The following is the second in a series of interviews that will feature plaintiffs’ attorneys who represent claimants pursuing securities fraud claims against financial services firms. NSCP member Richard Szuch sat down with Phil Aidikoff for this interview. Richard is a principal with Bressler Amery & Ross; he has defended the financial services business in regulatory inquiries and customer disputes for decades and he manages Bressler’s seniors initiatives. Phil is a founder of the law firm Aidikoff, Uhl and Bakhtiari, in Beverly Hills, California. He is a past President and Director Emeritus of the Public Investors Arbitration Bar Association (PIABA). Phil is a highly skilled trial attorney who has participated for years with various industry organizations, including FINRA, to effect change and create fairness in the process of handling customer claims. Phil has been recognized for excellence by his peers in the law and he is frequently called upon to speak about industry issues in the national media.
He took some time to sit down with Richard and discuss his views about the financial services industry. Read on, and learn what Phil thinks about the current market, the materials he assesses when deciding which cases to accept, and why two simple things can help protect a financial advisor against recrimination.
– Lisa Crossley, Executive Director NSCP
Richard Szuch: Tell me about your client base Phil, I know you do claimant’s side work only.
Phil Aidikoff: I certainly represent the claimant side of the ledger in almost every single case. Those claimants include not only customers but also brokers and executives with firms. Our law firm is always adverse to the financial services industry.
Richard Szuch: With your work, the intake process is critical, how do you assess claims?
Phil Aidikoff: The great majority of our cases we accept on a contingency fee basis, and we accept fewer than one in five right now. We’ve learned that although it’s easy to take a case, sometimes it’s not so easy to get out of a case if you’ve made a mistake. So we spend a lot of time on due diligence before our agreement to accept representation.
When we’re dealing with customer cases, we want to see as much as possible about the relationship. We want to see monthly statements, confirms and e-mail traffic/correspondence between the customer and the firm. Once we have reviewed all of that, we have a profit and loss prepared. We do not accept cases without running the numbers because the profit and loss report will uncover issues in the case that may work for or against our client. On the executive or broker side, we need to see the totality of the understanding between the employee and the firm. We want to look at offers of employment, employment modifications, employee forgivable loans, everything possible to understand what documents are in play in connection with the potential claim, before we accept a case.
Richard Szuch: Over the years, you have done work with FINRA to try to improve process and procedure governing FINRA arbitrations. Can you tell us about that work?
Phil Aidikoff: I was appointed to the National Arbitration and Mediation Committee in 2004 and served for five years, three of which were as Chair. In 2014, I was appointed to serve on the Dispute Resolution Task Force, which addressed procedures and policies and recommendations that FINRA wanted to be made in connection with rule and policy changes with respect to how the process is governed.
Generally speaking, the committees have a slight majority in favor of the claimant side of the table; on both sides, the quality of those who served was impressive. Their commitment to the process was really outstanding. We had opportunities to make some significant changes in the way these cases are heard and made perhaps as many as 30 or 35 proposals. Almost every proposal was the byproduct of a unanimous vote and that wasn’t just to make people feel good. That was because we all worked hard to make suggestions on how the process could be improved in ways that were fair.
Richard Szuch: One of the changes that received a lot of attention was the effective elimination of the industry person from FINRA panels, can you tell us if you have seen a difference in the hearings or the outcomes as a result of that change?
Phil Aidikoff: It used to be that you had public members and industry members, who are now called non-public members. The reason they are now called nonpublic members is to create a place for people like me who do claimant’s work. We have an opportunity (if the claimant chooses) to strike all of the nonpublic members and simply select from the two public lists, the chair and the regular public list. I can’t tell you how this has affected the process overall since I don’t have the statistics on it. I will tell you that it certainly makes claimants feel more comfortable knowing that it is no longer the case that there has to be somebody from the industry sitting on their panel.
Richard Szuch: We just celebrated the tenth anniversary of the bull market which started in March of 2009, what do you see in the markets now, and what do you think investors should be concerned about?
Phil Aidikoff: The laws of gravity have not been suspended, and we know that the bull market that we’re involved in now will come to an end. I don’t think anybody can predict when that will occur or how significant the correction will be, but it’s clear to me that it’s only a matter of time for the markets to drop. How that might affect investors is largely determined by two things, their asset allocation and their time horizon. So, if you have a moderate investor who let’s say is 50/50 between cash and fixed income on one side and equities on the other side, and that person is in their 30s or 40s, there is a lot less motivation to move into a more conservative portfolio because over time, if they’re properly allocated, they should do just fine. If, however, you’re talking about retirees who are no longer in the workforce and who have principal protection as a primary investment objective, the investments would be different. So, in terms of what a correction means, it’s largely investor specific.
Richard Szuch: The SEC, FINRA and state regulators are increasing the focus on protecting senior and vulnerable investors, how do you see these initiatives impacting the landscape going forward?
Phil Aidikoff: A variety of state elder abuse statutes specify that once a person reaches a certain age, for example 65, then that person has a separate claim for damages. The remedies based on those claims are dependent on the specifics of the statute. In California there is an elder abuse provision which allows for attorneys’ fees and opens the door to punitive damages. As the baby boom generation moves forward, you’re going to see more and more folks who have legitimate, age-based claims. FINRA is properly focusing on those people in an effort to get the word out, to investors and to the firms, that they pay particular attention to these people and understand the obligation to recommend a suitable asset allocation.
Richard Szuch: More and more money is moving from broker dealers to investment advisers, how does this trend impact investors and the cases that you see?
Phil Aidikoff: Obviously, not all investment advisers are equal. In large part, the advisers are prudent and careful. I am involved in a number of cases where the IA was originally the person’s broker, they decide for whatever reason to move to the IA side, and they transition the client over there as well. One of the things that we have found interesting is the lack of clarity about the terms of the new arrangement.
Many times, the client, when he or she was on the broker-dealer side, did not have a discretionary account and every trade had to be approved in advance. When you get to the IA side, it’s very unusual to have that relationship. The IA accounts are generally discretionary and we’ve had clients come into our office who have moved to the IA side with their broker, and their complaint is that the advisor never called before the trade and we patiently explain to the client that they have granted discretion. The question then jumps to, has the IA done their job in terms of a portfolio that is suitable for the client based on their risk tolerance and their investment objectives so you get right back into that same model and the same issue of suitability.
Last, one of the issues that has come up recently is collectability. Sometimes, these folks who had been with larger broker-dealers and moved to the IA side moved to IA’s that are, to be polite, very thinly capitalized. That may mean there may be no remedy available even if liability is proved.
Richard Szuch: Can you talk conduct at firms where you see repeated errors?
Phil Aidikoff: Yes, and I think that they fall into general categories. One general category involves products that are manufactured and/or marketed by the firms, and those products are presented to the brokers as something that they should discuss with their clients. Brokers of course are certainly entitled to assume that the firm has done the proper due diligence either in the creation of the product or in the placement of the product on their platform; as a result, the brokers generally don’t do anything more than just absorb what they’re told by the firm and then pass that along to their clients. That can often be a problem because there is sometimes an encouragement by the firm to sell these products, and the focus is more on sales than it is on suitability so that’s something that we’ve seen many, many times over the years, and this goes way back to the limited partnerships sold in the late 80’s.
The other thing that often comes up is a failure of the firm to focus on an advisor’s outside business activities. I believe that there is still an obligation on the firms to properly monitor and supervise their brokers in connection with these things. We’ve seen situations, for example, where a broker is engaging in private securities transactions away from the firm and is selling the same investment to multiple clients. The firm should be noticing that round numbers are being transferred out of their accounts: $10,000, $20,000, $50,000, $100,000, numbers like that over a variety of clients, and it’s all going out at approximately the same time. That should have the bells and whistles going off.
Richard Szuch: If you had a bit of advice that you would extend to the advisors, what would it be?
Phil Aidikoff: It’s simple: (1) always tell the truth; (2) be sure to memorialize significant conversations with the client. Memorialize it in a letter, memorialize it in notes that are taken on contact management systems, memorialize it in a way that leaves no doubt that you have had the appropriate conversation with the client. The firm can then look at those things and see whether or not, in fact, the broker is doing their job and fulfilling their duty of care to the client.