Updates and Trends within Professional Liability: Financial Services

Transcription

1 Updates and Trends within Professional Liability: Financial Services

2 FINRA STATISTICS 2013: Filings are down 22% for First Quarter 2013 (compared to 2012) 38% of cases taken to hearing resulted in a customer award.

3 What to Learn from 2012 The number of customer awards was consistent with prior years (45% in 2012 compared to 44% in 2011, 47% in 2010, 45% in 2009, and 42% in 2008). The securities that predominated cases were 1) common stock (736 cases), 2) mutual funds (392 cases), and 3) variable annuities (220 cases). Breach of fiduciary duty claims were most common (2,216), followed by negligence (1,941) and misrepresentation cases (1,769). Trends?

4 THE DODD FRANK ACT Overview: Became law on July 21, A response to the 2008 stock market crash and designed to correct systemic risk, the concept of too big to fail, and increase investor protection. The legislation is still being discussed and debated and will be for some time.

5 Highlights from the Dodd-Frank Act Creation of Consumer Financial Protection Bureau Implements and enforces consumer protection laws. Consolidated the prior regulatory framework that was previously provided by seven agencies. Richard Cordray appointed as Director on Jan. 4, 2010 (without Congressional approval). Enforcement and Rulemaking authority July 17, 2012: $165 million settlement with Capital One Bank. Sept. 24, 2012: $214 million settlement with Discover Bank. Oct. 1, 2012: $102.5 million settlement with American Express. Cases involved deceptive marketing tactics used to pressure or mislead consumers into paying for addon products such as payment protection and credit monitoring.

6 Highlights from the Dodd-Frank Act (Con t) New Whistleblower Rule Passed on May 25, 2011 Tip must be voluntary, provide original information, lead to successful enforcement, and result in monetary sanctions. Old Rule SEC could only provide whistleblowers with awards in insider trading cases. Award capped at 10%. New Rule SEC can now provide awards for any violation of federal securities law. Award capped at 30%.

7 Highlights from the Dodd-Frank Act (Con t) Uniform Fiduciary Standard of Care Section 913 of the Dodd-Frank Act directed the SEC to evaluate, among other things, the effectiveness of existing legal standards of care for Broker-Dealers, Investment Advisers, and Associated Persons. Current Standards Investment Advisers: Fiduciary standard of care must always act in the best interest of the client and avoid or disclose material conflicts. Broker-Dealers: Suitability standard recommend only suitable investments Other limited duties: Carry out customer orders Inform customers of risks related to purchasing/selling securities Refrain from self-dealing Do not misrepresent material information about a transaction Leib v. Merrill Lynch, Pierce, Fenner & Smith Inc., 461 F. Supp. 951, 953 (E.D. Mich. 1978), aff'd, 647 F.2d 165 (6 th Cir. 1981).

8 Highlights from the Dodd-Frank Act (Con t) SEC Staff Recommends Uniform Fiduciary Standard On January 22, 2011, the SEC Staff recommended, among other things, a uniform fiduciary duty for investment advisers and broker-dealers. The SEC should engage in rulemaking to implement the uniform fiduciary standard of conduct for broker-dealers and investment advisers when providing personalized investment advice about securities to retail customers. Will registered representatives owe a continuing duty?

9 Highlights from the Dodd-Frank Act (Con t) Will the SEC Recommendation be Adopted? The need to harmonize the regulation of broker-dealers and investment advisers to enhance investor protection is clear. FINRA believes that in order to truly harmonize regulation of these providers, two steps are necessary. The first is establishing a consistent fiduciary standard for investment advisers and broker-dealers providing investment advice. FINRA Chairman & CEO Rick Ketchum, October 6, 2009 testimony before the U.S. House of Representatives Committee on Financial Services I have long believed that retail investors deserve a fiduciary standard of conduct regardless of the title printed on their financial counselor s business card. SEC Chairman Mary Schapiro, February 8, 2011 Speech How will this affect claims handling? Underwriting?

10 The JOBS ACT Quick Summary: Jumpstart Our Business Startups Act = JOBS Act. Became law on April 5, The Act s stated purpose is to increase American job creation and economic growth by improving access to the public capital markets for emerging growth companies. The Act is only 22 pages long and consists of 7 sections. Major aspects are 1) changes to general solicitation and advertising for private offerings, and 2) Crowdfunding.

11 The JOBS Act (Con t) Private Offerings: Currently, issuers are prohibited under Rule 506 of Reg. D and Rule 144A under the Securities Act from engaging in general solicitation and advertising of a private offering. The JOBS Act directs the SEC to remove these prohibitions on general solicitations and advertisments. Why is this important? An increase in the number of individuals who are solicited regarding private placements will likely lead to more private placement investments, which will likely lead to more claims arising out of private placements. The NASAA has expressed concerns about the relaxed standard: Once implemented, those rules will allow companies and promoters to offer securities through means such as direct mail, cold calls, free lunch seminars and media advertisements. As a result, unscrupulous companies and promoters may take advantage of the new rules to offer potentially fraudulent investments.

12 The JOBS Act (Con t) Crowdfunding Capital Raising Online While Deterring Fraud and Unethical Non- Disclosure Act of 2012 = Crowdfunding This concerns the sale of a security to a large number of people in small amounts over the internet. Crowdfunding is designed to help start-up companies raise more capital, by offering alternatives from traditional financing. Rules Limited to $1 million the total amount of securities sold cannot exceed $1M. Funding Portals transactions must be made through a funding portal. Litigation Purchasers of these securities have a private right of action against the seller.

13 Updates and Trends within Professional Liability: Legal Malpractice

14 LEGAL MALPRACTICE STATS Factors affecting claims against attorneys: Number of lawsuits in general that are filed Number of practicing attorneys 2012: 1,268,011 licensed attorneys (according to the ABA), a twenty percent increase over last ten years Greater numbers of small firms or solo practitioners Majority of malpractice claims filed against attorneys in firms of 5 or fewer.

15 SUSCEPTIBLE PRACTICE AREAS According to Profile of Legal Malpractice Claims for the years 2008 to 2011, published by the ABA Standing Committee on Lawyers Professional Liability: Real estate: 20.33% of all claims reported. Plaintiffs personal injury: 15.59% Family law: 12.14% (higher than in prior report) Estate, trust and probate: 10.67% (higher than in prior report) Collection and bankruptcy: 9.2% (higher than in prior report)

16 TYPES OF CLAIMS Competency ( substantive errors ): 45% Administrative errors: 30% Client relations: 15% Intentional wrongs: 10%

17 EMERGING ISSUES Fair Debt Collection Practices Act (FDCPA) Secondary Liability for Attorneys - Contribution and Indemnity Exposure Under the FDCPA. Civil Conspiracy Trend Increasingly popular, in large part because such causes of action do not require privity with the attorney. Mortgage Crisis Lawyers are an integral part of the lending process, because they draft mortgage documents, and assist in collecting payments, and at times act as escrow agents. Much of the litigation in this area centers around faulty mortgage loans, who owns the loans, and who has authority to collect on those loans.

18 EMERGING ISSUES (Continued) Social Networking Social networking and electronic media pose various concerns for lawyers relating to ethical guidelines. Truthfulness Solicitations The Unauthorized Practice of Law Creation of an inadvertent attorney-client relationship

19 EMERGING ISSUES (Continued) Electronic Discovery New duties arise: Preservation is KEY Format and metadata Erosion of Privity Requirements The principle of privity has always been key to legal malpractice claims, requiring the existence of an attorney-client relationship before an action against the attorney may succeed. In recent years, the traditional view of privity has been eroded and the bases for liability have evolved such that non-client plaintiffs are increasingly bringing actions against attorneys. Largely depends on the jurisdiction. Ignoring Conflicts Transactions with Clients

20 EVOLVING DEFENSES Legal Malpractice Claims Not Assignable to Adversary Damages: Collectability of underlying judgment is a necessary element of a prima facie case. Limited scope of representation Attorneys are well-served to use a clearly drafted engagement letter (and disengagement letter when representation ceases) to limit or define scope of duties.

21 EVOLVING DEFENSES (Continued) Client Acts Plaintiffs Contributory Negligence Can be applied under certain circumstances where the client is also at fault for damages arising from an attorney s malpractice. In pari delicto defense Prevents courts from redistributing losses among wrongdoers. This doctrine bars recovery in legal malpractice.

22 Conclusion Thank you for your attendance!