There are nearly 30 law schools that have or soon will offer a master’s degree for nonlawyers, up from just a handful two years ago.
There are nearly 30 law schools that have or soon will offer a master’s degree for nonlawyers, up from just a handful two years ago.
Everywhere we go, we see lawyers using iPads. But what are they using them for? There are thousands of Apps available for the iPad – so many that it’s hard to know where to begin. Fortunately, Tom Mighell has written a new book called, iPad Apps in One Hour for Lawyers. In this episode, Dennis Kennedy and Tom Mighell discuss the importance of iPad apps for effective use of iPads, Tom’s book, and their favorite iPad Apps for lawyers and others.
In McDaniel v. Wells Fargo Investments, LLC, Nos. 11-17017, 11-55859, 11-55943, 11-55958, 2013 WL 1405949 (9th Cir. Apr. 9, 2013), the United States Court of Appeals for the Ninth Circuit affirmed the dismissal of four class action lawsuits filed by employees against brokerage firms Wells Fargo, Bank of America, and Morgan Stanley. In separate lawsuits, the employees alleged that the brokerage firms’ policies prohibiting employees from opening outside self-directed trading accounts violates Section 450(a) of the California Labor Code, which prohibits employers from forcing its employees to patronize his or her employer. The Ninth Circuit held that the California statute is preempted by the Section 15(g) of the Securities Exchange Act of 1934 (the “1934 Act”), 15 U.S.C. § 78o(g), which requires brokerage firms to take measures reasonably designed to prevent employees from engaging in insider trading. This case of first impression in California reassures brokerage firms that compliance with the securities laws will not violate California labor laws.
Section 15(g) of the 1934 Act requires brokerage firms to adopt policies “reasonably designed, taking into consideration the nature of such broker’s or dealer’s business, to prevent the misuse of . . . nonpublic information by such broker or dealer or any person associated with such broker or dealer.” As the court explained, breaches of this duty are punished harshly, including sanctions and civil penalties in the amount of three times the profit gained or loss avoided as a result of the employee misconduct.
The Securities and Exchange Commission (“SEC”) relies upon the securities exchanges (e.g., the New York Stock Exchange) to enforce Section 15(g). The exchanges are vested with the authority to promulgate their own rules that, once approved by the SEC, have the force of law. The exchanges thus have adopted rules requiring brokerage firms to adopt policies to ensure compliance with the Act.
Each of the brokerage firms in this case adopted policies generally prohibiting their financial advisors from opening self-directed trading accounts outside the firm. The reason given by the firms for doing so is to monitor employee activity to ensure that employees are not engaging in insider trading, and thus ensure compliance with Section 15(g) of the 1934 Act.
Section 450(a) of the California Labor Code provides that no employer “may compel or coerce any employee . . . to patronize his or her employer . . . in the purchase of any thing of value.” The employees here argued that the brokerage firms are violating this provision of California law by forcing them to open self-directed trading accounts inside their firm. According to the employees, they would rather open accounts outside the firm because the trading fees are lower.
The brokerage firms moved to dismiss, arguing that the California statute is preempted by the securities law. The United States District Courts for the Northern and Central Districts of California granted defendants’ motions and dismissed the complaints. The employees appealed.
After consolidating the cases on appeal, the Ninth Circuit affirmed. As an initial matter, the Court rejected the brokerage firms’ argument that when Section 450 is enforced against their policies prohibiting self-directed trading accounts outside their firms, the statute loses its character as a labor law and takes on the nature of a securities regulation. The Court explained that Section 450 regulates the labor market which is an area traditionally of state concern, and therefore, there is a presumption that Congress did not intend to preempt Section 450. However, that was not the end of the Court’s analysis.
The Court next turned to whether Section 450 of the California Labor Code presents an “obstacle” to the accomplishment of a significant objective of the securities laws. The Court concluded that it does. According to the court, Section 15(g) of the 1934 Act calls on the brokerage firms to decide “for themselves how to best monitor their employees’ trading, suggesting that individually tailored policies serve as an important means for achieving the Act’s basic goal of reducing insider trading.” Where federal law grants an actor a choice and the state law would restrict that choice, the state law is preempted if preserving that choice is a significant regulatory objective. Accordingly, the Court held that Section 450 is preempted by the 1934 Act because the state statute would restrict the brokerage firms’ discretion on how to best monitor and prevent insider trading by its employees.
The employees also argued that even if Section 450 of the California Labor Code did impede the firms’ discretion, they could still comply with Section 450 by offering free in-house accounts. The Ninth Circuit did not agree. It held that the plain language of Section 450 forbids mandatory free accounts just as it forbids paid ones. According to the Court, Section 450 not only prohibits forced purchases from the employer, but also prohibits forced purchases from any third party. Thus, free accounts would still violate Section 450 because it would force employees to purchase a thing of value (e.g., a brokerage account) through their employer.
Accordingly, the Court affirmed the dismissals of the lawsuits by the distrct courts, reassuring brokerage firms that may keep and/or implement policies which restrict their employees from opening outside self-directed trading accounts without running afoul of the California Labor Code.
In Belmont v. MB Investment Partners, Inc., No. 12-1580, 2013 WL 646344 (3d Cir. Feb. 22, 2013), the United States Court of Appeals for the Third Circuit held that a mere failure by corporate directors to oversee enforcement of compliance protocols which, if properly enforced, might have led to the directors’ knowledge of securities fraud by a corporate employee does not establish the directors’ “culpable participation” in the employee’s misconduct sufficient to support controlling person liability under Section 20(a) of the Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. § 78t(a). Third Circuit held additionally that corporate directors may not be held personally liable for misconduct of corporate employers under a theory of negligent supervision. These rulings reinforce protections for directors from personal exposure to damages caused to third parties by harmful acts of employees, even where better corporate oversight might have been able to prevent the harm caused by the employees.
Belmont arose from a Ponzi scheme. Mark Bloom, an employee and officer at defendant MB Investment Partners, Inc. (“MB”), also was the sole manager of a hedge fund called North Hills, L.P. (“North Hills”), unaffiliated with and outside the scope of his employment and responsibilities with MB. Bloom nevertheless marketed North Hills to several of MB’s clients.
North Hills turned out to be a Ponzi scheme. After it collapsed, Bloom was arrested, charged and pled guilty to all charges levied against him arising from the Ponzi scheme.
After Bloom’s guilty plea, plaintiffs (who had invested in North Hills and lost over $4 million in its collapse) filed suit against MB, certain MB officers and directors and one MB employee, alleging (1) controlling person liability under Section 20(a) of the Exchange Act; (2) negligent supervision; (3) violations Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Securities & Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder; (4) violations of the Pennsylvania Unfair Trade Practice and Consumer Protection Law, 73 Pa. Cons. Stat. Ann. § 201-1 et seq.; and (5) breach of fiduciary duty. Plaintiffs alleged that MB’s directors knew Bloom was operating North Hills, but did not know the fund was a Ponzi scheme.
Defendants moved to dismiss. The United States District Court for the Eastern District of Pennsylvania granted the motion in part, dismissing all claims against the MB employee. Following discovery, the remaining defendants filed motions for summary judgment. The district court granted that motion in its entirety. Plaintiffs appealed.
The Third Circuit affirmed nearly all of the district court’s decision, vacating and remanding for trial only the grant of summary judgment for MB Investment on the claims for violation of Section 10(b) and Rule 10b-5. In doing so, the Court made noteworthy rulings relating to Section 20(a) of the Exchange Act and negligent supervision that provide insight into the limits of liability of a corporation’s directors for misconduct of employees.
In their Section 20(a) claim, plaintiffs alleged that MB’s directors were controlling persons jointly and severally liable for the actions of Bloom, a person allegedly under their control. Plaintiffs argued that the directors recklessly failed to monitor Bloom and were therefore culpable participants in his fraud, making them secondarily liable for his actions under Section 20(a). Plaintiffs alleged no acts by the directors in furtherance of the fraud. Instead, they proceeded on a theory of inaction, arguing that because the liability being sought was secondary, they needed only to show recklessness, not knowing misconduct by the directors. According to plaintiffs, the directors’ alleged failure to enforce compliance protocols and investigate red flags relating to Bloom’s activities demonstrated recklessness adequate to make them liable for his misdeeds.
The Third Circuit explained that to prevail on a theory of inaction, plaintiffs must prove that the directors’ inaction was undertaken intentionally to further the fraud and intentionally to prevent its discovery. In other words, the directors must have had knowledge of the fraud in order to intentionally fail to act to prevent it — a fact the plaintiffs conceded was not true when they alleged the directors did not properly monitor Bloom. Further, the Court reiterated the principle that secondary liability requires a more culpable state of mind (intent), not a lesser one (recklessness). The Court concluded that sloppy compliance practices which result in a lack of knowledge of an employee’s harmful activities was insufficient to establish culpable participation for the purposes of Section 20(a) liability.
The Court also held that directors are not liable as employers under a theory of negligent supervision. Plaintiffs alleged that the directors, since they are vested by state corporate law with supervisory responsibilities for the corporation, are subject to liability for negligent supervision of the corporation’s employees. Plaintiffs also argued that Bloom’s misconduct was foreseeable by the directors as a matter of law because the MB directors knew Bloom managed a separate hedge fund, but failed to monitor his operation.
The Court explained that while negligent supervision requires the elements of common law negligence (duty, breach, causation and damages), the tort is specifically predicated on the duties of an employer to responsibly monitor its employees and to refrain from placing an employee in a situation where the employee will harm a third party. The Court observed that the question of whether a director of an employer corporation, rather than or in addition to the employer corporation itself, can be liable for negligent supervision is determined by asking whether a director owes a duty to third parties to supervise a corporation’s employees.
The Third Circuit held that directors do not owe a duty to third parties to supervise employees. The Court noted that while a director’s fiduciary duty of loyalty to act in good faith for the benefit of the corporation has been held to include some duty of oversight, that duty has never been understood to include responsibility for day-to-day supervision of employees. The Court noted that those types of day-to-day supervision duties are the responsibility of officer or employee-supervisors and are expressly not the duty of directors. The Court further concluded that there is no agency relationship between the director and employee. Instead, the corporation itself is the employer of the culpable employee and potentially liable for his or her tortious acts. Therefore, directors are not liable under a theory of negligent supervision.
The rulings issued by the Third Circuit confirm the limits to directors’ exposure for damage caused by actions of unscrupulous employees, and in particular preserve those limits even where arguably poor oversight prevented the directors from discovering the employees’ harmful acts.
For more information, please contact John Stigi at (310) 228-3717.
Are contract lawyers an expense or a fee item? This issue has been litigated before and, according to my reading, has been resolved in favor of the law firm. The law firm is entitled to engage contract or temporary lawyers for one price and charge the client a higher price. One rationale for this is that the firm can engage lawyers on a short term basis, without a long term commitment, to provide the work for the client that is necessary. When that job or assignment is completed, the law firm can sever the tie with the contract lawyer and retain a lower overhead. Everyone benefits: the lawyer who otherwise would not have been employed; the law firm that can take on additional work and its resulting benefits; and the client whose goals can be met more efficiently and timely.
The issue usually arises from a complaint by an insurance carrier who is responsible for payment of legal fees under a policy of insurance or a creditors’ committee that wants a larger share of available funds and finds the law firm(s) an easy target. Currently, the Citigroup class action legal fees are being challenged by a group called the Center for Class Action Fairness.
The allegations in this case go beyond the assertion that a law firm cannot charge more than it pays for legal talent. If this were the only issue, the challengers would have no standing; this issue has been resolved and it would be a major reversal of thought for the court to rule otherwise. But, the real issues are whether the engagement agreement mentioned anything about contract lawyers and, if so, what were the terms; what risk did the law firm accept when its fee was based on a contingency (was this a novel area of law or one in which plaintiffs had not been successful before); what was the expertise needed in the matter for which contract lawyers were engaged, and what was the expertise actually engaged; and were the fees charged “reasonable” under all the circumstances.
In this case, the total fees amount to less than 17% of the class action settlement. The court will have to decide whether this was a reasonable fee overall and/or whether each component of the fee requested reasonable. The added risk for any law firm taking on this type of case is that its fee is always reviewed on Monday morning … the Monday morning quarterback always has a better perspective than does the game-day quarterback. While the large company client can protect itself by hiring the contract lawyers directly, though they could then hardly expect the law firm to oversee that portion of the work product. The client can further protect itself by objecting to paying the legal fee and litigating the fee. But, how does a law firm protect itself against the client (usually someone else speaking in the shoes of the client) so as to avoid an after-the-fact conflict?
MyCase features my guest blog post suggesting that there is plenty of work for those lawyers willing to be realistic both in the nature of the clients they serve and the fees they charge.
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Isabel Raskin, who runs the Education Advocacy Clinic at Suffolk University Law School, discusses her goals for the clinic, as well as what students enrolled in the clinic experience. Learn more about Ms. Raskin at http://bit.ly/AAPxJa.
On February 14, 2012, President Obama signed the Federal Aviation Administration Modernization and Reform Act into law. This Act requires the FAA to allow others to fly drones, including law enforcement agencies, private companies and even individual hobbyists, over American neighborhoods. Lawyer2Lawyer co-hosts and attorneys, Craig Williams and Bob Ambrogi, talk to the experts, Ryan Calo, Director for Privacy and Robotics, for the Center for Internet and Society at Stanford Law School and Jennifer Lynch, a staff attorney with the Electronic Frontier Foundation, about drones, transparency, public safety and the potential impact on privacy law.
Oklahoma Attorney General E. Scott Pruitt is already cracking down on price gouging, identity theft and charitable fraud after a tornado destroyed an Oklahoma City suburb.
Lawyers are very often the brunt of jokes, but there is a group of attorneys that has turned the tables and is making people laugh with them instead of at them. Lawyer2Lawyer co-hosts and attorneys, Bob Ambrogi and Craig Williams, share the stage with two of the Comedians At Law. Alex Barnett and Matt Ritter explain how they transitioned from lawyers to comics and how they now make people laugh at the lighter side of the law.