Mon, 2 Oct 2006 12:12:56 EDT
Arbitrators Grant $4.3M to Former Wachovia Broker Fired for Market Timing Trades
Beth Bar
New York Law Journal
10-02-2006
An arbitration panel last week ordered Wachovia Securities to pay $4.3 million to a broker fired for market timing.
Frederick O'Meally argued in National Association of Securities Dealers proceedings that he was wrongfully terminated and that his former employer had committed libel and/or slander. He also said that his former employer still owed him compensation from a company savings plan and from a retention bonus.
O'Meally was a broker at Prudential Securities and then Wachovia after the two companies merged in 2003. His attorneys say that from 1999 through September 2003, O'Meally engaged in market timing on behalf of hedge fund clients.
Wachovia fired O'Meally in September 2003 as a result of these actions, but the broker said his conduct had been reviewed and approved by in-house counsel at Prudential Securities.
"He never acted contrary to any policy," said Peter Fleming Jr., a partner at Curtis, Mallet-Prevost, Colt & Mosle, who represents O'Meally.
The NASD panel, in Frederick J. O'Meally v. Prudential Securities, Inc. and Wachovia Securities LLC, 05-01678, ordered Wachovia to pay O'Meally $2.7 million in profit-sharing and $1.6 million in retention bonuses to be paid in equal installments over five years. Both awards included interest.
Wachovia had requested compensatory damages of $323,712, but the panel denied this request.
It also dismissed O'Meally's claims against Prudential in their entirety.
Teresa Dougherty, a spokesperson for Wachovia Securities, said the company stands by its decision to terminate O'Meally.
"We disagree with the panel's decision to award to O'Meally benefits ... under these circumstances," Dougherty said. "We are considering our options with regard to an appeal."
Market timing involves the frequent trading of mutual funds in order to exploit inefficiencies in mutual fund pricing. The act is not illegal, but is seen as problematic because these funds are given an unfair advantage over other investors.
The practice has been investigated by Attorney General Eliot Spitzer and regulators at the Securities and Exchange Commission. Spitzer's September 2003 settlement with Canary Capital Partners for $40 million was an eye-opener for investment companies and sent them scrambling to examine their own practices.
Last month, Prudential's brokerage unit reached a deferred prosecution agreement in connection with investigations into its improper trading of mutual funds. Prudential admitted to "criminal wrongdoing" and agreed to pay $600 million.
SEC CHARGES
O'Meally also faces civil charges in connection with his market timing activities. Southern District Judge Laura Taylor Swain is overseeing the case, Securities and Exchange Commission v. O'Meally, 06 cv. 6483.
In its complaint, the SEC accuses O'Meally and three other Prudential Securities brokers of defrauding dozens of mutual fund companies and the funds' shareholders in order to engage in thousands of market timing trades "worth more than $2.5 billion."
Through these activities, the SEC claims O'Meally and the other defendants violated §17(a) of the Securities Act of 1933 and §10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.
The commission is seeking disgorgement of the brokers' profits from the trades plus prejudgment interest and the imposition of a civil penalty against each of the brokers.
Fleming said the arbitration decision will not affect the outcome of the SEC litigation because evidence of the NASD award is not admissible.
O'Meally, a Long Island resident, is presently a managing member at Kismet Capital.
In addition to Fleming, O'Meally was represented in the arbitration proceedings by Jonathan Harris and Timothy N. McNabe, also partners at Curtis, Mallet-Prevost, Colt & Mosle.
Prudential Securities was represented by Thomas J. Kavaler, a partner at Cahill Gordon & Reindel. Kavaler declined to comment on the award.
Wachovia Securities was represented by Andrew J. Dubill, an associate at Kirkpatrick & Lockhart Nicholson Graham. Dubill did not return calls for comment.