Monthly Archives: June 2013

State Developments May Have Big Impact on FINRA Arbitration Proceedings

Recently, the Florida Supreme Court issued a decision ruling that the state’s statute of limitations (“SOLs”), or laws that limit the time within which a party can bring a lawsuit against another party, applies not only to court proceedings, but also to securities arbitration cases between investors and their brokers.  As such, this ruling allows securities arbitrators in Florida to cut the time investors have to file a complaint with the Financial Industry Regulatory Authority’s (“FINRAs”) arbitration division.  This ruling may have a significant impact on those seeking to file such a complaint due to the large disparity between Florida and FINRA SOLs.  Whereas FINRA typically allows investors to bring a claim if they are filed within six (6) years from the event giving rise to the claim, Florida law imposes a four (4) year deadline to file a negligence case, and a two (2) year deadline to bring a claim under Florida’s securities fraud law. 

Florida is not the only state implementing such rules, however.  In Washington State, previous state court rulings have held that Washington’s SOLs should not be applied to arbitration proceedings that would prohibit claims otherwise valid if brought under FINRA’s SOL rules.  In response to these cases, the state legislature recently amended its Uniform Arbitration Act, allowing Washington’s SOLs to apply to such arbitration proceedings.  The rule, which will become effective on July 28, 2013, states “a claim sought to be arbitrated is subject to the same limitations of time for the commencement of actions as if the claim had been asserted in court.”  Washington did provide additional protection for investors, though, by allowing pre-dispute arbitration agreements to specify what the SOL governing the agreement will be, so long as such agreements are “reasonable.” 

It remains to be seen just how large an impact these developments may have, or how many other states may follow suit.  However, broker-dealers and investors should be aware of the regulations in their respective states, and be sure that any contracts that include a pre-dispute arbitration provision specify what rules are to govern.

For further information on this, or other related topics, please contact us at info@jackolg.com or (619) 298-2880.

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Recent Events Portray Importance of Conducting Proper Due Diligence Prior to Investing in Securities

Recently, the Securities and Exchange Commission (“SEC”) charged a penny stock promoter, David F. Bahr of Rancho Santa Fe, California, with fraudulently arranging the purchase of over $2.5million worth of shares in a penny stock company in an attempt to generate the false appearance of market interest and induce other investors to purchase stock.  In doing so, Mr. Bahr allegedly violated Section 17(a)(1) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  According to the claim, Mr. Bahr conspired with a purported business man with access to a network of “corrupt brokers” to artificially increase the trading price and volume of the company. In a twist worthy of Hollywood however, this businessman was actually an undercover FBI agent, who was gathering evidence against Mr. Bahr, and prevented the execution of the fraudulent plan.

The case against Mr. Bahr came on the heels of letters issued last week by the SEC and the Financial Industry Regulatory Authority (“FINRA”), warning investors about a sharp increase in e-mail linked “pump-and-dump” schemes.  In such schemes, sham promoters profit by selling their shares of a stock after that stock price has been “pumped” up by a buying frenzy which is artificially created through a mass e-mail push.  Once the fraudulent parties “dump” their shares, they stop hyping the stock, and those investors who were lured into buying are left with worthless, or near worthless, stock.

These are simply two recent examples of how one may be duped into purchasing equity ownership in companies under false pretenses.  It is vital that proper due diligence is conducted prior to purchasing any ownership interests.  Investment strategies and policies should be developed to filter these types of equities prior to investing.

For further information on this, or other related topics, please contact us at info@jackolg.com or (619) 298-2880. 

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Supreme Court Ruling May Have Big Impact on How Investors View Biotech Market

This week, the US Supreme Court (the “Court”) delivered their opinion in the matter of Association for Molecular Pathology v. Myriad Genetics, 12-398.  Going against years of precedent set by lower courts and the United States Patent and Trademark Office, the Court unanimously held that naturally occurring DNA sequences are “products of nature” and therefore cannot be patented.  This ruling marks a potentially major transition in patent law, and may greatly limit the scope of patentable subject matter in the biotech industry.

Without giving a detailed biology lecture, this case asked the question of whether or not isolating human gene sequences, or “isolated DNA”, is a patent-eligible discovery.  Genes are encoded strands of nucleotides in different sequences that are responsible for inherited traits.  Prior to this ruling, companies who had identified, or isolated, specific sequences were able to patent this knowledge exclusively.  Proponents of such patents argue that they incentivize investment in biotechnology and promote innovation in genetic research. Opponents argue that these patents stifle innovation by preventing others from conducting research on these gene sequences, thus limiting the ability for genetic testing, and should not be patentable because such genetic information is intrinsic to all humans.

It’s too early to tell how this ruling will affect investments made in the biotech industry.  The impact will depend greatly upon the breadth this opinion is given in subsequent cases since the Court failed to address exactly “how much” of a change to naturally occurring substances is required to transform them into patentable inventions.  The Court did state in its opinion that those patents held by Myriad Genetics regarding complementary DNA, or cDNA, required enough human intervention so as to be eligible for legal protection.  cDNA, in its most basic definition, is essentially a synthesized copy of actual DNA, which is generally a more stable form to use in experimentation.   Thus, the Court clearly believes there is a line to be drawn between “naturally occurring” and “patentable” inventions, however where that line is exactly remains unclear.

If the opinion is interpreted narrowly, so that it applies only to DNA sequences, or sections of those sequences, then its economic impact may be slight.  However, if interpreted broadly, it could invalidate patents held by several companies, causing the value of these companies to decrease dramatically as their value is often directly tied to the number, and types, of patents they hold.  As such, advisers should stay abreast of these changes, and monitor client assets invested in this sector of industry closely.

For further information on this, or other related topics, please contact us at info@jackolg.com or (619) 298-2880.

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Recent SEC Case Exemplifies Importance of Policies & Procedures Designed to Protect Clients and Monitor Third-Party Vendors

Recently, the Securities and Exchange Commission (SEC) brought charges against Institutional Shareholder Services Inc. (ISS), a company that advises large investors on corporate proxy issues, claiming that ISS failed to safeguard its clients’ confidential votes.  Specifically, the SEC claimed that an employee at ISS provided a proxy solicitor with material, non-public information revealing how more than 100 ISS clients intended to vote their proxy ballots, and thus violated Section 204A of the Investment Advisers Act of 1940.  In exchange for this information, the employee received more than $30,000 worth of benefits including meals, tickets to concerts and sporting events, and an airline ticket.  The SEC said that this breach was made possible because ISS lacked sufficient controls over employees’ access to confidential client vote information.  While ISS neither admitted nor denied the charges, it agreed to a settlement with the SEC whereby ISS is required to pay $300,000 and retain an independent compliance consultant.

This case clearly exemplifies the importance of tailoring a firm’s own policies and procedures to adhere to the mandate promulgated by Section 204A, which requires investment advisers to “establish, maintain, and enforce written policies and procedures reasonably designed…to prevent the misuse…of material, nonpublic information by such investment adviser…”. 

However, what is equally as important, but often overlooked, is the importance of developing policies and procedures for effectively monitoring third-party vendors.  Part of the fiduciary duty that investment advisers owe their clients is to conduct due diligence on those third-party vendors employed by the adviser, to ensure that their policies and procedures are adequate.  It will be interesting whether this case will prompt SEC investigators to now scrutinize the due diligence efforts of the investment advisory firms that employed ISS’s services.  In any case, this is a good reminder for firms to ensure they have tested not only their own policies and procedures for compliance with state and federal regulations, but also those of their third-party vendors as well.

For further information on this, or other related topics, please contact us at info@jackolg.com or (619)298-2880.

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