Stockbrokers are regulated by the Financial Industry Regulatory Authority, or “FINRA.”  FINRA rules prohibit brokers from making voluminous trades for their clients in order to generate excessive commissions, a practice known in the industry as “churning.”  Investors can enforce their rights against brokers through FINRA’s arbitration process.

An investor generally must prove two elements to recover under a churning claim:  “control” over the account by the broker; and excessive trading.  Additionally, such claims usually require an investor to establish that the broker intended to generate the excessive commissions, but when the elements of control and excessive trading are met, this intent is often presumed.

Control is often found when the client routinely follows the broker’s advice to buy and sell stocks, even if the client retained ultimate authority over the account.  The second element of a churning claim is excessive trading.  FINRA arbitration panels tend to employ one of three standards for determining excessive trading in a churning case.  The “cost equity ratio” is the percentage of return on an account’s equity needed in order to pay commissions and fees – the costs cannot exceed any reasonably-expected return.  Another factor is the level of “in and out trading.”

Despite the importance of cost equity ratio and in-and-out trading, the most widely-used indicia of excessive trading is the turnover rate – in other words, the ratio of the total purchases or sales to the average account equity during a period.  Generally, an annual turnover of six clearly meets the test for “excessive.”  More specifically, many FINRA arbitration panels subscribe to the so-called 2-4-6 Rule: a ratio of two means that excessive trading is possible; four means that it is presumed; and six is conclusive.  Other experts argue that this rule of thumb is too accommodating to unscrupulous brokers, and that the appropriate basis of comparison is with mutual funds’ lower turnover rates:  after all, mutual fund managers trade only to maximize return without any possibility of commissions.

Unfortunately, as long as brokers are paid on commission, some will take advantage of their clients.  But the good news is that investors can – and should – fight back. 

E. Powell Miller

Marc L. Newman

Christopher D. Kaye

The Miller Law Firm, P.C.

The Super Lawyers lists are created on a state-by-state basis each year, and no more than 5 percent of the attorneys in a given state are selected for this honor.  Super Lawyers is a particularly prestigious recognition, as attorneys are selected “using a rigorous, multiphase process in which peer nominations and evaluations are combined with independent research.”  Candidates for inclusion in Super Lawyers are evaluated based on 12 indicators of peer recognition and professional achievement, including verdicts, settlements and transactions, representative clients, experience, honors and awards, special licenses and certifications, position within law firm, bar and other professional activity, pro bono and community service, scholarly lectures and writings, education and employment background, and other outstanding achievements.

The Miller Law Firm would like to congratulate its attorneys who were named to the 2011-2012 list of Michigan Rising Stars:  Brian Etzel, Martha Olijnyk, Lauren Northrop, Devon Allard, Evan Chall, Casey Fry, Emily Hughes, Adele Ice-King, Christopher Kaye and Adam Schnatz.  The Rising Stars list is comprised of top attorneys who are 40 years old and younger, or who have been in practice 10 or fewer years.

To learn more about The Miller Law Firm, P.C. or any of the attorneys mentioned above, please visit our website at www.millerlawpc.com or click on the attorney name.

E. Powell Miller

Marc L. Newman

Ann L. Miller

Casey A. Fry

The Miller Law Firm, P.C.

Employees of both Citigroup and McGraw-Hill were eligible to participate in 401(k) retirement plans offered by their respective employers.   The 401(k) retirement plans included the option to invest in stock primarily of the employer.  After the stock market crashed in 2008, plan participants filed class action complaints against plan sponsors (the companies) and plan administrators, investment and/or administrative committees and the boards of directors.

In both the Citigroup and McGraw-Hill District Court opinions, the respective judges held that the defendants were entitled to a presumption that their decisions to offer company stock were prudent.  Further, Judge Stein in Citigroup held that the facts alleged by the plaintiffs were, if proven, inadequate to overcome this presumption. Judge Sullivan in Gearren likewise rejected the plaintiffs’ contention that the McGraw-Hill defendants had an affirmative duty to disclose information regarding McGraw-Hill’s financial position to plan participants.

In its October 19, 2011 opinion, the Second U.S. Circuit Court of Appeals adopted the standard established by Moench that courts should presume that administrators of employee stock ownership plans do not violate their fiduciary duties by investing in their employer’s stock.  The Second Circuit Court of Appeals affirmed the dismissal of the participants’ consolidated class action complaints, holding that plaintiffs failed to adequately allege that McGraw-Hill and Citigroup directors and officers did not breach their fiduciary duties under the ERISA by continuing to offer company stock as an investment option in its employee retirement plans.   The appellate court also held that defendants had no affirmative duty to disclose to plan participants nonpublic information regarding the expected performance of the companies’ stock, and that the complaints did not sufficiently allege that defendants, as fiduciaries, made any knowing misstatements regarding this stock.

The court determined that review of the administrators’ decisions to permit investment in employer stock should be done under an abuse of discretion standard.  Joining the Third, Fifth, Sixth and Ninth Circuits, the Second Circuit adopted the “Moench presumption”.  Specifically, the Moench presumption is a rebuttable presumption that administrators, by offering employer stock though an ESOP or EIAP, have complied with their fiduciary obligations under ERISA.  This presumption can be overcome only by establishing that the administrator knew or should have known that the employer was in a “dire situation” that was unforeseeable by the individual em

The court noted that the presumption allows for reasonable people to disagree about whether to invest or divest from a particular company’s stock.   Stock fluctuations that trend downward significantly are not enough to establish the requisite imprudence to rebut the presumption of compliance with ERISA.   Furthermore, the amount of judicial scrutiny depends on the degree of discretion that the plan allows in making investments; a failure to divest is less likely to constitute an abuse of discretion when the plan requires investment in company stock.

There are still cognizable claims available after this October 19, 2011 opinion.   Courts will look to how the plaintiffs plead their cases specifically with regard to the investments permitted by the plans and the administrators’ actions with respect to the plan specifications to determine whether the plaintiffs should prevail on their claims.

E. Powell Miller

Marc L. Newman

Courtney Ciullo

The Miller Law Firm, P.C.

]]> http://www.millerlawpc.com/mibusinesslaw/2011/12/02/second-circuit-ruling-approves-investments-in-employers-stocks-by-employee-stock-plan-administrators/feed/ 0 http://www.millerlawpc.com/mibusinesslaw/2011/07/18/miller-law-firm-wins-substantial-victory-for-first-mercury-shareholders/ http://www.millerlawpc.com/mibusinesslaw/2011/07/18/miller-law-firm-wins-substantial-victory-for-first-mercury-shareholders/#comments Mon, 18 Jul 2011 22:16:59 +0000 admin http://www.millerlawpc.com/mibusinesslaw/?p=51 The Miller Law Firm, P.C. secured a substantial victory for the shareholders of First Mercury Financial Corp. on June 30, 2011 when the Honorable George C. Steeh approved a class action settlement which secured valuable disclosures relating to the merger of First Mercury and Fairfax Financial Holdings Limited in Israni v. First Mercury Financial Corp., et al, Case No. 10-cv-14482, United States District Court, Eastern District of Michigan.

Through hard fought negotiations with highly respected and experienced defense counsel, The Miller Law Firm, P.C., together with co-counsel Wolf Haldenstein Adler Freeman & Herz, LLP, obtained substantial value for the shareholders by securing supplemental disclosures regarding the negotiations, bidding history, and the valuation methodology relating to the merger.  The supplemental disclosures ensured that the shareholders of First Mercury had all of the key and critical information before them in order to make an educated and informed decision on whether to vote for the merger.  The Miller Law Firm, P.C., together with co-counsel, further secured an amendment to the merger agreement, substantially reducing the termination fee by half a million dollars, further protecting shareholders’ rights.

E. Powell Miller

Marc L. Newman

Emily Hughes

The Miller Law Firm, P.C.

On July 2, 2010, Plaintiff Kyklos Bearing International, LLC (“KBI”), the sole supplier of Defendant General Motors LLC’s (“GM”) requirements of wheel bearings for certain vehicle programs, filed a breach of contract suit against GM in Oakland County Circuit Court.  KBI claimed that it was entitled to the award of future vehicle program contracts from GM.  Despite the pending suit, KBI continued to supply GM for approximately four months pursuant to the parties supply agreement (the “Supply Agreement”), until November 9, 2010, when KBI sent a letter to GM claiming that since GM was in breach of the Supply Agreement, KBI was under no further obligation to continue to supply GM.  GM filed an emergency motion seeking a preliminary injunction requiring KBI to continue supplying in accordance with the Supply Agreement.

GM argued that KBI’s supply was essential to GM’s manufacturing because KBI was the sole supplier of 100% of GM’s requirements of certain wheel bearings.  GM reasoned that, due to the “just in time” supply chain method and the fact that the component parts were specialized and unique, if KBI ceased delivery, GM would be unable to obtain the component parts from an alternate source in sufficient volume, and plants would be forced to shut down within a matter of days, costing millions of dollars per day, per plant.

On November 24, 2010, the circuit court denied GM’s motion for a preliminary injunction.  The court stated “it is not conclusive that [GM] … is likely to succeed on the merits [nor] … that there is information that will additionally be presented that may reach that burden….”  (emphasis added). GM then sought relief from the Michigan Court of Appeals, filing an emergency application for leave to appeal the circuit court’s decision.

GM contended that being required to “conclusively” establish that it was to succeed on the merits was an improperly heightened standard and that the court erred when it did not consider and balance all four factors of the preliminary injunction standard, which are:  (1) harm to the public interest if an injunction is issued; (2) whether harm to the applicant in the absence of a stay outweighs the harm to the opposing party if a stay is granted; (3) the strength of the applicant’s demonstration that the applicant is likely to prevail on the merits; and (4) demonstration that the applicant will suffer irreparable injury if a preliminary injunction is not granted.  GM further claimed that KBI’s strategy to cease shipping placed GM in a situation where it was forced to either capitulate and forego its right to a trial on the merits or shut-down numerous automobile assembly plants.  GM argued that unless KBI was ordered to continue to furnish parts under the Supply Agreement, KBI would essentially have a “license to extort.”

On February 10, 2011, the appellate court ruled in favor of GM, finding that the circuit court decision was clearly erroneous.  The court held that the notion that GM was not likely to prevail on the merits of its claims was contrary to the evidence before it.  Additionally, the court reasoned that the public interest favored granting the injunction; that without a preliminary injunction, GM would suffer irreparable harm; and that the irreparable harm faced by GM would greatly outweigh any harm KBI may suffer due to the injunction.  The court further concluded that the circuit court abused its discretion by denying a preliminary injunction, and ordered KBI to continue to supply the component parts in accordance with the Supply Agreement.

E. Powell Miller

Martha J. Olijnyk

Devon P.  Allard

Jennifer E. Frushour

The Miller Law Firm, P.C.

At the class certification stage, a securities fraud plaintiff must prove that questions of law or fact common to the class members predominate over questions affecting individual members.  Establishing the predominance of common questions of law or fact generally hinges on the issue of reliance.  The Supreme Court previously recognized in Basic Inc. v. Levinson, 485 U.S. 224 (1988), that requiring individualized proof of reliance from every class member would almost always result in individual issues predominating over common ones.  Thus, the Supreme Court established that securities fraud plaintiffs may invoke a rebuttable presumption of reliance through the fraud-on-the-market theory.

Although not provided for under Basic, the Fifth Circuit Court of Appeals extended the ruling in Basic to require that EPJ Fund prove loss causation at the class certification stage to invoke the rebuttable presumption of reliance.  The U.S. Supreme Court disagreed.  While it is ultimately necessary to prove loss causation to prevail in a securities fraud action, “[l]oss causation has no logical connection to the facts necessary to establish the efficient market predicate to the fraud-on-the-market theory.”  Halliburton, 131 S.Ct. at 2186.  Accordingly, the Supreme Court reversed the Fifth Circuit and held that securities fraud plaintiffs need not prove loss causation at the class certification stage.

The Supreme Court’s entire opinion in Erica P. John Fund, Inc. v. Halliburton can be read here.

E. Powell Miller

Marc L. Newman

Casey A. Fry

The Miller Law Firm, P.C.

E. Powell Miller

Marc L. Newman

Martha J. Olijnyk

The Miller Law Firm, P.C.

In its opinion, the Court distinguished the two validity challenges a party can bring under Section 2 of the Federal Arbitration Act:  (1) a challenge to the enforeceability of the entire agreement and (2) a challenge to the enforceability of just the agreement to arbitrate.  As a threshold matter, the Court noted that the Federal Arbitration Act considers arbitration agreements to be the same as contracts and, as such, arbitration agreements are enforced according to their terms.  Notably, this classification also renders arbitration agreements vulnerable to typical contract defenses, including validity defenses such as unconscionability.  The Court recognized the long-standing federal arbitration principle that the agreement to arbitrate provision is severable from the rest of the contract.  Therefore, if a challenge to just the agreement to arbitrate is made in the district court, the district court can and must decide that issue before enforcing the parties’ agreement to arbitrate because it is severable from the rest of the contract.

Ultimately, the Court found that if the entire agreement is being challenged as unconscionable or invalid, that decision belongs to the arbitrator.  If only the enforceability of the agreement to arbitrate is being challenged, the district court may decide the issue because it does not affect the remainder of the contract.  In other words, when considering an agreement to arbitrate, the district court should only intervene if the validity challenge is directed specifically to the agreement to arbitrate and not the validity of the contract as a whole.  This is an important distinction for employers and employees to keep in mind when challenging an employment agreement that contains an arbitration clause.

By January 2008, Die Tron, Inc. was experiencing financial difficulties, many of which were attributable to mismanagement of the company by the Roses’ son.    Mrs. Rose initially agreed to temporarily modify the spousal support obligation to help Die Tron, Inc. recover, but eventually moved the Circuit Court to enforce the parties’ agreement as written.  Unfortunately, Die Tron, Inc. did not remain viable and Mr. Rose’s income fell to approximately $52,000 per year.  The Circuit Court originally denied Mr. Rose’s motion to modify the spousal support agreement, but subsequently granted Mr. Rose relief from the judgment after an evidentiary hearing.  The Circuit Court reduced his spousal support obligation to $900 per month.

On appeal, the Michigan Court of Appeals reversed the Circuit Court’s decision, finding the Circuit Court had abused its discretion in modifying the non-modifiable spousal support obligation.  As the Court noted, “[i]nstead of opting for flexibility, the parties struck a bargain favoring finality, benefiting both … In striking their deal, both parties deliberately risked that future circumstances would render their contract inequitable.”  The Court’s reasoning for not modifying the judgment fell squarely on the notion that the spousal support agreement was a contract, and contracts must be enforced as written.  Thus, any individual contemplating a non-modifiable support agreement should heed the Michigan Court of Appeals’ opinion and fully consider whether it is flexibility or finality they seek, not only in the short-term but in the long-term as well.