Dynamic Securities Analytics, Inc.

Outside Counsel Usage Rates in Customer/Member Disputes

Broker/dealers rely on outside counsel to handle a great deal of customer disputes. However, outside counsel usage rates vary widely from firm to firm. The list below reflects 1Q12 arbitration award announcements for Customer v. Member Firm cases for firms that had at least four awards during the period. A few cases listed both inside and outside representation and are not reflected in the percentages below.

 

Customer v. Member Firm
Rank	Broker/Dealer	% Case Awards Listing Outside Counsel Only
1	RBC	100%
1	UBS	100%
2	Bank of America / Merrill Lynch	88%
3	Charles Schwab	82%
4	Ameriprise Financial	75%
5	Morgan Keegan	68%
6	Wells Fargo / Wachovia	59%
7	Citigroup / Morgan Stanley	48%
8	LPL Financial	25%
9	TD Ameritrade	20%
10	E*Trade	0%

 

Claimed Compensatory Damages for cases handled exclusively by Outside Counsel were on average four times larger than claimed damages for cases handled by Inside Counsel.

KYL Tops Customer/Member Firm Ranking

Keesal Young & Logan tops the 1Q12 Securities Arbitration Law Firm League Table: Customer v. Member Firm. The rankings reflect the number of cases for law firms representing broker/dealers with an award issued in 1Q12. Bressler Amery & Ross came in second with 11 matters and Greenberg Traurig landed third with 10 cases. 

 

 

Rubin Fortunato & Harbison Lead Member/Associated Person List

Rubin Fortunato & Harbison edged out the competition to top the Member Firm v. Associated Person league table for 1Q12. Kane & Fischer and Schuyler Roche & Crisham tied for the second spot. 

 

 

The rankings reflect the number of cases for law firms representing broker/dealers with an award issued in 1Q12.  Rankings do not include cases resolved through mediation, settlement or withdrawn.

Interactive Map of Legal Interest Rates

Legal/statutory interest rates vary widely from state to state. Legal rates range from a high of 16% in New York to a current low of 4.75% in Florida. Most states have fixed rates but several states tie the legal rate to treasuries. Findlaw provides state by state legal & judgement rates, footnotes and caveats to supplement the map. As noted, rates can change so be sure to verify the current rate.

Legal interest rates play an important role in the calculation of rescissory damage. For example, a $100,000 investment in XYZ made two years ago in Florida could be awarded rescissory damages of $109,500 while the same XYZ investment could result in rescissory damages of $132,000 in New York.

 

Copyright DSA 2012

 

DSA President Files Application for U.S. Provisional Patent

Tampa, Fla. (September 19, 2011) - Tampa-based company Dynamic Securities Analytics, Inc. ("DSA") has discovered a new method to detect property tax revenue that has been missed due to fraud, error, or oversight. Developed by company President Alison Jimenez, the algorithm and data-mining system identifies non-compliant homestead exemptions.    The financial benefits of property tax homestead exemptions have long enticed some citizens to misuse them. Many property appraisers and assessors have attempted to uncover homestead exemption fraud through tips, legwork, and mass mailings. However, these methods are neither cost nor time efficient. DSA has simplified and automated the detection process through the application of an algorithm that determines which properties are most likely to be subject to fraud. The system can also focus on higher dollar exemptions, which allows for a greater return of tax dollars through a small amount of time invested.  The results are expected to empower local governments including cities and counties to collect more of the property taxes owed by identifying invalid exemptions.   "Local governments are increasingly pinched for resources and often face the hard choice of cutting services or raising taxes. However, there is a third option - increase the collection of taxes by searching out fraud." said Alison Jimenez. "Having a quick and efficient methodology that aids property appraisers and assessors to fairly apply property tax code will boost municipal revenue by identifying invalid homestead exemptions."   Jimenez filed for United States Patent protections (US Serial No: 61/533324) on September 12, 2011.   About DSA & Alison Jimenez DSA specializes in forensic economics and was founded in 2003 by Alison Jimenez. Ms. Jimenez holds a bachelor's and a master's degree in economics.  She is also a Certified Anti-Money Laundering Specialist and a member of the Association of Certified Fraud Examiners.

 

The Cost of Not Conducting an Independent AML Audit

If you are an AMLCO or CCO who must justify the cost of your firm’s annual independent AML audit, the PDF  Download FINRA 2010 AML Audit fines should help you.  The cost of not conducting an independent anti-money laundering audit is steep. The PDF contains excerpts compiled from 2010  FINRA Monthly Disciplinary Reports.  Fines were imposed for either not conducting AML audits or conducting audits that were not independent. Here are some quick quotes:

"The findings stated that the firm failed to conduct independent testing for its AML program for one year"

"failed to perform the required independent AML testing for two years and performed an inadequate test another year"

"did not use an independent third party to conduct the firm's AML tests"

Download FINRA 2010 AML Audit fines

 

 

Putting Madoff's Theft into Context

One of the most useful things an economist can do in litigation consulting is to put abstract numbers into context.  Bernie Madoff's theft of $65 billion dollars is almost mind-boggling.  To illustrate the significance of his crime, I compared his theft with other financial crimes most people are familiar with- burglary, theft, pick pocketing and purse snatching.  The table below contains statistics from the US Department of Justice's 2006 Crime Victimization Report including the total number of victimizations, average loss and gross loss by crime.

 

There were 18 million victims of these five crimes with average losses in the range of a few hundred dollars to just over a thousand dollars. By comparison, Madoff's victims number somewhere between the 8,800 who have filed claims with SIPC and estimates in the "tens of thousands".  The average loss for the 8,800 SIPC filers is $7.3 million dollars.  If we assume that there are many more investors yet to be named (say 30,000) then the average loss per investor drops to $2.1 million.

Madoff's theft of $65 billion was uncovered in 2008 although it was a multi-year or multi-decade endeavor so this is not an "apples to apples" comparison.  But what is clear is that the dollar value of this theft is five and half times greater than all stick-ups, burglaries, purse snatchers, and other thefts in 2006. 

tags: Madoff, ponzi scheme, SIPC claims
 

Kiplinger's New Calculator is a (bad) Sign of the Times

Kiplinger.com recently added a new calculator tool to its website.  In addition to traditional personal finance calculators such as “How Much Do I Need to Save to Retire” and “What Will it Take to Pay Off My Credit Card Balance”, Kiplinger now has a “Recoup your Savings” calculator.  The calculator will determine either the amount of time, the annualized rate of return or the amount of annual contributions needed to return to the account's starting value. Simply enter the value of the account before the crash and the current value and then complete two of the three following variables: annual contributions, annual rate of return or time to recoup.

For example, if the account’s starting value was $100,000 and is currently worth $70,000 and the goal is to return to $100,000 in one year without any new contributions, then the calculator computes that the account will need to earn 42.9% annually.  If the time period is stretched two years to be back to $100,000 then the annualized rate of return needed is 19.5%. 

This calculator is a handy tool for simple scenarios (it does not allow for withdrawals).  It also demonstrates two principles that people often overlook in calculating returns for brokerage accounts:

 

• First, the account dropped from $100,000 to $70,000, a 30% decline (let’s assume over one year).  However, to the recoup the losses in one year the remaining diminished account value must to earn 42.5% - quite a bit higher than the drop.   
• Secondly, the required annualized ROR drops to 19.5% (not 42.5/2=21.25%) when the time period is extended to two years. This is because of compounding.  When people attempt to “annualize” Rates of Return by simply dividing the total ROR by the number of years, the resulting ending value is too high.  In this case, the $70,000 would have grown to $102,910 in two years at 21.25% instead of $100,000 at 19.5%.   

 

tags: rate of return, compounding, recouping loss, kiplinger, securities arbitration, securities litigation

The Collision of Collapses

The media talks of the housing market collapse, the tightening credit market and the stock market collapse.  At DSA, we’ve found investors that simultaneously got caught by falling home & securities prices and a tightening credit market. Here are two examples:

 

1)      During the days of easy credit, a man took out a line of credit on his paid-off house to invest in the stock market.  His investment account’s value has plummeted and his line of credit has been cut by the bank. He cannot repay the line of credit and may lose his home.

 

2)      In 2006, a couple used a margin loan to pay for home improvements in order to sell their house for a higher price.  They are unable to sell the house and repaid the margin calls by selling securities for a loss.

tags: housing market collapse, tightening credit market, stock market collapse, margin loan

Complaints filed with Florida Securities Regulator Spikes

The number of complaints filed with the Florida Division of Securities has quadrupled over 2007 levels according to Securities chief Bill Reilly.  The Division has added four employees to deal with the increased levels of complaints.  

Are Nebraskans Really the Most Suspicious People in the Nation?

If you gauge suspicious activity by the Financial Crimes Enforcement Network's (FinCEN) “By the Numbers” report on the Securities & Futures Industries, then yes.  By FinCEN’s tally, Nebraska accounted for 7.31% of all SAR-SF filings from January 1, 2003 through June 30, 2008. Three states had higher counts (New York, Massachusetts & California) but Nebraska is the clear winner of SAR-SF filings on a per capita basis Download SAR-SF per capita .

Comparison with other States

• Nebraska filed 82% more SAR-SFs per capita compared to its next closest competitor, Massachusetts
• Nebraska filed 3.7 times as many SAR-SFs per capita as did New York   
• Nebraska recorded 185 SAR-SFs for every 100,000 residents whiled Florida filed just 6.4 per 100,000 in residents

How can this be so?

According to a FinCEN spokesman, Steve Hudak, the “By the Numbers” filings are recorded by the location of the branch where the suspicious activity occurred.  Hudak continued that if the branch information is left blank, the reporting institution’s headquarter location is used instead.  Reporting by institution headquarter location biases the state results especially in the cases of an on-line brokers, a mutual fund companies or a clearing firms.

In the case of Nebraska, Omaha is home to Legent, a top clearing firm and to TD Ameritrade, one of the nation’s largest on-line brokerages. The headquarters of a large clearing firm and large on-line broker/dealer in a low population state result in Nebraska documenting the highest per capita SAR-SF filing rate.

The inverse also holds true.

Florida is not home to a major mutual fund company, on-line brokerage or clearing firm.  Florida ranks 11^th in the nation in the number of SAR-SFs filed and 15^th on a per capita basis. Floridians are no angels as witnessed by the state’s #1 spot in mortgage fraud yet the Sunshine state trails in securities related SAR filings. This is because a large share of the suspicious activity undertaken by Floridians is being recorded in another state’s column.

Some securities transactions involve as many as three locations:

1) the location of the suspicious person initiating the activity (let's say Illinois)

2) the branch location of his broker/dealer (ex. an online brokerage based out of Ft. Lauderdale, Florida) 

3) the location of the clearing firm or home office (for instance, Nebraska).  

Why is the branch location the state chosen for the “By the Numbers” report? Why not the clearing firm/home office location or the location of the suspicious person? All three locations are important and FinCEN should produce the “By the Numbers” report reflecting all three. 

Why is this important?

The current methodology is not useful or even worse, provides misleading information.  The chief securities regulator for Florida could not use FinCEN’s report to justify a request for more examiners and a state legislator in Nebraska might think the state was awash with securities scammers. When FinCEN prepares and disseminates the report, it should be useful and reflect reality.  The public, regulators, government officials, law enforcement, and compliance professionals rely on this data to make important decisions and they should have confidence in its accuracy.

tags: Suspicious Activity Report, SAR, FinCEN, anti-money laundering, Financial Crimes Enforcement Network