by Sheila Pursglove
Misrepresentation, unsuitability, unauthorized trading, excessive trading (“churning”), and failure to supervise – all issues that make investors nervous in these days of a rollercoaster Dow, vanishing pension funds, Ponzi schemes, and other financial shenanigans. For people without training in the area, financial disputes can be complicated and difficult to understand.
Ultra-wealthy investors can afford to hire attorneys or find someone to take a big case on a contingency fee. But “little guys” aren’t usually so lucky.
MSU College of Law may be able to help — with the launch this fall of the Investor Advocacy Clinic, spearheaded by professor Ben Edwards and made possible by a grant from the FINRA Investor Education Foundation.
“We’re hoping to provide public education about informed investing and help smaller investors who can’t otherwise find an attorney,” Edwards explains. “We may be able to help some individual investors recover losses.”
Investors cannot sue their broker or financial advisor simply because they lost money.
“Many times, investors lose money when the market goes down or because the risks their broker warned them about occur,” Edwards notes.
But sometimes investors lose money because someone convinced them to take more risk than they wanted. This can happen if an adviser misrepresents the risks associated with a particular investment to collect a commission. In these cases, the clinic may be able to help.
“Most people are surprised to discover that they can sometimes bring a claim against a stockbroker or financial adviser after suffering investment losses,” Edwards says. “Whether the investor has a claim will depend on the circumstances and the complicated law that applies.”
Edwards and his law students will focus on helping ordinary, individual investors who have lost money due to a financial professional’s bad advice or other misconduct.
“When individual investors go up against stockbrokers and investment advisers, they will usually find financial professionals are represented by some of the best lawyers in town,” he says. “With the Investor Advocacy Clinic, we may be able to help even the playing field and provide individual investors with legal counsel. We’re hoping that attorneys that have clients with a problem in this area will send clients our
way for claims too small for them to handle.”
The clinic will launch with an initial group of seven students who will learn about investigating new cases, preparing cases for arbitration and negotiating with opposing counsel; they also will make community presentations about informed investing, and give talks to community groups about investing basics.
Edwards brings plenty of financial expertise to his new role – having earned his chops in the rough-and-tumble world of New York City finance as an Associate with Skadden, Arps, Slate, Meagher & Flom LLP.
“Skadden’s New York office has some of the world’s most brilliant and hardworking lawyers and allows Associates to work on some of the world’s biggest cases and deals,” he says. “After four years there, I grew to appreciate the firm’s insistence that everything we did would always be of the highest quality. Clients knew if they had a big problem, they could call us and we would work all night to protect them.”
Practicing in the firm’s securities litigation group and litigating cases arising out of the Bernard L. Madoff scandal – the largest Ponzi scheme of all time – Edwards’ work included actions in federal trial and appellate courts in New York and state court actions in several other states.
“Depending on how you count their losses, investors in the Madoff Ponzi scheme lost between 16 and 50 billion dollars by the time his fraud came to light,” he says.
“When he went to jail, many people who lost money to him started suing everyone who had any involvement with him. Much of the ongoing Madoff litigation revolves around who knew what and when and whether they should have figured out that the former chairman of the National Association of Securities Dealers—which later became NASDAQ—was running history’s biggest financial fraud.”
Edwards also served on a team representing financial institutions in matters related to mortgage-backed securities and securities class and derivative actions. He helped defend an investment bank against claims by Fannie Mae and Freddie Mac for losses on mortgage-backed securities.
“Many of the mortgage-backed securities cases revolve around underwriting standards. When local banks make loans to homebuyers, they then sell most loans to investment banks. The investment banks ‘securitize’ the loans and sell rights to the payment streams from borrowers repaying their loans,” Edwards explains. “When the payment streams ran lower than anticipated, people asked questions about the local banks’ underwriting standards and whether the investment banks knew what the local banks were doing.”
Unrelated to the financial crisis, he helped defend a bank syndicate against Securities Act claims arising out of an initial public offering – a typical case under Section 11 of the Securities Act, he says. When stock first goes on the market, the company files a registration statement with the Securities and Exchange Commission that makes disclosures about the company.
“This document should contain all material information about the company so investors can make informed decisions about whether to buy the stock,” he says. “If there are things in the registration statement that are not true or if the registration statement is materially incomplete, investors can sue the banks... I worked to defend a group of banks against claims that they should pay investors money because of purported misstatements and omissions in a company’s offering documents.”
Edwards also investigated insider trading. When a stock goes up, people can often look at news reports about the company and figure out why investors were buying the stock. But sometimes, the company will strike a deal behind closed doors and the stock will start going up before the deal is publicly announced, he says.
“If the stock shoots up without any apparent reason and good news comes out a few days later which drives the stock up higher, FINRA, the Financial Industry Regulatory Authority, will sometimes launch an investigation into the suspicious trading... In these investigations, FINRA asks the company to provide information about all the people that might have known about the deal before it went public. I worked to pull that information together and made many awkward phone calls to executives to ask them for information in response to FINRA’s requests.”
In addition to the securities work, Edwards had the opportunity to get into court doing civil rights work on a pro bono basis, for people who really needed the help or where he could make an impact for many people at once.
“In one case we successfully challenged a judicial practice of requiring medical documentation from transgender persons seeking to change their names. No one else needed a doctor’s note to change his or her name,” he says. “The case let us fix something that was clearly unfair.”
In 2012, along with other lawyers from Skadden, Edwards received Sanctuary for Families’ Pro Bono Excellence Award for work done in an asylum case.
The son of a South Carolina attorney, Edwards earned his undergraduate degree in philosophy at the University of South Carolina and his law degree at Columbia University. He left Skadden to join MSU Law as a Teaching Fellow with the Immigration Law Clinic.
“The clinic allowed me to spend more time doing work to help people while equipping students with information and skills to make a difference,” he says. “I enjoy working with students when they care about the client and take ownership of cases because the work we’re doing matters to someone and may make a tremendous difference in his or her life.”
For more on the new Investor Advocacy Clinic, visit law.msu.edu/clinics/investor/.
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