Charles Schwab Backs Down on Class Action Waivers in Client Account Agreements

Reuters is reporting that the brokerage firm of Charles Schwab Corp. is backing down on its requirement that account holders waiver class action lawsuits.  Reuters reports

Charles Schwab Corp has temporarily reversed its requirement that clients waive their right to bring class-action lawsuits, adding a new twist in a battle closely watched by the securities industry and plaintiffs’ attorneys.

“Effective immediately, Schwab is modifying its account agreements to eliminate the existing class-action lawsuit waiver for disputes related to events occurring on or after May 15, 2013 and for the foreseeable future,” the San Francisco-based brokerage company said in a statement that was posted on its website on Wednesday.

Schwab still believes that arbitration is the best forum for clients to resolve disputes with the firm, but said it was backing off the litigation ban in deference to clients who are uncertain about their rights as it fights to defend its original ban.

Schwab’s attempt to curtail consumer rights has drawn broad attention in recent months and has been cited as a principal reason by lawmakers to entirely abolish the mandatory pre-dispute arbitration provisions in customer account agreements.   Section 921 of Dodd-Frank Act provided the SEC with the discretionary rulemaking authority to restrict mandatory pre-dispute arbitration.  However, the SEC has taken no action on this issue to date.



Attorneys File Securities Fraud Class Action Complaint Against UniTek Global Services UNTK

Securities attorneys have filed a class action complaint against UniTek Global Services, Inc. in connection with its recent 50%  stock drop.   According to the complaint,

On April 12, 2013, UniTek issued a press release (the “April 12 Press Release”) announcing that the Company was being forced to restate its financial results for the interim periods ended March 31, 2012, June 30, 2012 and September 29, 2012,  the fiscal year ended December 31, 2011 and the interim period ended October 1, 2011. Further, “[a]s a result of an ongoing  internal investigation being conducted by the Audit Committee of the Company’s Board of Directors … it was determined that several employees of the Company’s Pinnacle Wireless subsidiary engaged in fraudulent activities that resulted in improper revenue recognition.” (Emphasis added). The Company also stated that the filing of the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 would be late.


The April 12 Press Release also revealed that that Ronald J. Lejman (“Lejman”), Chief Financial Officer and Treasurer was terminated, effective immediately and that “[i]n connection with the internal review and based on the recommendation of the Audit Committee, the Company also announced the termination of Kevin McClelland (“McClelland”), Controller and Chief Accounting Officer, as well as the terminations of Michael Hayford (“Hayford”), President of the Pinnacle Wireless division, several other employees of Pinnacle Wireless and an employee of the UniTek finance department. None of the terminated individuals will receive severance.” (Emphasis added).

On this news, UniTek’s stock price fell from its prior trading day close of $3.01 to close at $1.52 (a decline of nearly 50%) on April 15, 2013, on heavy trading volume.

Credit Suisse Asks Maryland Federal Court to Stop FINRA Arbitration Concerning TVIX Investments

Attorneys for Credit Suisse Securities (USA) LLC (“Credit Suisse”) and VLS Securities LLC (“VLS”) have filed a lawsuit in federal court in Maryland seeking to enjoin a group of investors who allegedly “have no prior or current relationship with either Credit Suisse or VLS, from pursuing an arbitration proceeding they have filed against Plaintiffs before the Financial Industry Regulatory Authority (‘FINRA’).”  The investors purportedly sustained losses in connection with “the offering of VelocityShares Daily 2x VIX Short Term Exchange Traded Notes (“TVIX”), a financial product issued by Credit Suisse
AG”.’  However, Credit Suisse argues that the investors are not its customers or customers of VLS and cannot be compelled to arbitrate the dispute.

You can see the federal court complaint and statement of claim here.

Credit Suisse Securities (USA) LLC v. Fesenko, Case No. 13-CV-01187 (District of Maryland).

Hearing Panel Dismisses Claims Against Charles Schwab & Company, Inc. Concerning Class Action Waiver

Yesterday, a Hearing Panel dismissed two claims brought by FINRA against Charles Schwab & Company (the “Broker”), Inc. concerning the Broker’s use of new provisions in customer agreements which provide that any customer claim against the Broker must be arbitrated solely on an individual, case-by-case basis.  The provisions provide that customers “waive any right to bring a class action, or any type of representative action” against the Broker or any related third party “in court.”  This would force all customer claims to arbitration without exception.   Since FINRA rules prohibit class actions in arbitration, the provision would have the effect of barring any class actions against the Broker in any forum.

In response to the use of these new provisions, FINRA brought an enforcement action against the Broker claiming that such class action waivers violate FINRA rules which prohibit members from imposing “limits” on the ability of a party to file a a claim in court if the rules of the of the forum where the claim might otherwise be filed permit filing in court.

According to the Decision,

The first two causes of action in this disciplinary proceeding against Respondent, Charles Schwab & Company, Inc., charge that new provisions in Respondent’s customer agreements by which a customer waives any ability to assert a claim by means of a judicial class action conflict with and violate FINRA Rules 2268(d)(1) and (d)(3) and NASD Rules 3110(f)(4)(A) and (4)(C). These Rules operate to preserve judicial class actions as an alternative to arbitration, even when there is a pre-dispute arbitration agreement between a FINRA member firm and its customer. The Hearing Panel concludes that Respondent’s new language does conflict with and violate these Rules. The Hearing Panel further concludes, however, that these Rules may not be enforced. Enforcement is foreclosed by the Federal Arbitration Act, as construed by the Supreme Court in Concepcion and other decisions. Those decisions hold that adjudicators must enforce
agreements to go to arbitration to resolve disputes and must reject any public policy exception that disfavors arbitration, unless Congress itself has indicated an exception to the Act. Accordingly, the Hearing Panel dismisses the first two causes of action.

FINRA may appeal the hearing panel’s decision to the National Adjudicatory Council or NAC.

Compelling arbitration has been a hot issue over recent years with the Concepcion decision and the enactment of Section 921 of Dodd-Frank which gives the SEC authority to limit or prohibit the use of mandatory arbitration provisions.

Dept. of Enforcement v. Charles Schwab & Company, Inc., Disciplinary Proceeding No. 2011029760201 (Feb. 21, 2013).   See the decision here.

Cornerstone Reports that Securities Fraud Class Actions Fall in 2012

Cornerstone Research has issued its Year in Review discussing federal securities fraud class actions filed in 2012. According to the report, class action filings fell from 188 in 2011 to 152 in 2012.  Cornerstone noted, among other things, the following observations. First, mergers and acquisition cases are down and appear to be filed in state courts rather than before federal tribunals. Second, filings against Chinese issuers listed through reverse mergers are down. Finally, there were no credit-crisis filings in 2012.

See the Year in Review here.

Complaint Initiating New Lawsuit Against Former Digital Domain CEO John Textor Filed by Legendary Pictures Funding LLC

In addition to the securities class action that has been filed against John C. Textor former officers and director of Digital Domain Media Group (DDMG), a new complaint was filed against John C. Textor in the Southern District of Florida by Legendary Pictures Funding, LLC (LPFL).

According to the complaint, on March 19, 2012, DDMG executed a Note pursuant to which DDMG promised to pay LPFL $3,000,000 plus interest at 8% per annum.  In connection with this transaction, Textor “executed a Guaranty pursuant to which he irrevocably and unconditionally guaranteed the punctual payment in full of all of the obligations of DDMG under the Note.”

As a result of the DDMG bankruptcy, LPFL contends that Textor is personally responsible for the obligations under the Note and has failed to perform under the Guaranty.

Legendary Pictures Funding, LLC v. Textor, Case No. 12-cv012375 (Southern District of Florida).

Claim Against SEC Under Federal Tort Claims Act Sustained on Motion to Dismiss – Zelaya v. U.S.

In a recent opinion, a District Court Judge in the Southern District of Florida upheld a claim against the government brought under the Federal Tort Claims Act. The complaint alleged, among other things, that the Securities and Exchange Commission was negligent in failing to notify the Securities Investor Protection Corporation about the illicit activities of a broker/dealer and investment advisor.

The U.S. government argued that the SEC’s actions fell under the “discretionary function exception of the FTCA.” The FTCA provides a limited waiver of the Government’s sovereign immunity, allowing the United States to be held liable “in the same manner and to the same extent as a private individual under like circumstances.” 28 U.S.C. § 1346(b)(1).

Under the discretionary function exception, the U.S. States will not be held liable for “the exercise or performance or the failure to exercise or perform a discretionary function or duty on the part of a federal agency or an employee of the Government.” 28 U.S.C. § 2680(a). If an alleged wrong falls within the discretionary function exception “then the court lacks subject matter jurisdiction over the matter.”

The court stated:

When the Securities and Exchange Commission believes that a broker or dealer is in or approaching financial difficulty then it must report that broker/dealer to the Securities Investor Protection Corporation.

Accepting the Plaintiffs’ allegations as true, the Securities and Exchange Commission was obligated to report Stanford’s company to the Securities Investor Protection Corporation. This obligation to report was not discretionary because the controlling statue mandates that the report be made. The duty to report, following the finding of financial difficulty, does not involve any element of judgment or choice.

(Emphasis added).  Accordingly, the Court found that the plaintiff had stated a claim against the government under the FTCA.

Zelaya v. United States, Case No. 11-62644 (S.D. Fla).

Digital Domain Media Group Securities Class Action Lawsuit Filed (OTC: DDMGQ, previously DDMG)

A securities class action lawsuit was filed against former executives and officers of Digital Domain Media Group (previously NYSE: DDMG, now OTC: DDMGQ) in United States District Court in the Southern District of Florida.  The securities class action complaint alleges violations of federal securities laws.  See the press release here.  The DDMG complaint can be found here.