Bull or Bear: Your Securities Litigation Resource - February 2021

What's Happening In the Securities Industry This Month

 February 2021

 Welcome to the February 2021 issue of my monthly newsletter, where you can read about important developments in the securities industry, learn about laws and decisions that affect your practice, and access free resources. Please feel free to share this newsletter with others who may benefit from the content.

  • Meme stocks, Robinhood, and the WallStreetBets army -- the rise (and fall?) of the masses
  • SPACs -- What they are and why you should know about them
  • FINRA Rule 3241 -- Uniform guidance about reps holding positions of trust for customers or becoming beneficiaries
  • GPB Update -- The first award goes to . . .
  • Statistic of the Month -- How are Claimants faring in Zoom arbitrations and mediations?
  • Book your next mediation online!


Meme Stocks, Robinhood and the Rise (and Fall?) of the WallStreetBets Army

Follow up to last month's article on record margin debt and options volume

Last month, we read about Mr. Burnsworth and how he turned his $23,000 options play on Tesla into $2 million. This month, we're talking about Reddit's Wall Street Bets thread and how a large group of small investors joimed forces to create an investing army that drove up the price of GameStop and other "meme stocks" and created short squeezes that caused billions of dollars in losses to hedge funds and institutions that had heavily shorted those stocks. I have to admit, it was a fascinating phenomenon to watch. And if we're being honest, don't you secretly wish you'd bought some shares of GameStop at $17 and sold at $480? While we can spend time pondering whether the Redditers democratized investing or acted as market manipulators, and whether Robinhood really needed to halt buying in the meme stocks, today I'm wondering about the people who used their student loan proceeds, dog walking or UberEats delivery money or other such funds to buy in, and add leverage, toward the top. Because those people are surely out there and the one thing those of us who are involved in securities litigation inherently knew was that the ride was going to end badly for them. We've already seen a class action filed against Robinhood. I imagine we'll also be seeing any number of cases about margin -- the parameters used to approve investors for margin, especially at higher risk levels, limits on the amounts of margin newer investors may use, and whether some firms acted reasonably in how they educated investors about the risks of margin, just to name a few. CNBC published a timeline, complete with charts and a cameo appearance from Jim Cramer :-) in an attached video. The button below will link to that article.

CNBC Timeline of Meme Stock/Short Squeeze Events


SPACs -- What You Need to Know

Everyone's talking about SPACs (Special Purpose Acquisitions Companies), but how might they affect securities litigation?

SPACs, also called “blank check companies,” are all the rage on Wall Street. You should know what they are, how they work, and the pros and cons of investing in SPACs. To form a SPAC, founding investors, often high profile, big money investors, form a shell company and take that company public. The due diligence process required for a SPAC IPO is very different than for a regular IPO because there is no company yet, only investors with a plan. When a SPAC goes public, it is basically a publicly-traded shell in search of a company to acquire. Most SPACs have intended goals with respect to what type of company they are looking for -- a green energy company, a cannabis company, a sports betting company -- but they are not required to acquire that type of company. SPACs have two years to identify a company, complete the acquisition and obtain list the merged company under a new ticker symbol. If the SPAC fails to complete an acquisition within the prescribed time frame, investors' money must be returned. Notably, sponsors’ compensation for closing the deal is typically a 20% stake in the acquired company when it is relisted. Retail investors can purchase shares of individual SPACs once they go public. The price is usually $10/share and the money sits in interest-bearing accounts until the merger is complete. SPAC ETFs have also appeared as a vehicle for retail investors. While SPAC investments have the potential for excellent returns, investors are, in effect, investing in an idea, not a company. They don’t know if or when a company will be acquired, which company will be acquired, whether that company is in line with the SPAC’s initial plan or a variety of other variables that could affect the ultimate value of their investment. The CNBC article and videos – see button, below – provide an easy-to-follow primer on SPACs. Look for a link to a recent WSJ podcast about SPACs later in this newsletter.

CNBC Article on SPACs, with Videos (free access)


New FINRA Rule 3241 -- Uniform Guidance Concerning Reps Named as Beneficiaries or Persons of Trust for Customers

This new rule provides guidelines and supervisory procedures when a rep asks to be a beneficiary, trustee or POA for a customer

FINRA Rule 3241, which provides national guidance for situations where a rep is a beneficiary or wants to become a trustee or POA for a customer, took effect 2/15/2021. This new rule creates broad uniform rules and guidance for reps and their member firms with respect to the circumstances under which a rep may be customer's beneficiary or hold a position of trust, such as trustee or POA, for a customer. The rule requires the rep to provide written notification to the firm as soon as she becomes aware of the designation or as soon as he is asked to hold a position of trust. The firm must then perform a "reasonable assessment of the risks" of the rep assuming or accepting the position. Should the firm approve the rep's request, it may impose reasonable conditions or limitations designed to safeguard the customer. Thereafter, the firm must supervise the rep to ensure compliance with the conditions or limitations it has imposed and must follow up on any red flags. Should the customer hold accounts away from the firm, the firm must supervise and follow up on red flags as it would for an outside business activity. The rule also addresses attempts to circumvent the rules, such as when a rep asks the customer to name his spouse or child as beneficiary or trustee or when she resigns as the customer's rep in order to receive a bequest.

FINRA Rule 3241, effective 2/15/2021 (NTM 20-38)


GPB Update -- And the Award Goes to . . .

The Detroit-based Panel awards Claimants full compensatory damages, statutory interest, attorney fees and costs

While a few awards with a GPB component have been issued in the last few months, the first pure GPB case resulted in an award to Claimants, who were represented by Brian Levin and Jeff Kaplan. The award included full claimed compensatory damages, statutory interest, attorney fees and costs. Claimants' counsel argued that the broker-deal failed in its due diligence obligations, in that GPB products were unsuitable for not only their particular clients but for any retail investor. GPB raised $1.8 billion beginning in 2013 from investors who invested in GPB private partnerships. It has been alleged that GPB was a ponzi scheme. The button below provides a link to the award.

FINRA Award Case No. 19-01143


Statistic of the Month -- Claimants' Recovery in Zoom Arbitrations

A recent analysis by SLCG suggests that Claimants recover less in Zoom arbitration

SLCG has released an interesting analysis about the impact of Zoom arbitration on arbitration awards. The report ultimately concludes that "investor Claimants are far less likely to win and, on average, they recover substantially less of their requested compensatory damages when they do prevail at ZOOM final hearings than at in person final hearings." More specifically, the report finds that Claimants received monetary awards in only 34% of arbitrations that went to hearing in 2020, down from between 42% and 45% in years 2015-2019. And when investors do obtain a favorable award, the amount awarded is 33.4% of claimed damages, a 49% decline from average award from 2015-2019. Geography seems to matter, with the most investor-friendly awards coming out of FINRA's West Region and the worst coming out of the Northeast and New York City (the number of awards was also substantially less in the latter regions). Settlement values were also lower in 2020 compared to previous years, according to SLCG's report. While there is always room to disagree on how statistical conclusions are arrived at, this report is certainly food for thought.

SLCG's Report: The Impact of ZOOM on FINRA Arbitration Hearings


Book Your Next Mediation Using ONLINE BOOKING at Kathy Adams Dispute Resolution Services!

You can now hold and book mediation dates on my website!
I am accepting online bookings through my website! Check availability, hold a date or request to book a date using my easy-to-use online calendar. No more going back and forth over dates, start times, venues, etc. Simply select "book a mediation" or "hold a date," choose your date, complete the brief intake form and look for your confirmation email. The calendar is optimized for mobile devices, too, so it's just as easy to use on the go. I look forward to working with you in 2021!

Check out my online calendar!


This Month's Free Resources

Link to "The Journal" Podcast Episode: The Shell Companies Taking Over Wall Street
Link to "The Journal" Podcast Episode: An Oral HIstory of WallStreetBets
Link to "The Journal" Podcast Episode: Free Trading Isn't Free: How Robinhood Makes Money


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