We are pleased to present the 25th edition of the Bernstein Shur Business and Commercial Litigation Newsletter. This month, we highlight financial services industry news and developments, including continued support for contractual waivers of class-action rights, securities claims against registered investment advisors and the rights of indirect investors in funds managed by Bernard Madoff. We hope you enjoy the newsletter.

In the News:

A Financial Industry Regulatory Authority arbitration panel upheld a contractual provision mandating the waiver of class-action rights of Charles Schwab Corp. customers, a decision that could prompt other financial service providers to follow suit. Last year, Schwab modified some eight million customer account agreements, requiring clients to waive their right to pursue claims through class actions. FINRA, the self-regulatory body that oversees the securities industry, brought an enforcement action against Schwab seeking to invalidate the provisions. The three member arbitration panel hearing the action held that Schwab’s ban on class actions was consistent with recent federal authority favoring arbitration. The panel relied on the U.S. Supreme Court’s decision in AT&T Mobility v. Concepcion, 131 S. Ct. 1740 (2011), which ruled that the Federal Arbitration Act pre-empted a California law that sought to override consumer contractual provisions requiring mandated individual arbitrations and waiving class action rights. In support of that decision, the high court cited the federal policy favoring enforcement of arbitration agreements. The FINRA panel’s decision upholding Schwab’s class-action waiver provisions may lead Schwab to seek dismissal of numerous class-action cases pending in courts and could prompt other industry players to adopt a similar approach. FINRA has indicated that it will appeal the decision. Click here to read the full decision and here to learn more about the Schwab case.

A civil jury in Boston awarded $51 million in damages to crime writer Patricia Cornwell based on negligent management of her assets by her former financial advisors. Cornwell brought suit in the U.S. District Court in Boston against Anchin, Block & Anchin, LLP.  Registered investment advisors, like Anchin, maintain obligations to act in the best interests of their clients and to disclose any conflicts of interest that implicate the duties of good faith and undivided loyalty. These duties exist at common law and are incorporated into the rules imposed by self-regulatory bodies governing the conduct of such advisors.  The duties of investment advisors are much more rigorous than the duties imposed on broker-dealers of securities.  The jury found that Anchin breached those duties, and mishandled and misappropriated Cornwell’s accounts, causing her to lose millions of dollars. Later this month, U.S. District Court Judge O’Toole will address whether the conduct of Cornwell’s advisors warrants the imposition of treble damages under Massachusetts’ consumer protection statute, M.G.L. c. 93A.  This decision is significant because it shows that financial advisors facing securities claims for customer account losses cannot rely solely on the defense that such losses were caused by the recession and accompanying stock market free fall. Click here to read more about Cornwell’s case.

The Second Circuit Court of Appeals held that indirect investors in funds managed by Bernard Madoff are not entitled to seek direct recovery from the bankruptcy estate for his investment firm. Although direct customers of Madoff’s investment firm are not barred from seeking recovery from the bankruptcy estate, the Second Circuit has concluded that indirect investors who entrusted money to hedge funds and other Madoff “feeders” are barred from pursuing such claims. In support of its determination, the court stated that indirect investors could not qualify as true customers that have entrusted cash or securities to an advisor for trading purposes. The decision will negatively impact many investors, as it leaves them only with claims against their own feeder fund advisors, and a limited recovery from the Securities Investor Protection Corp., which caps recoveries at $500,000. Click here to read more about the case.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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