THE GODFATHER GOES TO FINRA: SECURITIES ARBITRATION
Don Vito Corleone is a legitimate businessman, the founder and CEO of Genco Olive Oil Company. America has been good to him. He has made millions of dollars as a seller of olive oil and other foodstuffs. He has paid his taxes, raised his family, and been a good, law abiding citizen. While not well educated, Don Vito is a shrewd, intelligent businessman. But for all his business acumen, he has very little experience in the stock market.
Enter Virgil Sollozzo, a stockbroker employed by Tattaglia & Family Investments. Sollozzo was introduced to Don Vito by a mutual friend, who said “he’s a friend of mine.”
In the first few years, Sollozzo recommends only U.S. government bonds and very conservative “blue chip” stocks to the Don. Many times Don Vito has told Sollozzo “I believe in America,” to explain his penchant for U.S. government bonds as his investment of choice. In these years, Don Vito’s portfolio has grown, slowly, but steadily. He now holds some millions of dollars, the bulk in said government bonds and blue-chip companies.
The Don has always placed safety and security above all else in making his investments. The Don’s investment philosophy is “a man can’t be careless. Children can be careless. But not men.”
Whenever Sollozzo tries to interest the Don in something a little more speculative, the Don always politely listens, but then respectfully tells Sollozzo “I must say no to you. It doesn’t matter to me how a man invests his money, but some of your stock picks…well, they’re a little bit dangerous.” Indeed, the Don is very worried about his reputation with his friends in politics, the judiciary, and the police department.
Yet as prudent and cautions as Don Corleone is with his investments, his sons are a different matter. While all of them also do business with Sollozzo, and invest their own money, the situation for each of the Don’s three sons is very different, indeed.
First is the Don’s oldest son, Santino, the heir apparent to one day take over Genco Olive Oil. Santino is quick-tempered, boorish, and greedy. “Sonny,” as he is called, wants to make a lot of money quickly, so he can fulfill his lifelong dream: starting a company that makes only one thing—-white t-shirts for men.
From the very start of investing with Sollozzo, Sonny only wants to make a lot of money and fast. He is given to speculation, buying stocks carelessly on rumors and gut feelings. Sonny not only does no research, he never looks at any information Sollozzo offers him. “I want to read, I’ll go to the library,” Sonny often tells Sollozzo.
The Don’s middle son is Fredo. He is an idiot. Weak, timid, and stupid, the Don has him open an account with Sollozzo, and tells Fredo “only buy very safe, very secure things.” Because he barely understands investing, and is a coward to boot, Fredo tells Sollozzo to buy mutual funds, because “Pop told me to.”
Michael is the Don’s youngest son, and the smartest. Michael is highly educated, and possesses an M.B.A. from Dartmouth’s Amos Tuck School of Business. Michael has already been investing his own money, saved from his vacation in Sicily. Michael makes his own investment decisions, although he also uses Sollozzo as his broker. But he is completely self-directed.
Michael owns stock in large cap companies like Microsoft, IBM, and ExxonMobil. But he also has significant holdings in gaming and gambling companies, including casinos in Las Vegas and Reno, Nevada. Indeed, Michael is quite conservative, waiting for the day capitalism returns to Cuba, so he can make major investments in Cuba’s tourist and hospitality industries.
Things have been quiet for a long time, but over the last year, trouble starts. And this trouble quickly take shape, as follows.
The first problem is with Santino. Despite his father’s advice and prudent example, Sonny is anxious for a big score, so his speculation starts to go to an entirely new level. For example, he orders Sollozzo to buy a huge block of a highly speculative start-up company called Bronx Bedding, Inc. Sonny’s reasoning: he says “it’s time to go to the mattresses.”
Sollozzo expresses his doubts about this company, reminding Sonny that Bronx Bedding is an unproven company, its stock trades on the “OTC,” that is, “over the counter,” and not on an established stock exchange.
Sollozzo recommends to Sonny that he buy only $ 25,000 of Bronx Bedding, but Sonny insists on purchasing twice that, to be precise, $ 50,000 in the common stock of Bronx Bedding. Sollozzo actually puts in two orders for $ 25,000, each a week apart, the first as he recommended to Sonny, and the second at Sonny’s insistence.
Indeed, Sollozzo’s branch manager, Bruno Tattaglia, is worried. In reviewing Sollozzo’s daily trades (part of his job as branch manager), he sees Sonny’s overly large position in Bronx Bedding. Bruno Tattaglia telephones Sonny, and expresses his concerns. But Sonny is adamant; he wants this stock, so the purchase remains.
At the same time, Sollozzo recommends a different stock to Fredo. This stock is Louie’s Family Restaurants, Inc., an up and coming chain of small, family owned and operated restaurants. Sollozzo tells Fredo “they make the best veal in the city.” Fredo is unsure, and he says “let me think about it for a few days.”
The next day, Fredo goes fishing with Albert Neri. Fredo tell Neri about Louie’s Family Restaurants, and Neri says “Fredo, you have to buy it. Everybody I know eats there. Their restaurants are nice, quiet family places. Good food, and everybody minds their own business. The only bad thing is that the restrooms are kind of old fashioned.”
At the end of the week, Sollozzo calls Fredo, and offers to send some of his firm’s research material, and the public 10-K filed by Louie’s. Fredo says, “nah, it’s OK. My friend Al said it’s a great buy, so buy me as many shares as you can.” Sollozzo complies, and since Fredo already ordered the buy, Sollozzo never sends the research to Fredo.
But there is a minor snag. Fredo wants to purchase $ 5,000 of the common stock of Louie’s Family Restaurants, but he has only $ 1,000 in cash. Fredo does not want to liquidate any of this mutual funds, as it might anger his father, so he tries to cancel the order.
Sollozzo calls Fredo and says, “don’t worry. You can buy on margin.” Fredo, idiot that he is says, “Margin? You mean like a margin on a piece of paper?” Sollozzo cannot believe Fredo is that dumb. He says “no, no. It’s like buying the stock with borrowed money. Sure, you’re supposed to pay a little interest, but before that happens, the stock will go up, and you sell it for a profit, and pocket all the money.”
Fredo replies “gee, that sounds risky,” but Sollozzo says “Louie’s Restaurant is a stock that is going to make you a lot of money. You can’t lose. Trust me. I want to help all you Corleones.” Fredo agrees to the margin buy of Louie’s stock.
While all this is going on with Sonny and Fredo, Don Coreleone sees his stocks are starting to drop. He also notices that Sollozzo’s very active daily trading is starting to add up in commissions, commissions that come out of Don Corleone’s pocket and enrich Sollozzo, with no economic purpose nor gain for the Don.
As it happens, for about six months prior, Sollozzo was making daily trades for Don Corleone in the same stocks. He would buy a stock at the market open, sell it at lunch, and then buy it back at the close. And he would do this a few times a week. But since Don Corleone was making a little money on all these many, many trades, he did not complain to Sollozzo, and let it continue.
But now it becomes too much. Sollozzo is doing this every day with nearly every one of the Don’s stocks. Don Corleone is tired of what he now sees as excessive trading and commissions to Sollozzo, and, in addition, that various stocks recommended by Sollozzo are decreasing in value.
Don Corleone calls Sollozzo to complain. Sollozzo tells him the stocks will come back, and the Don will make money. “I promise you, they will go back up.” He also agrees to refrain from his excess trading. Don Corleone agrees, but tells him if it happens again, the Don’s C.P.A., Luca Brasi, will have to have a meeting with Sollozzo and Bruno Tattaglia. Sollozzo is strangely unconcerned; he replies “let me worry about Luca.”
But now Sollozzo tells Don Corleone he has a wonderful new investment idea. He tells the Don that his portfolio is too conservative and too low-yielding. Given the turmoil in the major pharmaceutical companies, he tells Don Corleone now is the time to buy drug company stocks: common stock, preferred stock, all kinds of shares, and in major American and European drug companies.
Indeed, one of the pharmaceutical companies is a relatively new venture, named Turkish Poppy, Inc., which supposedly has a new wonder drug that can make you very happy.
Sollozzo goes on and on to Don Vito that it’s a “can’t miss” stock, that he, Sollozzo has bought it for himself, his own family, and the entire Tattaglia family and all of their people have bought it. But that’s a lie. Sollozzo and the Tattaglias do not own a single share of Turkish Poppy. Sollozzo made that up, just to convince the Don to buy the stock.
Sollozzo implores Don Corleone to invest, telling him the drug companies are the future; if not now, then ten years from now. He strongly recommends that the Don invest at least $ 2 million, $ 1 million from the Don’s regular account, and the other $ 1 million from the Don’s IRA, into these drug stocks.
Don Corleone is openly skeptical at first, especially about investing $ 1 million from his retirement funds. The Don reminds Sollozzo that he is getting older, and he plans on retiring soon, and having his son Michael assume control of the family business (because Sonny can’t think about anything except his white t-shirts).
Sollozzo finally convinces Don Corleone, by promising him “in the first year, you’ll make $ 3, $ 4 million dollars. Then it will go up.”
Finally, Sollozzo adds: “if you’re worried about the security of your investment, I guarantee it.” Don Corleone relents, takes Sollozzo’s advice, and invests the $ 2 million in the drug company stocks, including $ 1 million in his IRA.
Days later, a major economic upheaval brings the entire market down, in particular the pharmaceutical sector. No one saw this coming. There are Senate investigations, media coverage, and the like. But, in the end, while there is plenty of blame to spread around, it is all inconclusive.
As for all of the Corleone accounts, they are left, as follows. All of Don Corleone’s drug company stocks lose half their value. If he had stayed with his solid, steady blue-chips, he might have lost ten to twenty per cent of his investments, but nothing near what he lost by taking Sollozzo’s advice. The Don has also lost some money from Sollozzo buying and selling, buying and selling, for no cogent reason, Don Vito’s blue chip stocks.
Sonny’s speculative stocks, especially Bronx Bedding, take a beating, losing anywhere from 75 % to 90 % of their value. Sonny’s close friend and advisor, Peter Clemenza, remarks to Sonny “the Sanitation Department will be picking up a lot of broke investors off the streets in the next few months.”
Louie’s Family Restaurants files for Chapter 11 bankruptcy, and Fredo loses his entire investment therein. His old friend, Sal Tessio, says to Fredo “I warned you; never invest in a place with dirty bathrooms. Besides, their veal was never that good.”
And on top of that, Fredo owes the interest from the margin borrowing to buy the Louie’s shares in the first place. Since the stock crashed, Fredo has the loss and the margin interest to pay, and nothing to show for it. Had he stayed exclusively in the mutual funds the Don had him start with, he would have had a modest return, but, more importantly, not the significant loss he has now sustained.
The only member of the Corleone family left unharmed is Michael. While he sustained some losses here and there, his carefully structured portfolio, self-directed by Michael himself, is relatively intact. Having an M.B.A. from Dartmouth apparently paid off, since, as a sophisticated investor, Michael avoided the mistakes of his father and brothers.
Except for one thing: Michael noticed that eighteen (18) months ago, an even $ 5,000 in cash was “journaled,” that is to say, transferred, out of his main brokerage account. Subsequent investigation reveals that Sollozzo transferred it to another client, his personal friend Paulie Gatto. Michael is immediately suspicious. He has heard rumors that Paulie spends all his money on cannolis.
Certainly, Michael never authorized such a cash transfer. To date, he let it go, but when he finds out about all the other travails of his father and brothers, now he gets angry.
For a few days, the Corleones put all business aside. After all, Connie Corleone is getting married, and the focus is on the very small, very intimate wedding that has been planned. But the day after the wedding, Don Vito Corleone sits down with all his sons, and they have a long, detailed discussion of this Sollozzo business.
The Corleone family decides enough is enough. They declare war on Sollozzo and Tattaglia & Family investments. The Corleones warn the other three family owned and operated investment firms (Barzini & Barzini, L.P., Cuneo & Associates, Inc., Anthony Stracci & Sons, Ltd.) to stay out of it. “It’s none of your affair,” says Don Corleone.
Don Corleone decides to sue. His personal legal advisor, his adopted son Thomas Hagen, informs the Don that his dispute must be arbitrated, not litigated, and only before FINRA.
Don Corleone is familiar with the five most powerful and unscrupulous law firms in New York, the so-called “Five New York Law Firms.” The Five New York Law Firms, the ones most feared in New York, and indeed all of America, are Cravath, Sullivan & Cromwell, Skadden, Weil, Gotshal, and Milbank, Tweed.
The Don knows all about them, having been informed by his old friend, the Hollywood producer, Jack Woltz. Woltz knows all the big New York lawyers (the Don and Woltz also share a love of horses, and often go riding with their mutual friend, the actor Johnny Fontane).
But the Don knows the Five New York Law Firms are not up to the task of representing his family in this important matter. Don Corleone knows that he must turn to the law firm he most respects, and even he fears for reason of its ruthlessness.
Don Corleone goes to the Sixth New York Law Firm, the one that he knows and has trusted over the many years to protect his family business.
The Don goes to Sabino & Sabino, P.C. And that is where you are interning this summer.
*****
INSTRUCTIONS
PREPARE A DISCUSSION MEMORANDUM. This is not a brief or a memorandum of law in the strict sense.
TARGET A LENGTH OF APPROXIMATELY 25 PAGES. This is a target, not an absolute. A page or two less is not a big deal. In all honesty, once you start writing, you will find that you can easily exceed the target.
THE PAPER IS TO BE DOUBLE SPACED, STANARD TYPE, ETC. NO EXCEPTIONS.
USE BLUE BOOK CITES FOR BRIEFS IN THE TEXT. You can use footnotes as appropriate, but no endnotes.
CITE CAREFULLY AND PROOFREAD. I HATE TYPOS, and I will not be happy if you are sloppy. Neatness counts!
YOU WILL HAND IN THE PAPER IN THE FOLLOWING MANNER.
EMAIL A COPY TO ME BY 12 NOON ON MONDAY, 4 MAY 2015. TURN IN A HARD COPY TO MS. BETTY BLACK, LAW SCHOOL SECRETARY, NO LATER THAN 4 P.M. THAT SAME DAY. NO EXCUSES, NO EXCEPTIONS.
KEEP A HARD COPY FOR YOURSELF. Add it to your collection for writing samples.
DO NOT WASTE TIME EXPLAING THE FACTS. I obviously know the facts already. Do not take up space repeating them.
ADDRESS IT TO ME, AS LEAD COUNSEL REPRESENTING THE CORLEONE FAMILY.
GO RIGHT TO THE ISSUES. IDENTIFY CAUSES OF ACTIONS, AND DEFENSES. PROVIDE ALL APPLICABLE FEDERAL CLAIMS, COMMON LAW CLAIMS, AND CLAIMS PURSUANT TO FINRA RULES. POINT OUT PLEADING ISSUES.
BREAK IT DOWN INDIVIDUALLY, IN THE FOLLOWING ORDER: DON CORLEONE, SANTINO, FREDO, AND MICHAEL. DISCUSS WHAT EACH PERSON CAN SUE FOR. IDENTIFY THEIR STRENGTHS AND WEAKNESSES. IDENTIFY THE DEFENSES AGAINST THEIR CLAIMS.
IDENTIFY THE EVIDENCE NEEDED TO PROVE EACH RESPECTIVE CASE. POINT OUT THE APPLICABLE STATUTE OF LIMITATIONS ISSUES.
IDENTIFY THE DEFENSES THAT WILL BE USED AGAINS THE CORLEONES. OPINE AS TO HOW GOOD OR WEAK THE DEFENSES ARE.
DISCUSS THE LEADING CASES. CONNECT THE LAW TO EACH INDIVIDUAL’S SITUATION. Among other things, do not hypothesize. Relate real facts to the real law.
BE STRONG, NOT WEAK. Know what you are talking about, and have the strength of your convictions. Be firm in what you say. Be candid. Do not hold back.
But show respect.