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Samsung Heirs Could Pay a Massive US$6 Billion Inheritance Tax

China Topix article by Ren Benavidez 

Heirs of Samsung Electronics Group’s founder face a stupendous US$6 billion inheritance tax bill.

Samsung Group chairman Lee Kun Hee, 72, has been in a hospital for three months following a heart attack. His frail condition has led to speculations about the future of the company, said Reuters.

Lee is a legendary figure in South Korea as the man who turned Samsung Electronics into a powerful conglomerate. He is also the country’s richest man with an estimated net worth of US$11.4 billion.

Under Korean inheritance law, an heir will have to pay 50 percent in tax when inheriting such wealth, indicating an inheritance tax bill of some US$6 billion.

Tax attorney Kim Hyeon Jin said it may be possible to avoid this massive tax by placing the money in a foundation, but that will cause the Lee family to lose control over some of their assets.

Reports claim that in order to pay for the inheritance bill, the Lees are planning to open two additional Samsung businesses: Cheil Industries Inc. and Samsung SDS Co.

Cheil Industries, more popularly known as Samsung Everland, will operate golf courses and zoos while Samsung SDS is a provider of technology services.

The two offerings will not only raise the money to cover the inheritance bill and comply with government limits on conglomerates, but will also give the public a view of some parts of the Samsung empire that are not well known.

Lee Jae Yong, 46, son of the elder Lee, is the groups’s presumed heir apparent.

He graduated from Seoul National University and has proven himself by forging partnerships with Apple and Google.

Doubts persist if he can command the same respect as his father.

Source:  chinatopix.com

Posted by:  Steven Maimes, The Trust Advisor

Permalink:  http://thetrustadvisor.com/news/samsung-heir

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Money Fund Rule Changes Offer New Reality to U.S. Retail Investors

Reuters news by Tim McLaughlin and Ross Kerber

money hundredsNew rules announced on Wednesday will likely drive safety-oriented retail investors away from some money market funds because they highlight risks and make it harder to pull cash out when market turmoil strikes.

The U.S. Securities and Exchange Commission’s reform will force institutional “prime” money market funds to float their share price, a major change from the current convention that allows them to maintain a stable $1 per share net asset value. The new rules also would allow money funds to impose fees and restrictions on withdrawals during times of extreme market stress.

“Why would anyone stay in these money funds once they’re floating, rather than just go to a government or treasury fund that’s not floating at all?” said Diahann Lassus, president of Lassus Wherley & Associates, a New Jersey financial adviser.

Institutional prime money funds attract mostly professional investors and are considered more risky because of their exposure to short-term corporate debt. Investment advisers say money could flow away from these funds and into funds composed of safer government securities.

Bank-insured sweep accounts will be a clear alternative for the safety-first crowd, while short-duration bond funds appeal to investors hunting for higher yields, financial advisers said.

Money funds already have lost some luster during an extended period of near-zero interest rates. Investors typically receive yields of 0.01 percent on their money, a losing proposition if you factor in inflation.

Money fund providers have waived some $24 billion in fees over the past five years to give customers that yield.

Marie Chandoha, President and CEO of Charles Schwab Investment Management, a top money fund provider that oversees $158.2 billion in those investments, downplayed the new SEC rule imposing barriers or penalties on withdrawals.

“It’s an extreme scenario where this would even be considered,” Chandoha said.

Mike Vogelzang, who is president of Boston Advisors LLC, an investment management company with about $2.8 billion in assets under management, said some of his clients might push back against the rules. And if they do, he will suggest they use a bank-insured account for cash, he said.

“Most of this is going to be about education and having them understand that a dollar is not a dollar any more in these money market funds,” Vogelzang said.

Annapolis, Maryland-based financial adviser Martin Hopkins, said the new rules will help investors understand they can lose money.

“Most clients see these as just like cash, and they are not,” Hopkins said in an email.

Short duration bond fund assets, among the vehicles advisers think will benefit from a possible exit from MMFs, have already surged in recent years because of relatively high yields.

At the end of June, short duration bond fund assets totaled $319.4 billion, up 172 percent from $117.6 billion at the end of March 2009, at about the same time the stock market hit rock bottom.

Source:  finance.yahoo.com

Posted by:  Steven Maimes, The Trust Advisor

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Trusts: Out With the Old, In With the New

Wills, Trusts & Estates Prof Blog post by Gerry W. Beyer

truAs families reunite, it is a good time to review any trusts created during a family member’s lifetime or at death.  Because families can often have a variety of trusts, created at different stages during different stages of their lives, it is common that they have not updated them in a while.

Accordingly, if estate planners do not stay on top of these changes, problems are bound to arise.  Many trusts are irrevocable, meaning that the grantor cannot modify their terms.  However, depending upon the trust’s provisions, the trustee’s powers and the state’s laws, there may be strategies to administer them more flexibly.

Some common problems that occur when trusts are not updated are when distribution ages occur earlier than preferred and assets may appreciate more dramatically than anticipated.  In situations like this, one option is not to put any additional money into the trusts and instead create new trusts with extended distribution terms for any future transfers.  Another choice may be to rely on the terms of the trust and state law to enable the trustees to distribute the trust property to different trusts for the benefit of the beneficiaries with a stretched out distribution schedule.

Some of the issues that arise with old trusts can be evaded by making new trusts as flexible as possible.  “Trusts are live, dynamic documents and must be managed and reviewed as laws and family circumstances change.”

See Judith Saxe, Old Trusts, New Problems, Private Wealth, July 23, 2014.

Source:  lawprofessors.typepad.com

Posted by:  Steven Maimes, The Trust Advisor

Permalink: http://thetrustadvisor.com/headlines/out-with-the-old

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UBS Urges Families to Break the Silence On Inheritance

ubs aaInheritance is not being discussed at the dinner table. But it should be, according to UBS Wealth Management Americas’ quarterly UBS Investor Watch report (see links at end).

The report found that nearly half (46%) of benefactors have not discussed their inheritance plans with their children. And only 34% have revealed their wealth. More discussions lead to better and happier wealth transfers — and, as the report points out, an estimated $40 trillion of personal wealth expected to change hands by 2050 means there is a lot to talk about.

Survey findings

  • The traditional view of inheritance is changing—it’s more than a will.
  • Parents and children aren’t talking to each other about it—but they’re happier if they do.
  • Reluctance to communicate is driven by emotional barriers on both sides.
  • Increasing longevity makes inheritance only part of wealth transfer planning.
  • Boomers and Millennials have different perspectives on wealth transfer.

For many, the idea of inheritance means discussions in a lawyer’s office about a family member who has passed on, and a dramatic reveal of the contents of a will. The latest issue of UBS Investor Watch—our quarterly survey—examines the changing dynamics surrounding inheritance; in particular, what families are saying, what they’re not—and why.


The traditional view of inheritance is changing—it’s more than a will. Inheritance planning is no longer about just having a will or waiting until the end. It’s about parents actively engaging children earlier on. Satisfaction with the inheritance process goes up significantly when children know the details ahead of time—with 90% being highly satisfied.

Parents and children aren’t talking to each other about it—but they’re happier if they do. Active inheritance planning increases the need for dialogue. But neither party feels comfortable having this conversation. In fact, while 83% of parents have a current will, only 50% have discussed inheritance plans with their children. And only 34% have revealed their wealth.

Reluctance to communicate is driven by emotional barriers on both sides. Parents don’t think inheritance is a pressing issue and are often in denial about their mortality. They also don’t want their children to feel “entitled.” Conversely, children don’t want to appear greedy or break the family standard of not talking about money. But both sides agree; it’s up to the parents to start the conversation.

Increasing longevity means inheritance is just part of wealth transfer planning.

Inheritance planning includes elements such as “giving while living,” multigenerational giving, and tax and estate planning. 60% of parents would prefer to begin passing on their wealth to their children while living. But they must take into account the impact of realities such as long-term care and increasing healthcare costs.

Boomers and Millennials have different perspectives on wealth transfer. As Boomers live longer, they prefer to transfer part of their wealth while living—and they want to do so more than parents of any other generation—­to enable and share cherished experiences with their children and grandchildren.

Read the e-brochure

Read the report (PDF)

Source:   ubs.com

Posted by:  Steven Maimes, The Trust Advisor

Permalink:  http://thetrustadvisor.com/headlines/ubs-on-inheritance

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Why Philip Seymour Hoffman Didn’t Leave His Fortune to His Children

Yahoo! Celebrity article by Suzy Byrne

sePhilip Seymour Hoffman did everything in his power to make sure his children were “normal.”

When the Capote actor died of a heroin overdose in February, he left the bulk of his estate to his partner, Mimi O’Donnell, and added the unusual request that their offspring be raised outside of Los Angeles. According to his accountant, David Friedman, these decisions were made to keep his children from becoming trust fund kids.

In court papers filed July 18 in Manhattan Surrogate’s Court and obtained by the New York Post, attorney James Cahill Jr. — who was appointed by the court to protect the interests of Hoffman’s children Cooper, 10, Tallulah, 7, and Willa, 5 in his estate proceeding — interviewed the actor’s accountant as part of the legal process. Friedman “recalled conversations with [Hoffman] in the year before his demise where the topic of a trust was raised for the kids and summarily rejected by him,” Cahill wrote, according to the newspaper. He “did not want his children to be considered ‘trust fund’ kids.”

Friedman said he wanted his estate — which was an estimated $35 million, according to Forbes magazine — to go to O’Donnell because he knew she would “take care of the children.”

While he was living apart from O’Donnell at his time of death — residing in an apartment a few blocks away from their family home, reportedly due to his drug problem — “Friedman also advised that he observed Hoffman treating his partner/girlfriend … in the same manner as if she were a spouse,” Cahill reported. And Hoffman told Friedman that the reason they never married was simply that he “did not believe in marriage.” However, “The size and nature of the jointly held assets support the position that [Hoffman] regarded [O’Donnell] as the natural object of his bounty,” Cahill wrote.

As we reported in February when the will was submitted, Hoffman asked that Cooper (his only child at the time the document was written) be “raised and reside in” Manhattan, Chicago, or San Francisco. “The purpose of this request is so that my son will be exposed to the culture, arts and architecture that such cities offer.”

Hoffman also set up a trust for Cooper, but stipulated that it only be used for “education, support, health, and maintenance.” O’Donnell is the trustee. According to the document, Cooper will get half of the trust when he’s 25, and the rest when he’s 30.

The actor’s latest film, A Most Wanted Man, opened on Friday.

Source:  celebrity.yahoo.com 

Posted by:  Steven Maimes, The Trust Advisor

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Understanding the Philosophy Behind Your Investment Portfolio

NYT article by Paul Sullivan

Investment-ManagementPicking a financial adviser who understands what you want has never been easy. Broker or independent adviser? Lone wolf or team player? Holistic planner, numbers-crunching investor or backslapping golfer?

While always tough, the decision must now be more self-reflective: Do you understand what investment model your adviser is using and know if he or she has the skill to make good on what that approach promises?

In a new report, the consulting firm Casey Quirk evaluates four new investment models being pursued by financial advisers. While the report is intended for investment management companies, it contains valuable insight for investors who are trying to understand how their money is being managed and how their advisers are being paid to manage it.

All four models seek to distinguish themselves from the old model — in which an adviser or wealth management firm essentially relied on a select family of mutual funds for all of a client’s investments, whether stocks or bonds.

While this model seems simple, it is not always in the best interest of the client. And it’s unlikely that all of a company’s investment strategies are going to be top performers. Although 34 percent of advisers use the strategy, it’s eroding for several reasons: First, advisers are looking less at a client’s risk tolerance and an investment’s benchmarks and more at what clients want to get out of life and how much they’re going to need to pursue their interests. Second, more complex products are being created in hopes of delivering the desired outcome in both up and down markets. And third, since many advisers have a fiduciary responsibility to their clients, they have to look for the best-performing investments, not stick with one fund company for everything.

On the surface, the four new approaches might have advantages over the cozy relationship of yore with one fund company. But they all also have pitfalls that an investor needs to be aware of as well.

Here’s a look at each to prepare for your next chat with your adviser.


These advisers try to take on the role of big institutional money managers for their clients. But instead of concentrating on just one type of stock or industry, they aim to make selections across a broad array of investments.

Their pitch to clients is that they, and not a distant fund manager, are ultimately in charge of how money gets invested. They can customize a portfolio for a specific client and manage it to minimize taxes.

It’s a lot of work, though, since those advisers are still going to be asked to do financial planning, offer more general advice — on college savings, for example — and keep bringing in new clients. For this reason, the approach probably works best in teams. Jeffrey A. Levi, a partner at Casey Quirk and one of the report’s authors, says he would be skeptical of a solo adviser who promises to act as a portfolio manager for all clients.

The obvious downside here is that the adviser — who is making more money by managing everything alone — may not be qualified to select investments. According to a separate study by Cerulli Associates, a Boston-based research firm focused on financial services, only 4 percent of financial advisers in 2013 held the chartered financial analyst designation, perhaps the most rigorous investment designation. Some 17 percent were certified financial planners and 11 percent were chartered financial consultants.

Many of the larger brokerage firms have programs that aim to accredit advisers who want to manage clients’ money directly. Sometimes called “reps as portfolio managers,” they may not be true portfolio managers. Instead, they’re executing the firm’s strategies. For these advisers, though, being accepted into the program means they will probably also be able to keep a higher percentage of the fee revenue for themselves.


This group of advisers believes that investing broadly at lower costs through index funds and exchange-traded funds will be better for their clients.

“The adviser earns his fee through asset allocation and financial planning,” said Tyler Cloherty, a senior manager at Casey Quirk and an author of the study. “They punt on security selection and show that asset allocation is more important because it lowers your costs.”

The knock against this approach is that it is passive. Some investors want active management if they’re paying a fee. They don’t see the value in an adviser allocating their money into passive vehicles that will replicate an index.

Clients might also think they can buy index funds from Vanguard and exchange-traded funds from State Street Global Advisors on their own and save even more on fees.


These advisers put money into more sophisticated funds whose goal is total return and not beating a benchmark. (For example, if a benchmark is down 30 percent but the stockfund is down only 20 percent, the fund beat the benchmark but the client still lost money.)

Mr. Levi said a typical execution of this strategy would be for advisers to put 45 percent of a client’s portfolio equally into three different multi-asset-class investment funds — the Blackrock Global Allocation Fund, for example, invests anywhere it finds the best opportunity — and to give the rest to other managers or to do it themselves.

A concern with this approach is that the adviser may not know exactly what the client’s money has bought, beyond a fund that says it invests globally across sectors. This is where the client needs to be confident that an adviser is doing the due diligence on the various funds, or the three seemingly different multi-asset-class funds could have very similar strategies and holdings.

There is also a secondary risk akin to the one that plagues the old manager selectors who get wined and dined by firms trying to have more money sent their way: Instead of spreading money out among a number of funds all operated by one company, the adviser is putting more money into a single product.


This approach is similar to third-party outsourcing except that nothing is really outsourced. The responsibility for a broad investment approach leaves the adviser’s office but not the firm itself.

With this approach, a large firm has a central office that is doing all of the research and security selection. It also asks the advisers to funnel money its way. On the positive side, that central hub should have more knowledge than an individual adviser and be easier to monitor than a third-party firm.

There are, however, quite a few negatives, at least in terms of perception. Such a strategy is one-size-fits-all. A client could reasonably wonder what conflicts of interest are contained in the home-office approach.

It also makes the advisers fairly interchangeable: If everything they’re doing for a client comes from the home office, what’s the incentive to stay with that adviser? And do the advisers actually know anything, or are they simply parroting what they’re being told from headquarters?


Casey Quirk isn’t saying which approach is best. But the firm does make predictions as to which strategies are likely to gain market share in the next three years: Portfolio managers and third-party outsourcers will gain 8 percent of the money being managed, at the expense of the manager selector approach.

Beyond that, the firm is taking the position that this is a sea change moment for investment management. “We’re talking about the evolution of an industry,” said John F. Casey, chairman and co-founder of the firm. “It’s a relearning about investing and how it’s done and how to apply some of the things that are being done.”

As with any new approach, some things are going to work and some things are going to fail. It’s going to be up to the clients to understand what their advisers are doing for them.

Source:  nytimes.com

Posted by:  Steven Maimes, The Trust Advisor

Permalink:  http://thetrustadvisor.com/headlines/investment-portfolio

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Wealth Management Unit Helps Morgan Stanley Deliver Strong Q2 Performance


The corporate logo of financial firm Morgan Stanley is pictured on a building in San DiegoThe country’s largest banks have all comfortably beaten expectations this earnings season thanks to an uptick in global debt trading activity in June. But Morgan Stanley’s outdid its peers by reporting a net income figure which was nearly double that for the same period a year ago. Earnings for the period were, in fact, 26% higher than those for the first quarter – a period that receives a marked seasonal boost each year.

It is not difficult to see the reason for this, though, as the investment bank received a $609 million discrete tax benefit over the period which almost completely wiped out its tax expense. A better idea of Morgan Stanley MS +1.54%’s quarterly performance comes from the fact that the pre-tax income figure of just under $2 billion was 11% higher year-on-year, but 15% lower quarter-on-quarter – in line with the trend demonstrated by its peers.

The one-time tax gain notwithstanding, Morgan Stanley reported balanced results for the quarter, with continued growth in its wealth management revenues making up for the shortfall in trading revenues. The bank’s advisory and underwriting unit also saw a notable increase in fee revenues. On the flip side, the bank reported total compensation expenses of $4.2 billion in Q2 – just 2% lower than the figure for the previous quarter. As Q1 compensation figures are high due to payments of annual bonuses, the elevated Q2 figure points to higher performance-related payouts to employees.

Improving operating margins for the bank’s wealth management unit, coupled with a better-than-expected showing by its debt trading desk, prompted us to revise our price estimate for Morgan Stanley’s stock upwards from $35 to $38.

Trading Revenues Slipped After Strong Q1 Showing

Unlike its other major competitors in the U.S. – namely Goldman Sachs, JPMorgan, Citigroup C +0.91% and Bank of America BAC +0.03% – Morgan Stanley’s trading business relies more on equity trading operations than fixed-income to generate value, due to a conscious decision by the bank to scale down the latter. This fact is evident from the chart above, which shows that its equities trading desk contributes almost 30% of its total share value while the FICC (fixed-income, currencies and commodities) desk is responsible for less than 15%. The bank also kept its trading operations largely out of focus over the 2010-2012 period – choosing to concentrate its efforts on its wealth management business.

This is why investors were surprised when Morgan Stanley delivered its strongest performance in more than two years in Q1 as the equities and debt trading desks each roped in $1.7 billion in revenues. However, the bank failed to replicate the success in Q2 as total trading revenues of $2.8 billion were 18% lower than in Q1 2014 and 14% lower than in Q2 2013. It should be noted here that equities trading still managed to make $1.8 billion in Q2 2014 while FICC trading revenues fell to just above $1 billion. This trend of strong equity trading revenues is definitely a good sign for Morgan Stanley’s overall business model in the long run.

Wealth Management Pre-Tax Margins Grow

Morgan Stanley’s struggle to eke out profits from its wealth management business is no secret, with the bank unable to break the trend of single-digit margin figures for two long years in 2010-2011. But it stuck to its decision to completely buy out Citigroup’s stake in the Smith Barney operations, with this being the focus of its capital plan even in 2013. Having achieved the self-imposed 17% margin target for the business well before the 2014 deadline in Q4 2012, Morgan Stanley has seen revenues steadily outpace expenses since then. Having crossed the 19% mark for the first time in Q1 2014, operating margins for the division touched an unprecedented high of 21% in Q2. This helped the division report a pre-tax income of $767 million in Q2 compared to $691 million in Q1 2014 and $655 million in Q2 2013. Considering the fact that the bank is eyeing compensation cuts for brokers in the near future, the margin figures are only expected to improve going forward.

Source:  forbes.com

Posted by:  Steven Maimes, The Trust Advisor

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Securities America to Acquire Assets of Sunset Financial Services

SAISecurities America will add 268 advisors, $2.4 billion in client assets and $18 million in gross revenue

Securities America, a subsidiary of Ladenburg Thalmann Financial Services Inc. (NYSE MKT: LTS), announced a definitive agreement to acquire certain assets of Sunset Financial Services, Inc., a full-service broker-dealer, from Kansas City Life Insurance Company (NASDAQ: KCLI).

Sunset Financial Services has approximately 268 registered representatives in 48 states plus the District of Columbia, approximately $18 million in annual gross revenue and $2.4 billion in client assets. KCL Service Company will operate as a branch of Securities America for these representatives. Following the transaction, Sunset Financial Services will continue to assist Kansas City Life in issuing and promoting its variable insurance products.

“The primary objective of this agreement is to improve the services Kansas City Life provides to our customers and representatives,” said Walter E. Bixby, Kansas City Life Insurance Company executive vice president and vice chairman of the board. “This agreement caps a two-year broker-dealer search to find the best match for our customers and representatives. Securities America is well equipped to provide more robust technology, more diverse products and enhanced practice management.”

Earlier this month, Securities America announced its acquisition of Dalton Strategic Investment Services of Knightstown, Ind., an independent broker-dealer with 60 advisors and $950 million in client assets. In 2013, Securities America added 30 advisors from Eagle One Investments in Washington, Iowa. The year prior, the company transitioned 140 advisors from Investors Security Company Inc. In 2010, the company transitioned 45 advisors from Equitas and 40 from ePlanning. In 2009, Securities America acquired broker-dealer Brecek & Young Associates from Security Benefit Corp., adding 260 advisors.

“This business has become increasingly challenging for smaller broker-dealers,” said Jim Nagengast, Securities America chief executive officer and president. “We welcome the advisors from Sunset Financial Services and look forward to helping them grow through our expertise in advisory business, retirement income distribution, practice management solutions and technology.”

The transaction, expected to close by the end of 2014, is subject to customary closing conditions, including regulatory approval. Shareholder approval is not required.

About Securities America

Securities America is one of the nation’s largest independent broker-dealers with more than 1,800 independent advisors responsible for $50 billion in client assets.

About Kansas City Life Insurance Company

Kansas City Life Insurance Company (NASDAQ: KCLI) was established in 1895 and is based in Kansas City, Mo. The company operates in 48 states and the District of Columbia. For more information, please visit www.kclife.com.

Source:  securitiesamerica.com

Posted by:  Steven Maimes, The Trust Advisor

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Madoff Associates Should Get Significant Prison Sentences

Reuters News by Bernard Vaughn

Five former employees of disgraced investment manager Bernard Madoff should be sentenced to “significant” prison sentences of up to 20 years or more, prosecutors said in a court filing on Friday.

“The five defendants here, along with others, were the people who allowed Madoff’s fraud to succeed as wildly as it did,” prosecutors with U.S. Attorney Preet Bharara’s office in Manhattan said in the filing. “Justice requires that each receive a significant prison sentence, commensurate with their active and long-standing role in the fraud.”

A jury in March convicted Madoff’s former office director Daniel Bonventre, portfolio managers Annette Bongiorno and Joann Crupi, and computer programmers Jerome O’Hara and George Perez for helping their former boss conceal his multibillion-dollar Ponzi scheme for decades.

In the filing, prosecutors said that Bonventre and Bongiorno should be sentenced to a term greater than the 20-year sentence recommended by federal probation officers; that Crupi should be sentenced to more than the recommended 14-year sentence; and that O’Hara and Perez be sentenced to “substantially more” than the recommended eight years for each.

The five-month trial was one of the longest white-collar criminal trials in Manhattan federal court history, and the first criminal trial stemming from Madoff’s fraud.

Madoff pleaded guilty in 2009 to running the Ponzi scheme estimated to have cost investors more than $17 billion of principal, and is serving a 150-year-prison sentence.

During the trial, attorneys for the former staffers cast their clients as mere puppets of a pathological liar who bewitched them into becoming unwitting accomplices.

“They thought he was almost a god,” said Eric Breslin, a lawyer for Crupi, during the trial.

The jury disagreed, however, and found them guilty on all counts, including securities fraud and conspiracy to defraud clients.

In court filings, attorneys for Bonventre, Perez and O’Hara requested a sentence of home confinement and community service, or a short prison term. Attorneys for Bongiorno recommended she be sentenced to between eight and 10 years. Crupi’s lawyer asked the court to exercise leniency, arguing that 14 years is “nearly as bad as a life sentence,” as she would then be 70 upon her release.

Gordon Mehler, a lawyer for O’Hara, and Larry Krantz, a lawyer for Perez, declined to comment. Lawyers for Bonventre, Bongiorno and Crupi did not immediately respond to a request for comment.

Source:  reuters.com 

Posted by:  Steven Maimes, The Trust Advisor

Permalink:  http://thetrustadvisor.com/news/madoff-associates

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Taking a Broker to Arbitration

NYT article by Tara Siegel Bernard

arbitIf you have a problem with your investment broker and you cannot resolve the dispute on your own, you probably won’t get your day in court. But you will be heard, most likely in a conference room somewhere, before a panel of arbitrators.

The moment people open a brokerage or investment account, they most likely — and perhaps inadvertently — waive their right to sue. The fine print of most customer agreements almost always contains a clause that says the customer agree to resolve any future disputes through arbitration, largely through the forum operated by the Financial Industry Regulatory Authority, Wall Street’s self-regulatory organization, known as Finra.

The mandatory nature of these agreements — which are increasingly appearing in other consumer financial products as well and have been repeatedly blessed by the Supreme Court — is a frequent complaint of consumer advocates. And if you try to avoid brokers’ so-called predispute arbitration clause, you may have little choice but to stow your savings in a mattress.

While arbitration has its share of benefits — it’s much quicker and cheaper than litigation — some securities lawyers who represent investors argue that they would get better results before a jury of their peers. But other legal experts point out that many investors wouldn’t have a chance to be heard if it weren’t for arbitration; federal securities laws, along with some states’ laws, are not always investor-friendly.

“From the investor’s perspective, the great advantage of the Finra model is that arbitrators might be able to find a remedy for investors that is not supported by law,” said Barbara Black, a professor at the University of Cincinnati College of Law.

But it doesn’t always work in investors’ favor, according to securities lawyers. And on Thursday, Finra acknowledged that its arbitration process, which has come under recent criticism, could be improved when it announced a 13-member task force to look into improving transparency, impartiality and efficiency.

So how do investors fare in arbitration right now? Last year, about 18 percent of customer cases, or 499 claims, were decided in arbitration. Customers received monetary or nonmonetary damages in 42 percent of those cases. But 77 percent of customer cases — including settlements between the parties and arbitration awards — resulted in some sort of monetary or nonmonetary relief (such as canceling a stock purchase and getting money back).

Investors’ lawyers say, however, that even a $1 win would be considered an award so the statistics don’t necessarily provide the full story. “It is seldom that you see a home run,” even on stronger cases, said Robert Rex, who typically represents retirees in Boca Raton, Fla.

“One of the big deficiencies in the process is the quality of dedication of the arbitrators,” Mr. Rex added. “You can have some that are very smart and they try to do the right thing. And then you have people in there who are career arbitrators, and know if they give a big award they won’t get on another case” because the brokerages will not choose them to be on their panels.

Finra and some academics contend, however, that the $400 a day arbitrators earn isn’t enough of a financial incentive to create a bias.

The leading reason consumers pursue arbitration is because of claims of a breach of fiduciary duty, which is the legal way of saying the broker did not act in a customer’s best interest. There were nearly 1,900 of those cases last year, according to Finra, followed by lesser numbers of cases involving claims of negligence and misrepresentation. Problems involving stock investments were the most frequent, followed by mutual funds and variable annuities.

Investors are often surprised at how the process works. Arbitration is considered an “equitable forum,” for instance, which means arbitrators don’t have to strictly apply the law. “The court applies the law to the facts and makes a decision,” said Jonathan Morris, chief legal officer at Dynasty Financial, who has served as an arbitrator. “In arbitration, they might not rule all for one side or another. The investor can be partially right and partially at fault and arbitrators can split the difference.”

Depending on the circumstances, the lack of a legal standard can help or hurt your case. Someone like Phil Ashburn, whose case was arbitrated last year, may have done better if his case had been heard by a jury, at least by his lawyer’s estimation, because the laws in his home state, California, are more favorable for investors.

Mr. Ashburn, a former phone installation and repair technician, said he pursued his claim after an “adviser” who visited his company offices, and later his kitchen table, urged him to take a company buyout instead of a $1,500-a-month pension. He was 51 at the time, and took the buyout.

The adviser then invested the $355,000 he received into a high-cost variable annuity. Mr. Ashburn needed income right away, so she recommended that he take advantage of a tax rule allowing penalty-free withdrawals before retirement age. He took out about 9 percent of his money each year. “She kept stressing the fact that you are never going to go broke,” said Mr. Ashburn, now 63 and working as a part-time dog trainer out of his Pleasanton, Calif., home. “And I believed her. It was my ignorance.”

He filed his case in 2009, seven years after he met with the adviser, and went to arbitration early last year. He, along with five of his co-workers, lost, though the opposition had to pay the arbitration fees.

Mr. Ashburn said he didn’t feel like he had received a fair hearing because the head arbitrator was hard of hearing, while the two other arbitrators struggled to stay awake. He said he also overheard the head arbitrator in the lobby laughing about the facts of the case.

Legal experts say that most arbitrators are well-intentioned, though Finra’s training program needs to be more rigorous. And Finra did recently improve the impartiality of the panels: Until 2011, the panel of arbitrators included one industry arbitrator and two “public” arbitrators, with no industry ties. Consumers can now request an all public panel. Finra also proposed a rule to make it more difficult for people with former industry ties to be listed as public arbitrators.

Still, Melinda Steuer, Mr. Ashburn’s lawyer, said that the makeup of a panel played a large role in the outcome of the case. “In a jury system, there are more protections, including the judge, the law and the right to appeal,” she said, noting the virtual impossibility of appeals in arbitration. But she also has had cases in which the arbitration rules worked in her clients’ favor, she said.

“There is much more room to plead a whole range of alleged violations in a Finra statement of claim,” said Linda Fienberg, president of Finra’s dispute resolution forum.

Whether investors win or lose, they rarely know arbitrators’ reasoning because they don’t have to provide any explanation. Investors can request one, but will receive it only if the opposing party also agrees; legal experts say that typically doesn’t happen. (Awards, however, are made public on Finra’s website.)

“Brokerage firms love the confidentiality,” said Andrew Stoltmann, a securities lawyer. “We have these product cases where brokerage firms create these really complicated defective investment products and in arbitration, it’s all kept quiet.”

The lack of transparency is a frequent complaint. “If the vast majority of the cases are being decided in arbitration, they are deciding the law,” said Mercer Bullard, an associate professor at the University of Mississippi School of Law. “The problem you have now is you have so much of the law being decided in secret we don’t know what the law is. There is no accountability.”

The Securities and Exchange Commission, as part of the financial regulatory law known as Dodd-Frank, was given the authority to adopt regulations to ban, limit or condition mandatory arbitration clauses, but consumer advocates do not expect the S.E.C. to push forward.

For people who decide to pursue arbitration, legal experts suggest finding a lawyer with significant experience in Finra arbitration. But many lawyers, who typically work on a contingency basis, do not take on claims with less than about $150,000 of losses.

Claims under $50,000 are typically resolved through a simplified arbitration process in which written complaints are submitted and decided by one arbitrator (Finra’s website has a list of clinics that offer help for smaller investors). The problem here, legal experts say, is that a lot of these cases turn on credibility, which doesn’t necessarily shine through on paper.

The Finra task force might start with figuring out ways to make the process more equitable for these smaller investors, for whom every last dollar counts.

Source:  nytimes.com

Posted by:  Steven Maimes, The Trust Advisor

Permalink:  http://thetrustadvisor.com/news/arbitration

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