Interview by Cooley Law School

A Conversation with Securities Attorney Joseph H. Spiegel About The Problems With Protecting American Investors in an Unfriendly Regulatory Scheme

By Colin W. Maguire

The American financial sector has been showcasing its shortcomings since 2008. These shortcomings were hardly news to Joseph H. Spiegel. A near 40-year veteran of securities and commodities law, Mr. Spiegel has gone from representing investment houses and stock clearing firms to representing victims of investment scams. His historical perspective and inside view sheds a great deal of light onto problems within our investment banking system, and possible solutions. Moreover, Mr. Spiegel is a passionate advocate who can offer advice on how to avoid predatory investment schemes. As Mr. Spiegel points out, the problem of investment fraud lays not just with men like Bernie Madoff, but with schemes which effect working-class people–especially seniors. The following conversation took me in a variety of directions and to surprising depths. The entire Cooley Law Review thanks Mr. Spiegel for his time and insights, while commending his outstanding work in representing victims. I should preface this conversation by sharing the learned Mr. Spiegel’s five rules for any plaintiff’s attorney:

  1. Never take a case on a day you have nothing better to do.
  2. It isn’t the cases you take that make you money; it’s the cases you turn down.
  3. Every client has to have some skin in the game.
  4. The client has to come to your office for the first meeting.
  5. The better the case, the harder it is to collect.

November 8, 2012 at the offices of Joseph H. Spiegel in Ann Arbor, Michigan:

1. A lot of law students are told that they should find a niche area of the law. You have certainly carved out securities and commodities litigation as an area of expertise. How did you get into this niche area of the law? 

When I was in law school in Chicago between 1970-4, I had a number of clerkships. My first clerkship was with a firm that had a former SEC Commissioner as a partner. I knew another senior partner at that firm and was very fortunate to get that position. One of my first assignments was to digest a deposition involving securities litigation. From there, I was given more work in that field. I also worked on Sundstrand Corp. v. Standard Coleman Industries.1 That case set the law for gross negligence claims deemed to be scienter. I then had an opportunity to work with David Ruder.2 He was a Professor at Northwestern Law School at the time, and later was appointed an SEC Commissioner. I then obtained a clerkship with small firm that represented commodity traders, mutual funds, and stock traders. Back in 1974, you still had fixed commissions for brokers. We represented clearing firms like Rosenthal and Company who did work on the Chicago Board of Trade (CBT) and the New York Stock Exchange (NYSE). We worked those firms on a lot of “Act 40”3 issues. Really, my journey to this field of law was a matter of luck. I define “luck” as when opportunity meets preparation.

2. For the first 12 years of your career, you worked in Chicago – a major economic hub of activity. Then, you began practicing in Southeast Michigan. What prompted the change from a city that had its own stock exchange to the Down River area and did you ever think of moving back when Detroit experienced economic decline? 

No, I did not consider moving back. When they changed Regulation T4 back in the 1980’s, this allowed exchange members and investment firms to leverage off more capital. The small brokerage firms needed more capital to keep up and there was a lot of consolidation. This was a precursor to the repeal of Glass-Steagall.5 Small firms could not really compete, and they were the basis of my Chicago firm’s practice. My late wife had family in Michigan and I had an opportunity with a large firm, so we moved here. I worked at the large firm for one year, decided it was not for me, and struck out on my own. I started the Midwest Securities Law Institute,6 and my own practice.7 This is a great place to practice law.

3. I am sure a lot has changed for you and your practice since 2008, but I would like to back-up a little bit. You came into the field in 1974, when Glass-Steagall was still in effect. Did the repeal of Glass-Steagall in 1999 have the biggest effect on your career up to that point, or did other developments affect your practice more in your first 25 years of practicing? 

You have to look at this question in a historical context. Up until 1974, you had fixed commissions in the securities and commodities industries. This meant you could only compete based upon execution and advice. When the laws changed and fixed commissions went away, you began to see discount brokerage business. In 1987, the Supreme Court decided Shearson v. McMahon,8 which mandated that essentially all securities or commodities litigation go to arbitration. Between 1974 and that decision, various federal and state courts guided the area of securities and commodities litigation. There were juries, consequences, and guidance for brokers. The Shearson decision had a massive impact on the industry and fundamentally changed how customers could bring actions against brokerage firms. It took another three years or so for courts to adjust the law to the Shearson decision. So, you could say that since around 1990, courts have not adjusted any case law on the relationship between the security and commodity customer plaintiff and the broker or investment advisor defendant.

Glass-Steagall’s repeal had a more broad impact and was the result of the merger of Travelers Group and Citi.9 In Europe, banks engaged in insurance, commercial banking, and investment banking as the norm. This was the model Travelers and Citi wanted to follow, but Glass-Steagall prevented this. President Clinton allowed this to happen, with very problematic, though unintended, consequences. A commercial banking person has a very different thought process than an investment banking person. This divergence of thought processes really set the table for the “tech wreck” in 2000 and the financial collapse in 2008. Keep in mind in October of 1987, when you had “Black Monday,” there was a confluence of “triple witching,”10 lack of federal regulation, and this whole issue of the various exchanges’ inability to regulate their own clearing firms.

My mentor David Ruder was the Chairman of the SEC in October of 1987. He was going to see President George H.W. Bush and recommend shutting down the NYSE. In 1987, such an action would have produced a massive effect on the world economy. One of my ex-clients, whose name I will keep confidential, received a call from the President of the CBT mere hours before David Ruder was on his way to see President Bush. The CBT President asked my client to start buying an index at the CBT and the NYSE Amex index; with the understanding the CBT would back my client. The CBT felt this action was necessary to free up the market because the market was in free-fall. So, my client started buying as the CBT requested. Almost instantly, you could see the market starting to go up a little bit. Once David Ruder reached President Bush’s office, the market had recovered enough that the decision was made not to close the NYSE.

After “Black Monday” the SEC began putting stronger checks and market-correction tools in place; it was not enough in the long run. The 2008 financial crisis was direct result the combined effect of the Shearson decision, the repeal of Glass-Steagall, and the 2000 “tech wreck,” because this led to de-regulation at a federal level, the inability of exchanges to control their members, and a lack of transparency and accountability across the investment world.

4. Does any part of you wish that Congress would reenact Glass-Steagall and get Commercial Banks out of the investment business? 

I have always said that I have five possible reforms that would have prevented the 2008 crisis. First, bring back Glass-Steagall. The thinking process of “too big to fail” and the creation of a mega-market for one company is really toxic. The very basis of the large bank/investment powerhouse combines totally disparate thoughts. An investment banker looks at speculation and acquiring hypothetical assets to make a business decision. A commercial banker looks at repayment and acquiring tangible assets to make a business decision. Second, Regulation T should be re-reformed so that an investment firm cannot leverage so much off of so little. Third, overrule Central Bank of Denver v. First Interstate Bank of Denver. This Supreme Court decision lets professionals completely off the hook in terms of “10b-5”12 litigation because only those who directly injure an investor are liable.

Fourth, get rid of mandatory arbitration for securities or commodities litigation. Allowing a customer to bring a claim in court creates transparency, you get a jury, courts will issue opinions on matters, and you have an opportunity for the industry and customers to receive guidance. Customers should still have the choice of going to arbitration, but they should have a right to transparency. FINRA,13 which is the basic tool for all security and commodity customer claims, has a docket of about 6,000-7,000 cases on a rolling basis. Customers do okay in this scheme, but there is no transparency and, therefore, no guidance. Finally, I would bring back floor traders, specialists, and market-makers. It is difficult for the federal government and the exchanges to regulate issues with upstairs traders and dark pools. Traders away from the floor are buying and selling stocks in volumes traditionally reserved for commodities, and doing so in milliseconds with computers anywhere in the world. That type of activity is not investment activity, it is merely speculation activity. The Supreme Court, and Seventh Circuit, addressed this issue of investments versus speculation.14 Regulators need to do a better job of bringing these computers and computer models under regulation.

5. Based upon your experience dealing with predatory investment schemes, did the financial problems of 2008 come as a surprise to you?

No! In 2000, you had the “tech wreck,” you had economic shifts involving the securitization of real estate, you had people unrealistically wanting to get money out of their homes, and you had hedge funds who wanted to make a lot of money. So when the “tech wreck” occurred, there were less investment products that were easily sellable. People in the industry looked to real estate to fill that product vacuum. Under the administrations of George W. Bush, there was this disintermediation where huge amounts of money were “withdrawn” from real estate. However, real estate is unique. When you securitize real estate and create derivatives out of pieces of mortgages, it creates an incredible amount of leverage. There are movies15 and books which describe just how out of control this leveraging got. Even student loans were securitized, but none of these new products really received oversight. Worse, the academic community almost unanimously supported this leveraging and risk.

Investors used speculation to leverage these new securities so high, that the end result was a very foreseeable implosion. Iceland’s economy is the most graphic example, but it happened here too. Similar to past crisis, this occurred as the somewhat predictable outcome of a confluence theory. You had Bear Sterns and Lehman Brothers needing cash on an on-going basis just to survive. The cash dried up and their problems became our problems because they were “too big to fail.” There was also a lot of focus on hedge funds, but even the term is a misnomer. A hedge fund is merely a mutual fund that invests large blocks of money in companies on a private basis. To some degree, hedge funds are not even regulated. The brokerage industry took advantage of this.

6. Do you think Dodd-Frank is an appropriate legal response that protects investors? 

Sort of, but not really. After the crash in the 1930’s, we had a series of market regulations. Dodd-Frank could have taken a look at those regulations and updated them for modern markets. The act really should have regulated technology. Dodd-Frank really does nothing to address the five reform suggestions I made previously. In my opinion, Dodd-Frank is an incomplete response that is also too complicated. The act is too complicated because it sells out to the financial industry. The more complicated the act is, the harder it is to give regulation teeth. At the last Midwest Securities Institute conference, we showed a vignette from The Daily Show where an actor dressed up as “Dodd-Frank” and was covered in tire marks because the industry had run over him so many times.16 

7. In your wealth of experience, what are some of the worst cases of investment fraud you have seen? Furthermore, do you try to stay emotionally uninvolved in the cases or is this impossible? 

You try to stay uninvolved, but you almost cannot. You have to have fire in your belly to do this sort of thing. I work with a lot of securities class-action suits now. I worked a very large class-action case in Michigan involving Mortgage Corporation of America. I represented the trustee, who represented 3700 investors. In total, they lost around $100 million. We extracted assets and concessions from the bankruptcy and recovered about $33-35 million. This was back in 2000, so we were able to create a legal template for mortgage company demise. This template proved important after 2008. In the Mortgage Company of America case, many people were hurt. However, the most recent claim I have filed is against Portage, Michigan-based American Benefits Concepts (ABC).17 This is probably the worst case I have ever worked on from an emotional stand-point. ABC lost $56-60 million of investor money from mostly elderly citizens in Western Michigan.

Obviously, this is not the highest amount of loss I have seen in a case. Still, this is a tragic case because the investors were people who did not have a lot to invest and lost everything, including their houses or farms in many instances. These people were not sophisticated investors who had insurance. The company was a total Ponzi scheme, it went bankrupt, and I imagine some people will serve jail time as a result. In many of these cases, like the Mortgage Company of America case, my clients and I have cooperated with the FBI. I have served as an advisor to the U.S. Justice Department and worked on a big case involving Provident/Shale Royalties where $485 million was defrauded. In the Mortgage Company of America and Provident/Shale Royalties cases, the losses were substantial, but the investors were could take such a financial loss. Indeed, many smaller brokerage firms suffered as a result of these schemes too. However, there is a huge distinction between the type of investment schemes you hear about involving Bernie Madoff or the major cases I worked on and. In those big cases, you can say, “this was too good to be true and people were greedy,” or what we sometimes call investors having the “greed gland.”

In the very public cases, these were wealthy investors. Many of these investors made more money that they put in. Not to diminish the loss of the plaintiffs in those other cases, but I have never been involved with a more tragic case than this ABC case because these were people who did not have much, often had affinity with the seller of the product through church or a social group, and lost everything. It was difficult for me to keep emotionally distant from this case.

8. A lawyer’s family members often seek their counsel on issues they are unsure about, perhaps even regarding investment opportunities. If law students or lawyers are reading this, what basic advice can you give them to help guide their family members, or themselves, clear of predatory investors? Moreover, what are the signs that a potential victim should call someone like you?

In today’s world, we have a lot of seniors. Seniors are subject to abuse. A young person, I define that as anyone between 25-50 years of age, needs to vigilantly monitor their parents financial situation. High-pressure sales agents often victimize seniors. Later, the senior will often not disclose this financial activity to their children or other family. This is where we have problems because a younger person might have helped their older family member engage in due diligence on investment opportunities. You need to be on alert when a family member starts talking about an investment opportunity where (1) it has steady returns, (2) it seems too good to be true, (3) it involves minimal paperwork, and (4) the seller of the investment has some sort of affinity with your relative. Every one of these factors is, individually, a red flag. Combined, this is almost surely an investment scam.

When a client comes into our office, we can establish whether their investment is part of a Ponzi scheme within five minutes. Again, the family has to work together to make sure those senior members of the family are protected against abuses like annuities that are complicated and tie up and incredible amount of money. The family must protect against Ponzi schemes and unscrupulous brokers. This step is as easy as going to the SEC’s website and using its BrokerCheck system.19 You can look up a broker’s background and figure out if a substantial firm is sponsoring the product in question. However, this is a tough conversation for children to have with parents. Unfortunately, parents do not want to disclose their financial situation to their children. Then, it is more difficult to find a plaintiff’s security litigation lawyer than you might think. You should have a good accountant, make sure the numbers work out, and avoid the “greed gland.”