Maine Securities & Business Litigation = Maine Business Court

Yes we can . . . find a more efficient, tailored, and effective process for resolving business and consumer disputes in Maine.  Welcome to Maine's Business Court, sometimes referred to as the Business and Consumer Docket (BCD).  The Judicial Branch website describes the BCD and its purpose this way:

The Business and Consumer Court , also known as the BCD, is a statewide docket comprised of selected actions involving business and /or consumer disputes, and shall be managed by two judges from either trial court designated by the Chief Justice of the Supreme Judicial Court.
The goals of the Business and Consumer Court are to provide predictable judicial action in selected cases involving business and or consumer disputes, avoid placing unnecessary burdens on the court and the litigants in such cases, keep litigation costs reasonable, and promote an effective and efficient process for resolving such disputes.
Cases that may be considered for transfer to the Business and Consumer Court are jury and nonjury civil actions and family matters that do not involve children, in which:

1. the principal claim or claims involve matters of significance to the transactions, operation or governance of a business entity and/or the rights of a consumer arising out of transactions or other dealings with a business entity, and
2. the case requires specialized and differentiated judicial management.

Any case can be transferred at any time to the BCD, at the Court's discretion.  The BCD offers specialized case management tailored to the circumstances of the case, a quasi-electronic filing protocol (e-mail filings, but no fancy ECF / Pacer system akin to what the federal courts use), a trial date setting at the first conference with the assigned Justice (there are two), and other benefits.   The Rules can be found on the Judicial Branch website.

The BCD should be on the checklist of options in every business (including securities) and consumer case.

Brokers Pay Heavily For REIT Sales In Massachusetts

Real-Estate Investment Trusts (REITs) are back in the spotlight, at least in Massachusetts. REITs, which own and manage income-producing property or other are otherwise involved in real-estate financing, may be considered risky investments. This is due part to the fact that they may not trade on exchanges and may be illiquid for long periods of time.

As Fox Business reports Massachusetts Secretary of State William Galvin recently announced that Ameriprise Financial Inc., Lincoln National Corp., Commonwealth Financial Corp., Royal Alliance Associates and Securities America will pay a total of $975,000 in fines and $8.6 million in restitution for allegedly improperly selling non-traded REITs.

As the Boston Business Journal also reports, the violations center on a rule in Massachusetts that permits investors to put no more than an 10% of the investor's liquid net worth into REITs.
 

Secretary Galvin reported that an investigation found significant and widespread problems with the firms' compliance with their own policies, practices and procedures and adherence with Massachusetts prospectus requirements, which left some investors locked into illiquid and underperforming financial products.
 

In addition to hefty monetary fines, the settlement also requires each of the firms above to examine the REITs they deal with to ensure proper sales and investment procedures were followed.

 

Massachusetts Secretary of State Fines Merill Lynch For Securities Violations

The Boston Herald recently reported that Merrill Lynch & Co. was fined $250,000 by Massachusetts Secretary of State William Galvin following its sale of over $39,000,000 in unregistered securities to two Massachusetts cooperative banks. As USA Today notes, the sale involved auction-rate securities, which, according to Galvin, Merill Lynch brokers assured investors that any cash put into these securities could be redeemed with ease – despite what some believe were warning signs to the contrary. The auction-rate securities market allows investors to purchase long-term bonds with the assurance of the access to their cash by selling at weekly or monthly auctions where investment banks act as market-makers.

Galvin accused Merill Lynch of manipulating research reports that failed to position auction rate securities in a positive light. In addition to the $250,000 fine, Galvin also wants Merill Lynch to make investors who invested whole, as their cash is now tied up in long-term bonds.

Merrill Lynch released the following statement: "We are disappointed that Massachusetts filed this action because it ignores the only reason our advisers sold auction-rate securities: They believed they were good investments for clients willing to trade some liquidity for higher return. … Our research reflected the honest belief that (ARS) offered higher returns in exchange for less liquidity and noted that market changes had begun to occur."

Auction-rate securities have been in the headlines in recent years. Since at least 2008, the SEC has been involved in various enforcement actions and the like related to auction-rate securities.

 

 

 

 

 

 

 

 

 

Increasing Compliance Costs Hit Financial Industry In Maine

Regulations in the financial services industry have steadily increased in number and extent over the past ten years. Since 2008 alone, 120 regulatory changes have been announced by 15 federal agencies for credit unions and a whopping 921 compliance changes for Banks.  This, according to a recent article from MaineBiz which highlights just how far-reaching the effects of these regulations are. Not surprisingly, the impetus behind much of these regulations is the recent mortgage and lending crisis and resulting economic recession. This, of course, led to the Dodd-Frank Wall Street Reform and Consumer Protection Act, one of the most comprehensive financial reform acts in history.

 Perhaps most concerning is the uncertainty surrounding the costs of regulations. One source notes that the FDIC is unsure of what compliance with these financial regulations actually costs the financial services industry. Here is what we know:  compliance costs account for 12% of total operating expenses ($50 billion) across the country’s banking industry. Maine is no exception to the trend. A regional survey in Maine reveals that compliance costs on average have increased nearly 19% since 2009.

 On the brighter side, much of the oversight under the new rules issued by the Consumer Financial Protection Bureau (the regulatory agency established under Dodd-Frank) only applies to banks and non-bank financial service providers with assets over $10 billion. Those with assets under $10 billion (which includes all such institutions in Maine) are regulated by separate authorities. However, as Chris Pinkham, Maine Bankers Association President warns, such rules can set a precedent that regulators find difficult to ignore.

Time will tell the full effect and costs of regulations on the financial industry, in and outside of Maine.

 

 

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S&P Credit Rating Litigation in Maine Short-Lived?

Odds are, yes.  Maine is among the nearly twenty states that have sued Standard & Poor's Financial Services, LLC and McGraw-Hill Companies, Inc. for alleged unfair trade practices in violation of state law, but that litigation is now in federal court and subject to a motion to transfer pending before the U.S. Judicial Panel on Multidistrict Litigation, according to the National Law Journal. 

Preti Flaherty attorneys Sigmund D. Schutz and Michael S. Smith serve as Maine counsel for Standard & Poors and McGraw-Hill in coordination with Cahill Gordon in New York City.

U.S. Supreme Court Paves the Way for Securities Class Actions

On February 27, 2013, the U.S. Supreme Court issued its decision in Amgen, Inc. et al. v. Connecticut Retirement Plans and Trust Funds, U.S. Supreme Court, No. 11-1085 (2013). In Amgen, the Court addressed the issue of whether plaintiffs seeking class certification of a securities fraud claim brought under Rule 10b-5 must prove the materiality of the alleged misstatements and omissions as a predicate to class certification.

In a much-anticipated decision, the U.S. Supreme Court allowed shareholders of Amgen to sue Amgen, as a group, without first having to show that Amgen had materially and fraudulently inflated its stock price.

According to the majority, the early stages of class action litigation are intended to ensure that cases are litigated fairly and efficiently. In the Court’s eyes, to hold otherwise "would have us put the cart before the horse." Moreover, the Court believes this holding does not run afoul of Federal Rule of Civil Procedure 23 (governing class actions) because the question of materiality is one that is common to all class members.

Of course, while plaintiffs do not have to meet this hurdle at the class certification stage, plaintiffs will need to meet this requirement once the case is evaluated on the merits, either at trial or by summary judgment. With this decision, there is also the likelihood for more motions for summary judgment filed sooner than later following class certification in Rule 10b-5 cases.

Maine Supreme Court Upholds Order Requiring Insurer to Pay Restitution and Civil Penalty Stemming From Deceptive Practices by its Agent

The pertinent facts are as follows. In 2007, a Bankers Life insurance agent met with a 75 year-old woman who had recently been treated for cancer to discuss issues related to Medicare, health and prescription insurance. These meetings resulted in the elderly woman purchasing three Bankers Life annuities. To purchase these annuities, the woman liquidated three certificates of deposit, sold General Electric stock and rolled over an IRA. The sales contained several irregularities: (1) a required summary of the woman’s financial situation failed to quantify many items, including debts; (2) the suitability of the IRA annuity rollover was questionable for several reasons (not the least of which was that the annuity would not mature until a time period after the woman’s life expectancy terminated); (3) mathematical considerations used to justify the recommendations were improperly compared, and omitted in part; (4) the timing of the stock sale was questionable given the substantial capital gains tax and the negative tax liability; and (5) the woman’s access to funds was diminished and delayed.

The Maine Superintendent of Insurance (which has oversight over insurance companies and agents that sell insurance and annuity products to the public) found the Bankers Life agent failed to evaluate the suitability of his recommendations, was incompetent, untrustworthy and financially irresponsible in his annuity sales, and made misleading comparisons between the woman’s existing investments and those offered by Bankers Life.  The Superintendent ordered Bankers Life to pay restitution and a $100,000 civil penalty stemming from these deceptive practices.

Bankers Life appealed to the Superior Court. The Superior Court affirmed the decision of the Superintendent. Bankers Life appealed to the Maine Supreme Court.

In Bankers Life and Casualty Company v Superintendent of Insurance, 2013 ME 17 (January 10, 2013), the Maine Supreme Court affirmed the Superintendent’s decision, finding the Superintendent did not abuse her discretion in imposing restitution and a civil penalty against Bankers Life.

The Bankers Life decision is significant in at least two respects. First, it seems that the Maine Bureau of Insurance has taken a keen interest in pursuing actions against insurers for unsuitable sales of annuities to the elderly. In all likelihood, this will be an ongoing trend, particularly given Maine's aging populations. Second, the decision highlights the challenge in overturning agency decisions. Under the applicable standard a court will reverse administrative fact findings by a state agency only if the decision "plainly compels a contrary result." That means that focus in defending such matters should be at the administrative level.