Rosenberg vs. MetLife Decision Affirms Financial Service Firms Have an "Absolute" Privilege to U-5 Comments

The Second Circuit dealt a severe blow today to the rights of anyone employed by a firm under the regulation of the NASD. In the case, Rosenberg vs. MetLife, the three of the five judges (one judge took no part) came to a majority decision that MetLife had an "absolute" privilege to the information they inserted into a departing employees "Form U-5," which is a process mandated by the SEC. The SEC requires this process to ensure that any past infractions are transparent to a new employer or the public at large.

The problem, however, is that many firms are using the Form U-5 to defame their departing employees. Many brokers who were dismissed for the mutual fund marketing timing practices were scapegoated and defamed on their Form U-5 to appease Eliot Spitzer and prevent the bank's upper management from further investigation. In other documented cases, the rationale for U-5 defamation was to prevent a departing broker from taking along his clients.

To better protect employees working in the securities industry, the NASD should revisit a 1998 rule enacting a "qualified" privilege allowing some recourse for those who have been defamed. I wrote this to NASD Chairman and CEO urging her to immediately reconsider the rule.

Schumer Shows Up to the Sub-Prime Party; Forgets Gift

It’s classic Chuck Schumer: a Sunday press conference proposing some sort of legislative action to solve the crisis du jour. Sunday is typically a slow "news" day so Schumer’s remarks help the dailies fill their Monday news holes.

Sunday’s adaptation was a proposal to create a new federal system and agency to oversee the mortgage brokers and loan officers and to establish a "suitability standard" barring lenders from issuing loans to consumers who cannot afford them is a common sense approach.

But actions speak louder than words so it’s hard to take this announcement seriously. Indeed, last week, four-days prior to Schumer’s press conference, the Senate Banking Committee in which Schumer is the number two ranking Democrat, held hearings to investigate why so many sub-prime mortgage owners have found themselves facing defaults.

And after briefing his office about the dozens of Long Islanders facing mortgage defaults after receiving unsuitable loans and being victimized by their now disgraced broker Peter Dawson, I looked forward to these guys get a little comeuppance from our Senator. Unfortunately Schumer was nowhere to be found.

Banking regulators and executives from mortgage companies including Sandy Samuels, Executive Managing Director of Countrywide Finance Corp. and Brendan McDonagh, CEO of HSBC Finance Corp., provided sworn testimony about their roles in the sub-prime crisis. Senator Schumer quite literally had to opportunity to directly address the executives responsible for, according to Schumer’s own numbers, 42,000 voting constituents facing foreclosure in New York City, Nassau County and Suffolk County alone.

Did Senator Schumer have other pressing matters? As a matter of fact yes, Senator Schumer did have other things on his mind that day. He spent a good chunk of the day playing the role of partisan pit bull threatening to subpoena administration officials involved in the entirely legal sacking of U.S. Attorneys. When not riding the party line, he made time for lobbyists from the "Buffalo Niagara Partnership" and championed their request for $11 million in pork spending.

Up until now Senator Schumer has paid little attention to the mortgage market. In fact, prior to Sunday’s announcement, the only lending industry activism on his website is a 1999 press release co-announcing legislation with Jesse Jackson aimed a credit card fees. Not exactly a burning issue.

So, while Senator Schumer plays catch-up and chases headlines, Dawson’s victims will take their fight for suitability standards to the Nassau County court system. Knowing Washington’s propensity for empty promises, I like our chances a little better.

What we need now is leadership and real action in Washington, not a Senator interested in finding ways to make the nightly news.

NYSE Should Follow the Merrill Market-Timing Trail Wherever it Goes

Finally the market-timing bonanza and the rush to judgment by Eliot Spitzer is coming home to roost. Yesterday a decision issued by the U.S. District Court in Manhattan rejected an appeal by Merrill Lynch which sought to vacate an arbitration decision to award $14 million to three brokers now known as the "CBS Group," who were dismissed and allegedly defamed after participating in market-timing activities while in the firm’s employ. http://online.wsj.com/article/SB117504262361851160.html?mod=todays_us_money_and_investing

This was largely a technical legal victory, but its an important step towards affirming that many of the dismissed brokers involved in market timing were scapegoated by Wall Street firms eager to appease Spitzer with minimal fines, sacrificial lambs and, of course, the ability to neither admit or deny guilt.

It should also be interesting to see how the recent investigation opened up by the NYSE into the trio’s former manager at the Paramus, N.J. branch of UBS AG shakes out. The manager was recently fined $50,000 for failing to supervise three unnamed financial advisers involved in market timing.

http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20070110/REG/701100704/-1/BreakingNews04 It doesn’t take a snoop to come to the conclusion that the CBS Group was also participating in market-timing with management’s blessing at their former employer.

It is my hope that the NYSE continues its investigation as far up the ladder as is justified even if it means more heads must roll. Clearly market-timing was not a "rogue" issue but a strategy well embedded in Wall Street’s most prestigious firms.

My Legal Quest to Hold Mortgage Lenders Accountable

As an attorney with a long track record of advocacy on behalf of individual investors wronged by their brokers, I am certainly proud of every judicial victory, big or small, scored on their behalf.

However, one in particular stands out as a career-defining moment. In 2001, I filed a complaint against Merrill Lynch on behalf of a New York doctor who lost $500,000 after following firm analyst Henry Blodget's tainted stock recommendations. That complaint became the catalyst for then New York attorney-general Eliot Spitzer's investigation into conflict-of-interest abuses on Wall Street and the subsequent $1.4 billion global settlement he wrangled from the top names in investment banking.

Having trod through some of Wall Street's muck as long as I have, I thought I had seen it all with respect to so-called financial professionals taking advantage of the Little Guy. Not quite.

I've uncovered a mortgage lending scandal on Long Island that I strongly suspect is indicative of widespread fraud and dubious lending practices throughout the industry. It is my sincere hope that a related lawsuit I filed today will similarly catch the attention of appropriate prosecutors and further fuel much-needed industry reforms, this time within the mortgage lending business.

Over the last five months, my firm has been conducting its own investigation on behalf of more than a dozen Long Island and Florida working-class retirees who collectively have been bilked out of more than $100 million by Peter J. Dawson, a once high-flying "financial planner" who is currently in jail awaiting trial on grand larceny charges. It gives me great pleasure to have been instrumental in putting him behind bars.

Dawson, president of BMG Advisory Services, worked out of one of Long Island's most prestigious office buildings, which gave him a patina of legitimacy. Over the course of 15 years, he convinced dozens of unsophisticated retirees to surrender their existing variable annuity policies and mortgage their paid-off homes so that he could invest the proceeds in new annuities on their behalf. Dawson promised that these annuities would pay a higher rate of interest than their home mortgages, thereby generating additional retirement income. Dawson assured clients that his office would pay the monthly mortgage bills.

Unfortunately for those he ensnared, he didn't invest all the mortgage proceeds. Instead, he siphoned off some $100 million to support his lavish lifestyle, which reportedly included several properties and a lavish antiques collection. His victims are now in danger of losing their own homes because they have little or no income to cover their monthly mortgage payments; foreclosure may be imminent. The victims are mostly retired senior citizens, including a legally blind firefighter, an electrician suffering from Lupus, an ailing sanitation worker, and even a priest.

Although Dawson masterminded the fraudulent scheme, about a dozen other mortgage companies were active participants, including well-known outfits like Countrywide Home Loans and Washington Mutual, two of the nation's biggest home lenders; PHH Corp., a NYSE-listed company that has agreed to be acquired by an affiliate of The Blackstone Group and the financing and asset management unit of General Electric; and The First National Bank of Long Island.

No doubt these mortgage company participants will dismissively invoke Sergeant Shultz's classic "I know nothing" defense if called on the carpet. After all, there are currently no hard and fast rules or regulations requiring mortgage lenders to determine whether the loans they make are “suitable” for their borrowers. Granted, it's quite possible that none of the lenders knew that Dawson was absconding with the monies they advanced, but they had plenty of reasons to be suspect of him.

Among the warning signs:

• Prior to starting his own firm, Dawson worked at various brokerage firms. Dawson's U4 form, an easily available document that lists all previous charges made against a broker, contains four customer complaints, including an allegation that he induced a customer to take out a $250,000 mortgage to invest in an annuity whose interest rate was lower than the mortgage rates. "Unsuitable investments followed," according to the complaint.


• The mortgage closings for Dawson's clients were typically held at his office, or in at least one highly irregular instance, a hotel room. None of Dawson's clients were represented by an attorney. Representing the mortgage lenders at most of these closings was an attorney named Ida D'Angelo or one of her associates. Ms. D'Angelo last year was indicted for mortgage fraud by the Deputy Attorney General in charge of the New York's Organized Crime Task Force for mortgage fraud. The indictment's complaint against D'Angelo does not pertain to her activities involving Dawson's clients.


• In most instances, the mortgage monies were given directly to Dawson , not his clients, which also should have raised warning signs.


• By any standard, none of Dawson's clients should have been granted mortgages. They had little or no income and there was no rational reason for them to assume mortgage debt given their late stage in life, and in several instances, their poor health.

Earlier today, I filed a lawsuit asking the New York State Supreme Court to issue a declaratory judgment ordering all the defendant banks and mortgage companies to void and cancel the mortgage loans they made to Dawson's clients and to immediately terminate and freeze all foreclosure proceedings against them.

Sadly, it shouldn't take a court order to force the defendant lending institutions to do what is so abundantly the proverbial "right thing". But morals and fairness have never been the hallmarks of the U.S. banking industry, especially when there is money at stake. The Dawson case underscores why Congress should impose suitability rules on all the nation's home lenders.

Whether Dawson's victims can ultimately keep their homes is in the hands of a Long Island judge. If a declaratory judgment is granted, it will establish a valuable legal precedent and put irresponsible mortgage lenders on notice that they will be held legally accountable for their wrongdoing. More important, it could serve as the catalyst for much-needed industry reforms that will level the playing field for unsophisticated borrowers who are otherwise at the mercy of ruthless financial planners who line their own pockets at the expense of those less financially savvy.

As we saw with my client's case against Merrill Lynch in 2001, it only takes a spark to light a fire.