Diversions July 18, 2013

Wall Street’s Moral Compass Still Wavering

All’s not well on Wall Street. A survey of financial services professionals turned up widespread misconduct, acceptance of illegal activities and disregard of client interests.
Reported by

But all’s not terrible, either. The survey also showed that financial watchdogs are increasingly trusted, willingness to report is high and awareness of the Securities and Exchange Commission (SEC) Whistleblower Program is exploding.

“Wall Street in Crisis: A Perfect Storm Looming” is the second survey of the U.S. financial services industry by Labaton Sucharow LLP. The independent survey confidentially polled financial professionals on corporate ethics, wrongdoing in the workplace and the role of financial regulators in policing the marketplace.

Want the latest retirement plan adviser news and insights? Sign up for PLANADVISER newsletters.

The results suggest that the financial services industry faces a serious and growing ethical crisis. The survey uncovered some startling numbers, showing the percentage of respondents who:

  • believe their competitors engaged in illegal or unethical behavior: 52%
  • feel that employees in their own company had engaged in similar misconduct: 24%
  • report observing or having first-hand knowledge of wrong-doing in the workplace: 23%
  • believe that financial services professionals may need to engage in illegal or unethical behavior in order to be successful: 29%
  • feel the industry does not put the interests of clients first: 28%
  • admit they would engage in insider trading if they could get away with it: 24%

Surprisingly, in response to each of these questions, younger professionals on Wall Street were significantly more likely to be aware, accept and engage in illegal or unethical conduct than their more senior colleagues.

“Many in the financial services industry appear to have lost their moral compass, and younger professionals pose the greatest threat to investors,” said Jordan Thomas, partner and chair of the Whistleblower Representation Practice at Labaton Sucharow. “Wall Street needs to take the first step toward recovery and admit that it has a corporate ethics problem, or Main Street should brace itself for more scandals.”   

The survey suggests a big disconnect between what the financial services industry preaches and what it actually does, according to Chris Keller, partner and head of case development at Labaton Sucharow. “Until a culture of integrity and stewardship is established, investors will be at risk,” Keller said.

Labaton Sucharow established the first national practice exclusively dedicated to representing SEC whistleblowers. The survey is available here.

Compliance July 17, 2013

Unpaid Multiemployer Plan Contributions not Dischargeable

A federal bankruptcy court ruled a plan fiduciary still owes contributions to multiemployer plans though he filed for bankruptcy.
Reported by

U.S. Bankruptcy Judge William C. Hillman of the U.S. Bankruptcy Court for the District of Massachusetts noted in his decision that under the trust agreements for the Massachusetts Bricklayers and Masons Health and Welfare Fund, Pension Fund and Annuity Fund, unpaid contributions that are due and owing are assets of the funds. According to the opinion, James M. Fahey Jr., president, treasurer and sole shareholder of Zani Tile Co. did not dispute that he was aware of his obligations to the funds, but failed to remit the contributions.

Hillman said the undisputed facts of the case indicate that Fahey instead prioritized the payment of corporate expenses that were beneficial to him, such as a bank loan that he personally guaranteed and his personal loan to Zani, over his obligations to the funds. “In so doing, he violated the duty of loyalty to the beneficiaries of the funds. Therefore, I find that the debtor committed a defalcation within the meaning of 11 U.S.C. § 523(a)(4),” Hillman wrote in the opinion.

For more stories like this, sign up for the PLANADVISERdash daily newsletter.

Section 523(a)(4) of the Bankruptcy Code excepts from discharge debts for “defalcation while acting in a fiduciary capacity.” Hillman relied on a U.S. Supreme Court decision in Bullock v. BankChampaign, N.A., in which the high court clarified that “where the conduct at issue does not involve bad faith, moral turpitude or other immoral conduct, the term requires an intentional wrong. We include as intentional not only conduct that the fiduciary knows is improper but also reckless conduct of the kind that the criminal law often treats as the equivalent. … Where actual knowledge of wrongdoing is lacking, we consider conduct as equivalent if the fiduciary ‘consciously disregards’ (or is willfully blind to) ‘a substantial and unjustifiable risk’ that his conduct will turn out to violate a fiduciary duty.”

According to Hillman’s opinion, as Zani’s “sole decisionmaker,” Fahey was in charge of day-to-day operations and was responsible for the company’s book-keeping, including payment of Zani’s bills. Zani was timely in its payment of contributions to the multiemployer plans until November 2008, at which time payments became consistently late. In March 2009, Zani ceased making payments altogether.

Fahey filed his voluntary Chapter 7 petition on January 21, 2011. He listed the multiemployer plan trustee’s claim on “Schedule F – Creditors Holding Unsecured Nonpriority Claims,” assigning it an approximate value of $200,000. On April 12, 2011, the trustee filed a complaint seeking to establish the nondischargeability of all unpaid deductions and contributions.

The opinion for In Re: James M. Fahey, Jr., Debtor is here.

«