Client Background
The client is a registered person and director of private client services for a major New York based broker-dealer, and has been in the securities industry for nearly 20 years.
Client Situation
Our client was sued by one of his former brokerage customers for $450 million in a securities arbitration in New York. The plaintiff alleged that our client had failed properly to hedge his stock portfolio, and had otherwise conspired to defraud him through the use of over-priced derivative instruments (costless collars, over-the-counter options, and forward contracts).
Both the size and nature of these fraud allegations were particularly problematic because as a registered person, our client was required to disclose these claims to the public as part of his broker’s record (called a CRD), which is easily available to anyone (including clients, prospects, and regulators) over the Internet. Thus, not only did we need to disprove all claims against our client, but we also needed to have the case history fully expunged from his CRD so that he could continue working in the financial services industry.
Primary Goals
Anticipated Problems
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Plaintiff was very wealthy and able to hire a very aggressive law firm to prosecute the case
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Settlement was not an option – we needed to win on the merits to obtain expungement
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We had to meet a heightened burden of proof for expungement – NASD rules required us not just to defeat plaintiff’s claims by a preponderance of the evidence, but to affirmatively establish that the claims were factually impossible, clearly erroneous, or otherwise false
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Failure to obtain expungement could result in additional customer claims and/or regulatory action against our client
Service Summary
The case, tried in New York between December 2004 and April 2005, required extensive pre-hearing discovery, including expert depositions, which was very unusual for an arbitration.
The plaintiff tried to present himself as an unsophisticated investor, who had little knowledge or understanding of hedging strategies or derivative instruments. We spent a significant amount of time investigating the plaintiff’s business dealings, reviewing his tax returns, and analyzing his other brokerage accounts. We discovered, buried in the schedules and footnotes of one of his old tax forms, that the plaintiff had purchased a controlling interest in a previously undisclosed company. We investigated further, and found that it was, in fact, a foreign currency hedge fund. It made for a very dramatic cross-examination -- the plaintiff literally sat in stunned silence on the witness stand for several minutes while trying to determine how to respond to our questions on this topic.
At the arbitration hearing, the plaintiff attempted to bolster his case with both a liability expert (who sat at plaintiff’s counsel table throughout the entire proceeding so he could opine on actual witness testimony), as well as a damages expert. We were able to nullify their testimony on cross-examination (both experts eventually admitted on cross to making material mistakes in their analyses), and then rebut their testimony during our case in chief with our own expert. Again, because our goal was not just to defeat the plaintiff’s claims, but also to affirmatively establish that our client had acted reasonably and appropriately, it was necessary for our expert to articulate and amplify those themes, which he did to great effect. Indeed, the Arbitration Panel ultimately concluded that our client’s hedging strategy served the plaintiff’s needs very well, and resulted in the plaintiff’s becoming a fabulously wealthy man. They also concluded that there had been no mispricings or other miscalculations regarding the various hedging instruments at issue, finding that our expert had effectively rebutted these claims as a matter of fact. Thus, by the end of the hearing, we were able to convince the Arbitration Panel that the plaintiff was a sophisticated investor with substantial knowledge of hedging and derivatives who was treated not only fairly and reasonably, but actually quite well by our client in managing his portfolio.
Results
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Complete defense verdict with all claims denied in their entirety
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Full expungement granted
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Received a 32-page written opinion from the three-member Arbitration Panel, stating (among other things) that: “In the Panel’s view, [Defendants] are the prevailing parties in this arbitration by a clear margin.”
In The Client’s Words…
“This case was complex in both its argument and in its presentation. The key for a good outcome lay in the ability to present the facts and circumstances in a simple and straightforward manner. Levenfeld Pearlstein executed on this strategy with precision. The Firm's intimate knowledge of the securities industry, particularly as it relates to the brokerage aspect, successfully resulted in the arbitration panels' award of an expungement. It was the perfect outcome to a long and trying process.”
“I am employed in the financial services industry, which is highly regulated. Levenfeld Pearlstein's ability to navigate through the regulatory and legal landscapes has been critical in maintaining my effectives in all areas of my profession. They have an unmatched ability to empathize with my personal position while constructing an effective legal strategy that has protected my career.”
“I have had to employee legal counsel that has run the gamut from the top tier and very large New York corporate law firm to the smaller boutique law firm headed by a single visionary individual. Levenfeld Pearlstein provides that rare combination that gives me the experience and resource depth of the largest law firms while maintaining that cutting edge commitment that comes from working with the founding partner of a smaller firm. My lawyer at LP has a great and proven pedigree--when needed he is a Pit Bull, a German Shepard, a Doberman, a Labrador, a Saint Bernard or a Border Collie--always at my side and always providing me with the protection and care that a certain situation requires.”