An irreverent Wall Street Blog
by Bill Singer
Join BrokeAndBroker blog on Facebook  Follow the BrokeAndBroker blog on Twitter  Connect with BrokeAndBroker on LinkedIn  Join Bill Singer on Google+  Subscribe to RSS Feed

New York State's Top Court Tells Wall Street Compliance Pros To Be Afraid, Be Very Afraid
Written: May 14, 2012

According to his Complaint filed in the New York State Supreme Court, New York County on November 10, 2008, Plaintiff Joseph Sullivan was a 15% partner in affiliated firms Defendants Peconic Partners LLC and Peconic Asset Managers LLC (collectively, “Peconic”), and served as Executive Vice President, Treasurer, Secretary, Chief Operating Officer and Chief Compliance Officer.” Peconic’s majority owner, CEO, and President was  Defendant William Harnisch.

The genesis of this lawsuit was Sullivan’s dismissal by Harnisch within hours after a lawyer for Sullivan contacted Peconic’s counsel to voice objections to a proposed agreement that would have eliminated Sullivan’s ownership interest.  Sullivan’s Complaint alleged that he was fired as retaliation for objecting to stock sales by Harnisch in his personal account and in family accounts because Sullivan believed such sales constituted a front running violation that disfavored the firm’s clients. Accordingly, Sullivan alleged that he was actually fired for speaking out against manipulative and deceptive trading practices, in contravention of company policy that prohibited such retaliation.

The gist of Sullivan’s claim was that the legal and ethical duties of a securities firm and its compliance officer justify recognizing a cause of action for damages when the compliance officer is fired for objecting to misconduct.  On defendants’ motion for summary judgment, the Supreme Court held this claim to be legally sufficient, but the Appellate Division reversed and dismissed.

SIDE BAR: As more fully described in Sullivan v. Harnisch, 81 A.D.3d 117 (NYAD 1st Dept, December 21, 2010):

Peconic had staked large sums of its investors’ capital on the fertilizer industry, mostly with Potash Corp. of Saskachewan, Inc. and a related company, Mosaic Corp. Prior to September 2008, Harnisch personally held over $100 million in Potash stock, and his clients held approximately $60 million worth of the same stock.

On September 29 and 30, 2008, Harnisch sold two thirds (784,085 shares) of his Potash shares at $132 per share, without either preclearing the trades with Sullivan or notifying Peconic clients who owned holdings in Potash. Also, allegedly in violation of Form ADV and the Code, these actions were taken without Harnisch making similar trades for the firms’ clients. Upon learning of the sales, Sullivan blocked the October purchase of Potash shares with new client investment monies until he could determine why Harnisch had sold from his own accounts and not for Peconic clients.

On October 1, 2008, Mosaic released a disappointing third-quarter earnings report. By the market opening on the next day, its stock price had dropped more than 15%. On October 2, 2008, Peconic sold half of the shares of Potash stock held in client accounts (230,000 shares) at an average price of $103 per share. Peconic’s clients were estimated to have lost $6,670,000 by not having their Potash stock sold at the same time that Harnisch sold his personal Potash shares. Harnisch thereafter sold the remaining shares of Potash held in his personal accounts (243,900 shares) on October 6, 2008 without selling any of the remaining 229,965 shares of Peconic’s clients’ Potash stock.

Sullivan claims that after reviewing Harnisch’s September 29 and 30 Potash sales against Peconic’s October 2 trading activity on behalf of clients, he believed, in his professional judgment, that Harnisch had engaged in “front-running,” a practice specifically forbidden by Peconic’s SEC Form ADV and its Code, as well as its Compliance Manual.

New York Court of Appeals

On appeal to the New York State Court of Appeals: Joseph W. Sullivan v. William F. Harnisch, et al. (NY Court of Appeals, May 8, 2012 : Opinion by Judge Smith. Judges Graffeo, Read, Pigott and Jones concur. Chief Judge Lippman dissents in an opinion in which Judge Ciparick concurs), the Court noted that American courts generally are reluctant to expanding the few exceptions to the at-will employee doctrine – recognized only once in New York in Wieder v Skala (80 NY2d 628 [1992]), where the Plaintiff was a lawyer who claimed to have been dismissed by his law firm “because of his insistence that the firm comply with the governing disciplinary rules by reporting professional misconduct” committed by one of the plaintiff’s colleagues.”

In fashioning the Wieder exception, the Court stressed both the ethical obligations of members of the bar and the importance of those obligations to the employment relationship between a lawyer and a law firm. In essence, Wieder recognized the unique nature of the legal profession and deemed it appropriate to grant a narrow exception to the at-will doctrine for the circumstances presented.  In applying Wieder to Sullivan’s case, the Court stated that:

Assuming that there are some employment relationships, other than those between a lawyer and a law firm, that might fit within the Wieder exception, the relationship in this case is not one of them.

Acknowledging the importance for funds and advisers to have a strong regulatory scheme, the Court notes the various federal laws, rules, and regulations in place; however, it refuses to extend the exception granted to the legal profession to that of compliance professionals.  Succinctly, the Court states:

Important as regulatory compliance is, it cannot be said of Sullivan, as we said of the plaintiff in Wieder, that his regulatory and ethical obligations and his duties as an employee “were so closely linked as to be incapable of separation” (Wieder, 80 NY2d at 635). Sullivan was not associated with othercompliance officers in a firm where all were subject to self regulation as members of a common profession. Indeed, Sullivan was not even a full-time compliance officer. He had four other titles at Peconic, including Executive Vice President and Chief Operating Officer, and was, according to his claim, a 15% partner in the business. It is simply not true that regulatory compliance, in the words of Wieder, “was at the very core and, indeed, the only purpose” of Sullivan’s employment.

It is beyond dispute that compliance with extensive federal regulations — overseen, at firms like Peconic, by compliance officers — is an integral part of the securities business. But the existence of federal regulation furnishes no reason to make state common law governing the employer-employee relationship more intrusive. Congress can regulate that relationship itself, to the extent that it thinks the objectives of federal law require it. Indeed, after the events involved in this case, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub L 111-203, 124 Stat 1376 [2010], codified at various sections of United States Code), which provides whistle blower protection, including a private right of action for double back pay, for employees who are fired for furnishing information about violations of the securities laws to the SEC (Dodd-Frank Act § 922 [a], 15 USC § 78u-6). That statute seems not to apply to conduct like that alleged in Sullivan’s complaint; Sullivan does not claim to have blown a whistle — i.e., to have told the SEC or anyone else outside Peconic about Harnisch’s alleged misconduct — but only to have confronted Harnisch himself. Nothing in federal law persuades us that we should change our own law to create a remedy where Congress did not.

Accordingly, the Court of Appeals affirmed the order of the Appellate Division.

In a passionate dissent, New York Court of Appeals Chief Judge Lippman offered the following rebuke to the majority’s opinion.

In the wake of the devastation caused by fraudulent financial schemes — such as the Madoff ponzi operation, infamous for many reasons including the length of time during which it continued undetected — the courts can ill afford to turn a blind eye to the potential for abuses that may be committed by unscrupulous financial services companies in violation of the public trust and the law. In the absence of conscientious efforts by those insiders entrusted to report and prevent such abuses of investors, such behavior can run rampant until a third party outside the company discovers it and takes action. The message that will be taken from the majority’s decision is self evident: if compliance officers (and others similarly situated) wish to keep their jobs, they should keep their heads down and ignore good-faith suspicions or evidence they may have that their employers have engaged in illegal and unethical behavior, even where such violations could cause or have caused staggering losses to their employers’ clients. The majority’s conclusion that an investment adviser like defendant Peconic has every right to fire its compliance officer, simply for doing his job, flies in the face of what we have learned from the Madoff debacle, runs counter to the letter and spirit of this Court’s precedent, and facilitates the perpetration of frauds on the public. . .

Bill Singer’s Comment

Personally, I detest the Court of Appeal’s Opinion and do not agree with many of its assumptions or its ultimate conclusion.  Frankly, I fail to appreciate the distinction drawn between the legal and compliance professions; and to the extent that such differences have been set out by the majority, I find the rationale artificial, strained, and not convincing.  On the other hand, as a veteran lawyer, I similarly recognize that in New York State, the highest state court has spoken and the matter is now resolved.

Frankly, given the shadow still cast by the fall of Bear Stearns and Lehman Brothers, and the tawdry recent regulatory history of MF Global, Citigroup, Merrill Lynch, UBS, Morgan Stanely, and even today’s troubling revelations about JP Morgan’s trading practices, one cannot imagine a more wrong-minded and ill-timed decision than that evidenced in Sullivan. 

To the extent that there is a silver lining in this cloud, it is that Wall Street compliance professionals in New York State will now better understand the legal counsel that I and other lawyers often provide in response to similar stories about so-called wrongful discharge or retaliation.  Notwithstanding the sympathetic nature of many of those tales, the law is not compassionate here.  If you think that by doing the right thing that you are protected from being escorted out of the building, having your security pass cancelled, and getting dinged on your Form U5, go back and re-read the Court of Appeals’ Opinion.  Be afraid. Be Very Afraid. 

READ full-text Sullivan Court of Appeals Decision

READ full-text Sullivan Appellate Division Decision


Previous Entries
July 3, 2015
On Sunday July 5th, Greeks will be going to the polls -- at least as of the writing of this column -- and voting whether to accept the terms of the pr... Read On
July 2, 2015
Offered for your consideration today in the Blog is a thought piece. On one side, we have the goose: An individual human being conv... Read On
July 1, 2015
If you're going to promise a Wall Street regulator that you will fix a problem, you better make certain -- in fact, you better make damn cer... Read On
June 30, 2015
In "SEC Commissioner Gallagher Rages Against The Dying Light In Two Dissents" (, June 18, 2015), I noted that:After four years ... Read On
June 30, 2015
Stockbroker, Compliance, Legal, and Regulatory JobsEmployment Page Jobs#wallstreetjobs @brokeandbrokerNOTICE TO EMPLOYERS: Brok... Read On
June 29, 2015
On June 26, 2015, the Financial Industry Regulatory Authority ("FINRA") published this somewhat unusual and intriguing press release:FINRA Supports NA... Read On Job Search

Related Topics
Tag Cloud
Internet FINRA Bear Stearns Bloomberg SEC NASD NYSE Money Laundering Due Diligence Waiver Forbes China Broy Woody Allen Madoff NAC NPR Marketplace Stanford UBS Ketchum Antitrust NASDAQ RRBDLAW Schapiro Bill Singer BrokerAndBroker USERRA Morgan Keegan Arbitration Counterclaim Khuzami BrokeAndBroker Aleynikov Goldman Sachs brokeandbroker Promissory Note U4 Bill SInger EFL CFTC Huffington Post Flash Crash arbitration RBC Ponzi Affinity Fraud Wachovia Criminal Raymond James Expungement Fraud Securities Fraud Outside Business Activity Registered Rep Magazine FOREX FBI Banc of America Pro Se PCAOB Supreme Court Morgan Stanley Smith Barney E*Trade Margin email Galleon Penson U5 Defamation Protocol Wells Fargo Punitive Damages Citigroup Merrill Lynch ARS Employee Forgivable Loan Street Legal Morgan Stanley AWC Fidelity Bankruptcy Broke And Broker HFT David Sobel Day Trading Ameriprise Commissions Spouse Schwab Commission CRD Kenneth Starr IRS CNBC Complaint ATM Skimming Hacking Phishing Malware Naskovets Poteroba Koval Lincoln Financial Selling Away Outside Business Activities Rakoff 2nd Circuit Second Circuit IRA 401k Forgery Tax Email Netschi Moore Whistleblower Street Sweeper Countrywide Tran Bharara Facebook Online Severance Bonus Eligibility Rule TD Ameritrade Hedge Fund SAC 1099 Smith Barney Lehman Brothers SIPC IC3 Scottrade AIG Lehman JPMorgan Chase Hertz Insider Trading Bank of America Department of Justice Elles Bribe Auction Rate Securities Raiding Spam Edward Jones Medicare Diabetes Dow Schumer Thain Walter Bid Rigging Real Estate Discrimination Wall Street Statutory Disqualification Form U4 Form U5 Indictment Boyland DOJ Corruption bill singer FTC Do Not Call FINRA Arbitration Costa Rica Settlement LIBOR Varney Plea Rule 8210 Eligibility RRBDlaw 8210 Appeal Fowler LPL Johnson Cellphone US Airways JPM BrokeandBroker Reg D MSSB Vault Loan SunTrust Discovery Employment Rosenthal Recruiting Lawyer Trading Platform JP Morgan Employment Tuesday Wrongful Termination Bank Guarantee WaMu Solicitation REIT Martin Credit Cards Rule 3050 Away Account Credit Repair PN Advisor Placement Group Fifth Amendment Forex Mortgage Private Placement Moon CGMI Failure to Supervise Merrill Anderson Exam Lee Borrowing Tax Lien Charity Conversion Oppenheimer Wedbush Felony Misdemeanor Expenses ING Lien OTR Estate Jobs Florida Credit Card Elderly Flash Drive Annuity Expense Reimbursement FNMA BrokeAndBroke TIC DWI Promissory Notes Suitability Will POA Power of Attorney Casino NSF MF Global Counterfeit Preet Bharara Corzine Hacker Deferred Compensation RIA Prison Disclosure NASAA Aguilar FCPA Subway Testimony Identity Theft Gold Dell Bar Injunction Bank Deutsche Bank Hospital Retirement Due Process God HSBC Private Placements Eric Stein Wire Fraud FINOP CCO Compliance Audit Test Examination Cheating Joshua Brown Backstage Wall Street Obstruction of Justice Reuters Retaliation Variable Annuity Arbitraiton Outside Account Options Telephone Wine Series 7 Social Media ADA Pacifico Non-Prosecution Agreement Confirm Tax Fraud OBA Equity Indexed Annuities EIA Disability MetLife Continuing Education OIP Tax Liens Willful CE Unregistered Impersonation Annuities BBVA Business Expenses ETF JOBS Act Mail Fraud Parking Variable Annuities Signatures BitTorrent Impersonator Wire Transfer Wire Crowdfunding Nasdaq Away Accounts WSP Laptop Dodd Frank Checks RMBS AML PST Solicited Unsolicited Congress SRO Password Wife Discretion Non-Solicitation Restaurant Commodities Private Securities Transaction Offer of Settlement Money Market employment jobs Great Recession Chase Investment Services Arrest Barclays Liens Obamacare Failure To Supervise Apple Time And Price T&P Willfully Husband Letter of Authorization LOA Sexism Debit Card Knight Practice Sale Unfair Competition Signature Judgments Data Undisclosed Settlement Trainee Fee Trust Laser Side Bar Mattera Female Sales Assistant Kennedy Charge Commodities Fraud Sexist NML Argentina Embezzlement Silver Investor Alert Evidence Judgment Bank Fraud Deceased Bill Singer BrokeAndBroker TSSB OHO Leveraged ETF Mary Jo White Trustee FINRA AWC Motion To Dismiss Frumento Conspiracy 6th Circuit Proctor Commissioner Stein 401(k) Rule 3040 Customer Files Class Action Beneficiary NYAG Schneiderman 11th Circuit Insurance Gallagher White Self Regulation Short Sale Compromise Website Rule 2010 Check TRO Supervision Vacatur Remand SDNY Rule 12206 BrokeAndBroker Bill Singer Piwowar Stifel Rule 1122 Article V signature Confidential Inside Information Reg SP VA Leveraged ETFs Regulation SP Fees Cease And Desist Customer Rule 3270 Rule 3240 Annual Compliance Questionnaire OWB 2Cir Red Flags Payroll Stockbrokers ALJ Cybercrime Loans BrokerCheck Altered Records
Email Bill Singer Connect with Bill Singer on Facebook Follow Bill Singer on Twitter Link up with Bill Singer on LinkedIn Join Bill Singer on Google+