Terra Extraneus

During the National Public Radio program Morning Edition, Liz Ryan, a columnist for Business Week, was interviewed by Steve Inskeep, and you can find the interview here. According to the NPR story, a company called Clarian Health first said it would dock the wages of employees who are overweight or who smoke. Then it backed away from that plan. When asked if such a wage withholding plan was lawful, Liz Ryan said it was.

She is wrong.

In most states, it would be illegal by statute to withhold wages without written consent. Thus, when or if someone objected to Clarian Health’s announced plan, Clarian Health no doubt got a refresher course on these little used statutes.

For in-house corporate lawyers who often must be “jacks of all trades,” Gordon E. Jackson’s book, Labor and Employment Law Handbook, Aspen Publishers, is a good desk reference to keep around to avoid such errors. Liz Ryan is a well-regarded human resourcees expert who writes a blog on workplace matters — and is a professional opera singer, as well! However, she is not an attorney. If Ms. Ryan is going to grant news interviews on employment law, she might want to grab a copy of Jackson’s handbook, too.

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George Clooney tells Tom Wilkinson that if he wants to
keep his bar license, he better stay on his meds.

If lawyers were really as powerful and influential as depicted in the movies, then everyone would be a lawyer, or no one would be. By the end of the current release, Michael Clayton, lawyers look like Wild West gunslingers, evil cattle barons, or cowboys. In politically correct speech, the word “cowboy” has of late become a pejorative term meaning “reckless.” After viewing Michael Clayton, people may begin to think in the same terms when they hear the word “lawyer.”

Nevertheless, Michael Clayton is an enjoyable movie. I must even admit that for a moment or two, I thought I caught George Clooney acting. He was not, however, portraying a lawyer, at least not one that exists. While Michael Clayton has less in common with the real legal profession than did Judd for the Defense, it is still a movie to see.

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Karen Donovan at Registered Rep reported the recent study issued by a Washington, DC law firm that concluded that fines and sanctions were less when the enforcement issues were litigated than when imposed by settling with FINRA (“Financial Industry Regulatory Authority”). FINRA, according to Donovan, rebutted the study by merely sloughing it off as a lawyer’s marketing dream.

I have not done a study. Indeed, the study that was issued by the law firm reported by Registered Representative only looked at 55 panel decisions from June 2006 through June 2007. That means the sweep of time was not considered and it means the recent merger of NASD enforcement with NYSE enforcement was not evaluated. In my own experience, there was a difference between the two.

FINRA investigations were usually conducted initially by a compliance professional that was not a trial lawyer and NYSE investigations were often conducted by lawyers, some of whom had enforcement trial experience. Both were relatively easy and fair to deal with prior to filing of a formal enforcement proceeding, and lots of matters could be settled at that stage. Once, however, the formal enforcement action was filed and pending, both were much more difficult.

My own experience has led me to believe the following about enforcement actions generally, and I believe this will generally be true of FINRA enforcement actions.

1. Enforcement proceeding panels usually have at least two industry members on the panel with an enforcement department attorney acting somewhat as an administrative law judge. Industry members are more likely to buffer the harshness of sanctions even in the presence of a stifling enforcement department panelist.

2. The real problem in enforcement actions for the licensed professional is financing the defense if the supervisor or employer will not do so. FINRA has finite resources to allocate, too, but in any given case the licensed professional is out classed. That does not mean that FINRA won’t be tempted to pick off the weak, the sick and aged like any good buffalo hunter, and avoid the bulls and mastodons running with the herd.

3. Most licensed professionals that end up in enforcement proceedings are probably there because of a lapse in integrity, but too many are there for an error in judgment that may not have been their fault. While the industry is retreating from its hand shake business model, that is still the dominate platform. It is a fertile ground for hindsight compliance reviews, customer complaints and disinterring the financial advice from the then prevalent circumstances.

4. Some enforcement actions are brought because of a lack of perspective. A lapse in judgment, i.e., a moment of carelessness, should not result in the same sanctions as intentional or even criminal conduct. If there was no loss attributable to the violative conduct, it almost always means the conduct resulted from unintentional rather than intentional conduct.

These are some, but not all, of the considerations that would create an environment in which enforcement proceedings might result in lesser sanctions or settlements result in harsher sanctions. Clearly, some have nothing to do with the facts of the case. None of them have to do with whether they are studied by lawyers or sociologists.

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In an earlier post, I commented on my absence from blogging during the first two-thirds of 2007. In addition to posting no content during that time (thankfully, my blogging partner Rod Heggy kept the TerraX fires burning during my sabbatical), I made very few visits to other sites in the blogosphere. So now that I’m back, I’ve been catching up on what I missed at some of my favorite blogs.

Of course, one of my favorites is the political satire blog, Jon Swift. “Jon” describes himself as a “reasonable conservative” who gets his news from Fox, Limbaugh and Leno. I wrote a review of Jon Swift last year: “What If Archie Bunker Were a Blogger?” Catching up on Jon’s posts of the last few months, I excerpted these choice morsels:

• In “The Torture Race,” commenting on U.S. interrogation techniques since the advent of the war on terror, Swift explains the “morality gap”:

As long as we can say the terrorists are worse than we are, we have the moral high ground. But we cannot let them get too much worse than us or there will be a morality gap … So we need to stay just one small step behind the enemy in the torture race. If they ratchet up their interrogation techniques, we need to ratchet up ours, making sure that they always stay just a little bit more evil than us so that we can retain our moral superiority.

Finally, an explanation of the present administration’s escalation of torture tactics that makes sense!

• When President Bush vetoed expansion of the State Children’s Health Insurance Program (SCHIP), Swift wrote, in “Bush to Kids: Grow Up!”:

While our enemies are preparing their youth to fight future jihads, we are lagging behind, pampering our kids and conditioning them to depend on the government. With this veto the President has stood up to Congress’ plans to turn more of our children into wards of the state by expanding SCHIP and started weaning them off of government dependence. Toughening up our children will make sure they are up to the task of fighting the wars of the future.

• In the same piece, Swift adds:

It’s better they learn now that the reason we have the best health care in the world is that we don’t just give it away to anyone. Imagine how unprepared our children would be when they grow up and discover that many adults don’t get to have any health care at all.

• In another post, Swift returns to the topic of health care:

Conservatives would rather struggle and be faced with terrible health care choices than to have no choice at all, which is what would happen under socialized medicine. Living in a free society means having the freedom to go into debt trying to pay for the cost of health care and having the choice to quit your job and take a job you hate because it offers health insurance … People who live in societies that have socialized medicine don’t have these kinds of choices.

• When Gen. David Petraeus testified before Congress about progress in Iraq since “the surge,” Swift wrote that “Surges Take Time”:

Would [Petraeus testify] that the surge, a plan that he was one of the principal architects of, was a failure or a brilliant success? No one had any idea what his verdict would be on how good a job he has been doing at executing his own plan. … Petraeus finally gave us his objective analysis. The surge, he said unexpectedly, has been a surprising success and he praised the progress he has made in Iraq.

… But surges take time, Petraeus pointed out. … Did anyone say that the surge would be quick, moving like advancing waves or an unexpected increase in electric current? Surges, of course, don’t work that way.

Actually, the title said it all.

Is Jon Swift serious in the views he shares? Swift gets about a thousand readers a day (!), and one of the most fun things about his blog is reading that very question debated among his (sometimes clueless) readers in the comments section.

Even if Jon is dead serious about being a “reasonable conservative,” I have proof positive that he is capable of tongue-in-check moments. You see, when the 2007 Weblog Awards began accepting nominations last month, Jon immediately nominated Terra Extraneus as the world’s best law blog. What a cut-up! Come on, Jon, you’re killing me here.

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How do you like our facelift? Regular readers of Terra Extraneus will notice that we have spruced up the appearance of our little blog. TerraX went online on Dec. 23, 2005, which means we are approaching our second anniversary. So, we thought it was about time to do some of the tweaks and tune-ups we had planned from the start or had made note of along the way.

We’re still running the same Wordpress theme, but we have transformed the previous color scheme of blacks and grays with some much-needed splashes of color. And we’ve finally completed the header design we sketched out on paper back in ’05 — our mysterious planet, floating in space, to accompany our name, Terra Extraneus, which means “strange world!”

We thank web designer Travis Langley for his help. We began working with Travis earlier this year on this and a couple of other projects, and Travis deserves a lot of the credit for the new improved us. We recommend him.

Along with the facelift, Rod and I have renewed our commitment to post quality content on the law and its practice on a frequent basis. Sometimes it’s hard to do. Rod is a busy attorney, and I have jobs in the law office and at my church. But we have managed to put up 135 TerraX posts in these first 22 months, plus another 150 pieces which were originally posted here but have been transferred to our faith blog, Joshua One — and we feel like we’re still just getting started.

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I saw an article in Investment News a day or so ago on this topic but after reading the article, could not tell what new event had led to the story. But, it led me to consider that even with a Democratic Congress in its infancy, there have already been bills submitted which would essentially abolish mandatory arbitration. So, the debate over whether FINRA should abolish the practice of mandating one industry arbitrator on each panel of arbitrators is again cutting edge. (FINRA, the Financial Industry Regulatory Authority, is the organization that resulted from the merger of the National Association of Securities Dealers, Inc. and the New York Stock Exchange, Inc.’s regulatory arm.)

The article by Dan Jamieson of Investment News contained the claim that industry arbitrators were the “good guys” because they were harder on industry “ne’er do wells” than public arbitrators.

Sometimes that is true and sometimes it is not.

FINRA provides to litigants a database that contains all of the decisions of every arbitrator proposed for an arbitration. Counsel can study the past decisions of an arbitrator and, if there are enough of them, can also develop a model of the arbitrators’ decision making proclivities that is sometimes predictive. For example, if an arbitrator has never awarded any money, or never an amount seemingly reflective of the claims, after sitting on several panels, it should be pretty clear that they are not likely to do it. Counsel for the aggrieved customer or aggrieved employee should not count on a break through with that arbitrator.

Many lawyers select arbitrators based solely on their respect for the arbitrator. While that is a good criteria, it should not be the only one. The mathematics of past decisions should be equal to or greater than subjective impressions. Half a dozen decisions is usually enough to gauge a prospective arbitrator, but a dozen is much better. Simple math tricks can also help: weighting types of cases, weighting the quality of counsel that have appeared in those past cases, weighting the awards, and dropping highs and lows. The passage of time should be considered; decisions more than a decade old may not truly reflect that an arbitrator has matured or ripened.

Arbitrators that have developed a decisional history that omits monetary awards are more often than not former branch managers. It is not hard to decipher the cause. Branch managers are historically front line cannon fodder for the wirehouses and appear at arbitrations as the company representative. They would not be sitting there, sometimes with their own career or future prospects on the line, if not for a customer or that disgruntled employee. At the very least, if there is an award by the panel, it usually comes off the bottom line of their office, and more directly, out of their bonus. It leaves an impression that is usually indelible. Even after many years of retirement, most former branch managers cannot strike that feeling of déjà vu. While most former or retired branch managers that are experienced arbitrators will deny that their bitter moments in arbitrations of long ago do not impact them in the here and now, their published voting pattern usually reveals something else.

Some of the most respected arbitrators are often the first struck from a prospective panel by students of their decisional histories. What would improve the standing of industry arbitrators is more stringent disclosures, including things such as the number of times the industry arbitrator has testified, the number of times they have acted as a company designee in litigation and arbitration, and clearer disclosures about whether they have ever suffered a professional or monetary set back because of an arbitrated claim. The current system of disclosures needs a tune up and bolt tightening.

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California courts have been narrowing the enforceability of arbitration agreements in adhesion contracts, especially in employment contracts used by employers with numerous at will employees.

The problem is caused because of the inability of the average employee in the United States, or anywhere, to read the foregoing sentence and understand words like “adhesion,” and even words like “at will” and “arbitration.” Employees that go to work for employers of numerous employees often have employment handbooks or sign employment documents, like applications, that contain arbitration clauses. However, from now on, in California, if the employment documents contain a clause purporting to strip the employee of the right to bring a class action, the clause is void. Further, no arbitration clause that depends upon a prohibition of a class action can trump the right to bring a class action. Lisa Murphy v Check ‘N Go of California, Inc., Cal. App., A114442, October 17, 2007. To read this decision, you can find it here.
This opinion is one of a numerous series of cases that have defined the substantive or procedural unconscionability of arbitration clauses.

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I had this thought this morning: “Effective marketing is not so much about the big splash as it is about countless continual small ripples.” Knowing that there are no new thoughts, I Googled “marketing + big splash + ripples” to see what others have said.

• First, I came across Jeffrey J. Fox’s book, How to Become a Marketing Superstar (2003). Fox is an award-winning marketing consultant and best-selling business writer, who also wrote, How to Be a Rainmaker (2000). In Marketing Superstar, Fox has a chapter titled: “Always make a big splash, instead of a lot of ripples.” Guess we know where he stands.

• Second, I came across an online article, “How We Must Learn To Face the Consumer Again,” by Jarvis Coffin. Coffin is CEO of the web consulting firm Burst! Media, and previously was an ad director for the LA Times and USA Today. Coffin contrasts the approaches of Google and Yahoo in capturing the Internet advertising market. He writes:

Therein lies the online problem for an advertising and media culture reared on big fish and small ponds: it’s not about splash, it’s about ripple effect.

I’d have to do quite a bit more reading to know exactly what either Fox or Coffin have in mind by their use of the splash/ripple metaphor. They’re both gurus, and they may both be right. But when it comes to law firm marketing, I’m much more inclined to think in terms of making a lot of small ripples than chasing after that one elusive big splash.

With billions of pages of content on the Internet, as well as dozens of other forms of media inundating us, making a “big splash” is a very hard thing to do. Pouring all of one’s law marketing efforts into trying to make the next big wave is likely to be ineffective and frustrating. But each day in countless ways, a professional is able to make small ripples. New contacts made, old contacts renewed, a new product or service offered, new twists on old products and services, etc. There’s always another small way to get oneself “out there.”

With each new idea, one may immediately think, “Why bother? This won’t make a big splash.” Probably true. But enough small ripples can get the job done. No telling which new acquaintance, which single-column inside-page news article, which new blog content posted, which business card handed out, will result in new business. And for lawyers, the truth is that when the next “big case” does come through the door, it is just as likely to have been landed by one of those countless small ripples than by one big splash.

(Hat tip to UK blogger Anja Merret, who writes, “Chatting To My Generation,” for pointing me to the Coffin article).

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Just received this by email. A quick Google check shows that this one’s been floating around on the Internet at least since 2002, but I’ll pass it along anyway. The email I received labeled this as: “Best Comeback Line Of The Year.”

Felony trial. Defense attorney cross-examining police officer.

Q: “Officer, did you see my client fleeing the scene?”
A: “No sir. But I subsequently observed a person matching the description of the offender, running several blocks away.”

Q: “Officer, who provided this description?”
A: “The officer who responded to the scene.”

Q: “A fellow officer provided the description of this so-called offender? Do you trust your fellow officers?”
A: “Yes sir. With my life.”

Q: “With your life? Let me ask you this then, Officer. Do you have a room where you change your clothes in preparation for your daily duties?”
A: “Yes sir, we do.”

Q: “And do you have a locker in the room?”
A: “Yes sir, I do.”

Q: “And do you have a lock on your locker?”
A: “Yes sir.”

Q: “Now why is it, Officer, if you trust your fellow officers with your life, you find it necessary to lock your locker in a room you share with these same officers?”
A: “You see, sir, we share the building with the court complex, and sometimes lawyers have been known to walk through that room.”

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The newest published decision regarding U-5 defamation of a terminated registered representative is like an aquarium, for once you can see all of the fish swimming about.

Deborah Galarneau v Merrill Lynch, Pierce Fenner & Smith, Inc. was issued by United States Court of Appeals for the 1st Circuit. The case did not go to industry arbitration because it included a federal discrimination claim. But, the only claim that survived motion practice was the claim that the Form U-5 filed by the employer was defamatory.

The case was tried and decided under the law of the state of Maine, which extended to the employer a qualified privilege, which required the employee to prove that the U-5 entry was false and that the entry was made with actual malice. On appeal, the employer sought 1st Amendment protection for its U-5 filing, but that rather bizarre argument was too little too late.

The 1st Circuit found that the record in the trial court before the jury, indeed, did contain evidence supporting the jury verdict. The employer on four occasions conducted management review of the trading, approved it each time, issued comfort letters to the customer and denied in written responses to regulators that the trading was in anyway improper.

Meanwhile, Ms. Galarneau was summoned to New York by her employer to be interviewed by the Office of the General Counsel. The lesson here for registered representatives: prepare for such an interview. Engage counsel to assist in the preparation, if necessary. Do not take counsel to the interview by the employer (employees that feel they need to take a lawyer to a meeting with their employer should prepare their resume). At the meeting, she allegedly admitted exercising time and price discretion.

But, on her U-5, in addition to listing exercise of time and price discretion as a reason for termination, the employer listed “inappropriate trading,” the same trading approved four times by management, as a reason for termination. The predictable result was that no other firm would consider her.

One of the interesting things contrasted in the opinion was the over reaction by in house counsel. In house counsel rebutted the state regulatory inquiry and then permitted the regulatory response to be contradicted in the U-5. In an awkward effort to defend it, the employer on appeal tried to argue that only after the employer received a report from its outside accounting vendor, Bates Capital, did it become clear that some of the trading was “inappropriate.” Because the employer is the largest broker dealer in the world, it is laughable to think its supervisory accounting systems cannot detect “inappropriate” trading, especially since that trading has to be approved one trade at a time by a local supervisor and further stretches credulity beyond the breaking point to think a multi-billion broker dealer and investment bank must rely on a tiny non-public accounting vendor to learn the truth.

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After the foregoing was posted, Investment News published its news blurb on the opinion which you can find here. While I have great respect for this publication, the title of the article implies the entire judgment was reversed. The article seems to spin the opinion (calling it a “report,” possibly indicating a lack of familiarity with the judicial system) favorably to the employer. However, the $850,000 verdict was sustained. The $2.1 million punitive damages award was reversed. The plaintiff was able to prove actual malice or the verdict for compensatory damages would not have been sustained. The plaintiff was unable to prove the U-5 defamation was intentionally designed to make the plaintiff unemployable, so the punitive damages award was not sustained.

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