is still marred by the 2009 allegations regarding insider trading by SEC employees. Stay tuned to see how this plays out.
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On July 9, 2012, the Financial Industry Regulatory Authority (FINRA) implemented a new securities rule governing the obligation of brokers to make “suitable” investment recommendations to customers. While FINRA Rule 2111 is based upon NASD Rule 2310 – the prior suitability rule – FINRA Rule 2111 expands the old rule in several significant ways.

The Suitability Obligation

Investors go to their stockbrokers not only to get advice as to which stocks are likely to offer good returns. They also are seeking input on which investments are suitable for their specific circumstance. The suitability rule is intended to provide the investor with peace of mind that his/her broker has reasonably believes the broker’s investment recommendations are appropriate at the time the investment is made. Unfortunately, we have seen far too many situations where the proposed investment makes more sense for the broker than for the investor.

Rule 2111 requires that brokers:

“have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the member or associated person to ascertain the customer’s investment profile”

FINRA Rule 2111(a) essentially takes existing case law and codifies it into three specific suitability claims. (1) reasonable-basis suitability; (2) customer-specific suitability; and (3) quantitative suitability.

1. Reasonable-Basis Suitability Reasonable-basis suitability means that a broker must perform reasonable diligence to understand the investment products and strategies that the broker recommends to her customer. The broker must also be able to demonstrate that she actually understands the product that she is recommending to her client.

2. Customer-Specific Suitability Customer-specific suitability means that a broker must have a reasonable basis to believe that her recommendations are suitable for a customer based on the customer’s “investment profile.” The broker must be able to establish that she understands who her client really is, what their needs are, and how this recommendation fits into what they are trying to accomplish.

3. Quantitative Suitability Quantitative suitability means that a broker who has control over a customer’s account must have a reasonable basis to believe that a series of recommended securities transactions is not excessive (often called a churning analysis). The broker’s must be able to establish that her overall trading record comports with the client’s goals.

New Requirements Imposed Upon Brokers

FINRA is clearly trying to send a message to brokers in this new economic climate and that message is “You will be responsible to your clients.” They are also expanding the potential definition of “clients” to include those who only had an informal relationship with the broker or prospective customers who may never have opened an account with the firm. Even recommended strategies, such a “hold” recommendation, may come under the purview of new FINAR Rule 2111. There is no requirement that the advice resulted in a commission before Rule 2111 comes into play. Simply put, brokers are now responsible for all customer recommendations.
While this is not an exhaustive discussion of the impact the new FINRA Rule will have upon brokers and their customers, it is clear FINRA is trying to chart a new course with an emphasis on protecting the individual customer from abuse. FINRA arbitration is relatively cheap and quick, especially in comparison to litigation a case in court. In fact, there is an expedited process for the elderly wherein you can file your complaint and have your case heard in less than 9 months.
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