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December 2005

  • Weis Participates in Real Estate Seminar

  • November 2005

  • Eccleston and Galbreath Present Webinar

  • Weis speaks on Issues in Estate Planning In Illinois

  • Weis participates in Real Estate Conference

  • Benefit Plan Client Alert

  • Code 409A Proposed Regs Deferred Compensation Plan Client Alert

  • SNSFE Participates in Exit Planning Seminar Series

  • U.S. District Court finds in Favor of SNSFE Employer Client

  • Weis Speaks on Commercial Real Estate Transactions at IAAI Chapter Meeting

  • Galbreath Assists IRS in Developing Proposed Regulations on New Deferred Compensation Rules

  • Staat speaks on Transitioning from Work to Retirement

  • October 2005

  • Eccleston and Gershon Present Webinar

  • Galbreath speaks on Executive Compensation and KETRA at Exempt Organization Conference

  • SNSFE Associate Jeffrey Gershon Admitted to the U.S. District Court, Northern District of Illinois

  • Gift Planning Alert - October 1, 2005

  • September 2005

  • SNSFE Attorneys Speak on ERISA Arbitration

  • August 2005

  • SNSFE Client Wins $300,000 from Prudential in NASD Securities Arbitration

  • New Worker's Compensation Laws: Compliance Updates

  • SNSFE Associate Scott Sissel Admitted to U.S. Tax Court

  • July 2005

  • Recent Developments Expand Protection for Retirement Assets in Bankruptcy.

  • April 2005

    Pitfalls to Avoid When Planning for a Reduction-in-Force (RIF)(Audio)

  • How to Obtain Good Title in Illinois Real Estate Transactions

  • March 2005

  • Drastic Changes to Nonqualified Deferred Compensation Plans Require Review of Plans Now

    Retirement Plans Alert

July, 2003

SNSFE Law Newsletter

Issue 03-1 - July 2003



The Chicago Tribune has run an article entitled, "Change in Brokers' Role Boosts Complaints". Attorney James Eccleston is frequently quoted in discussing aspects of liability when financial advisers fail to protect ("hedge") investors' portfolios from investment losses.

On October 7, 2002, attorney James Eccleston obtained the first arbitration award for a client whose financial adviser failed to hedge his large concentrated stock position resulting from the exercise of employee stock options from Cisco Systems.


In June, Lawrence G. Staat participated as a faculty member in a seminar for lawyers, accountants, business executives and financial planners titled “Strategies For Partnerships, S Corporations And Closely Held Corporation Distributions In Illinois” sponsored by Lorman Educational Services. Mr. Staat spoke on tax consequences of partnership distributions. (Click here to view the outline of his presentation.)


Please note that we have undergone a name change to accommodate the addition of a new equity partner to our firm. Eccleston and Associates joined the firm in January 2002. We are proud to include James J. Eccleston in our new name of "Shaheen, Novoselsky, Staat, Filipowski & Eccleston, P.C."



If you own life insurance under a split-dollar agreement-where another party is paying the premium and is entitled to recover all prior premium payments from the policy-you should review the arrangement and make any changes now. IRS is in the process of issuing final regulations that will increase income taxes on these arrangements if changes are made after the regulations are issued. Often these arrangements need to be changed to reduce the cost of the insurance.


You are probably aware that, after your death, the beneficiary of your IRA account may only receive 25% of its value. 75% may go to income and estate taxes, depending on the size of your estate, the income tax bracket of your beneficiary, and how rapidly you beneficiary withdraws funds from the account.

For example, you and your spouse have an estate of $5,000,000 which includes your IRAs and your spouse's IRAs, totaling $1,000,000 payable to your child who is ordinarily in the top income tax bracket or who elects to withdraw the IRA funds in lump-sum. In this scenario, your child would receive only $250,000 from the IRAs after paying the applicable estate and income taxes.

It is possible to increase this amount from $250,000 to $500,000 by re-arranging the ownership of the assets in your IRAs. To do this, your IRA custodians would exchange all of the assets in the IRAs for membership interests in a new limited liability company ("LLC") organized by them and managed by you and your spouse. The value of the membership interests owned by the IRA custodians will be substantially less than the value of the LLC's assets because the rights of the IRA custodians in those assets will be substantially less. In particular, the IRA custodians as owners of membership interests will no longer have rights to withdraw or control the assets. It is this reduced value that reduces the applicable taxes thus increasing the amount that your beneficiary will ultimately receive.

This ownership arrangement offers many non-tax advantages as well, including centralized investment management, asset protection, and extend spendthrift protection.


When it comes to taxes, reaching 70½ is an important milestone, as this is when you have to start taking minimum annual distributions from your IRAs. If you have already retired from your company, you must also begin making withdrawals from your company's retirement plan as well. If you do not take these distributions, you could get hit with a 50% penalty tax.

However, the decision whether or not to accelerate minimum distribution payouts is not an easy one and is not for everyone. Your overall financial picture must be taken into account. If this is your year to begin IRA distributions, you should promptly review your financial and tax situation to determine what method of distribution may be appropriate for your situation.


On June 20, 2003, the governor signed into law, retroactive to January 1, 2003, a bill that freezes the Illinois Estate Tax at the level in effect on December 31, 2001. Under prior law, Illinois assessed a "pick-up tax" on estates that exceeded the applicable exclusion amount (commonly referred to as an exemption) under Federal Estate Tax law. Federal law allows the estate a credit against federal estate tax for death taxes paid to a state. The Illinois Estate Tax was equal to the maximum credit allowed under the Federal law. In 2002, a change in Federal law reduced the amount of this credit 25% in 2002, 50 % in 2003, and 75% in 2004) and, as a result, the Illinois Estate Tax. The new Illinois law is designed to avoid this loss of revenue.

The new law does recognize the increases in the applicable exclusion amount under the Federal Estate Tax ($1.5 million on 2004, $2 million in 2006, but no the scheduled increase to $3.5 million in 2009). The law will cause an estate to pay the same amount of Illinois Estate Tax as it would have paid before the recent change in Federal law. Therefore, some estates will not be able to claim full credit against the Federal tax for Illinois estate taxes paid.

To discuss how this change in the tax law might affect your estate, please call William Hofmann at (312) 621-4400 or email him at .


Documenting employment decisions is essential to successful defense of employment related claims. In the case of Zimmerman v. Associates First Capital Corp., a vice president of sales fired a female sales representative on performance grounds. The sales representative sued the firm claiming gender discrimination, relying upon her own sales reports and bonus statements as proof of her good performance. The company vice president had no documents to support his decision. He testified that he had destroyed all documents relating to the sales rep shortly after the termination. He had no memos, sales figures or other documentation concerning productivity for any other sales representative. The jury found the company liable for gender discrimination and awarded back pay, compensatory and punitive damages, plus pre-judgment interest and attorneys' fees for a total exceeding $450,000. The judgment was affirmed on appeal. On appeal, the Appellate Court noted that the federal law and regulations require employers to keep employee records for a year after termination. Documents that must be maintained by Employer include information on other similarly situated employees. The failure to keep such records allows a jury to presume that missing or destroyed documents would have been unfavorable to the employer's case.

Documentation is necessary even in "at will" employment states. You can fire someone without cause, but you must preserve evidence that shows why a particular employment action was taken so that you can avoid charges of discrimination under Title VII of the Civil Rights Act (age, disability, race, sex or national origin).


As a company owner, it is possible that you or others are deemed to be "fiduciaries" under the law. Fiduciaries of ERISA Benefit Plans include the Plan sponsors (employers), business owners, accountants, bookkeepers, investment advisors and Trustees named in the Plan itself. If you are a Plan fiduciary and you mismanage plan assets or act in your own best interest rather than in the best interests of the Plan and its beneficiaries, you may be subject of claims by the Plan beneficiaries or the Department of Labor.

Any person-including a business entity-may be an ERISA Plan Fiduciary if he has discretionary authority or control in the administration of the plan, exercises any authority or control with respect to the management or disposition of the plan assets, or provides or renders investment advice to the plan. As a Plan fiduciary, you are bound by general fiduciary obligations, including a duty to act in the best interests of the plan and the beneficiaries.

In addition to general fiduciary obligations, fiduciaries are prohibited from engaging in certain transactions with "parties of interest" except in special circumstances. If your company has a Plan, you and others may be unwittingly assuming personal liability. It is possible to avoid exposure to personal liability. You should consult with your attorneys if you may have such exposure.


IRS Code Section 1031 provides an exception to the general rule requiring current recognition of gain or loss realized upon the sale or exchange of property. Basically, Section 1031 is an incentive to defer taxes where substantial appreciation has occurred or where significant tax depreciation has been claimed. Under Code Section 1031(a)(1), no gain or loss is recognized if property held for productive use in a trade or business or for investment is exchanged solely for property of a "like-kind" which is also to be held either for productive use in a trade or business or for investment. Some reasons why you might consider an exchange of real property under this Section are as follows:

  • Preserve equity by not paying tax on realized gain;
  • Generate of cash flow by exchanging unimproved land for income producing property;
  • Acquire property that is appreciating faster than the property transferred;
  • Consolidate assets by exchanging many properties for one equal to or greater than their combined values;
  • Diversify holdings and spread investment risk among several smaller properties, and;
  • Relocate of business facilities, even on a build-to-suit basis, without depleting equity by paying tax.


Trustees (corporate and individual) and ERISA plan sponsors are fiduciaries and, as such, they must investigate and pursue claims for the negligent and/or wrongful conduct of others.

Currently, SNSFE trust and securities lawyers are prosecuting several actions to recover investment losses on behalf of trustees and ERISA plan sponsors. Recently the securities practice group prevailed against a brokerage firm to recover losses for a trust.

Enron, Merrill Lynch and Salomon Smith Barney/ Citigroup and JP Morgan Chase

SNSFE securities lawyers are examining the role that financial institutions played in assisting Enron to engage in accounting deceptions that harmed investors and others. The U.S. Senate Permanent Subcommittee on Investigations has conducted hearings and has issued statements and findings criticizing the involvement of certain financial institutions.

For example, Senate Investigations Subcommittee has concluded that Merrill Lynch "helped Enron artificially and deceptively create revenue." Likewise, Salomon Smith Barney / Citgroup and JP Morgan Chase "helped Enron hide debt."

To discuss these matters, feel free to contact .



The NASD has charged another Merrill Lynch analyst with issuing misleading research, selectively disclosing material non-public information, and improper gift giving to Tyco's CEO.

Joining Henry Blodget, analyst Phua Young is charged with not disclosing in his purportedly objective, bullish company reports that he had private doubts about the very same companies. Likewise, he documented his apparent conflict of interest, noting in one email to a senior Tyco official that he was "paid indirectly by Tyco." Merrill Lynch led two debt offerings for Tyco between 1999 and 2001, reaping the firm over $20 million in investment banking fees.


UBS analyst Howard Capek has resigned on "mutually agreeable terms" amid a congressional probe, SEC and Justice Department inquiries of the ties between UBS and HealthSouth Corp.

In one email dated September 10, 1999, Capek told an institutional investor that he "wouldn't own a share" of HealthSouth stock, even though he had initiated research coverage of the stock in May, 1999 with a "Strong Buy" and that rating continued until August 2002 (only to downgrade to "Buy" despite the stock's plunge of 60% from the 52 week high and the company's issuing a severe profit warning).

Of course, during this time PaineWebber reaped substantial revenue for its investment banking business.


The fixed income manager for institutions has suffered from blowups in telecom bonds, losing 38% in just over one year.

Some clients are reacting with their feet. The firm has experienced $1.1 billion in client terminations in the fourth quarter alone, including the Merced County (California) Employee's Retirement System, the Colorado Fire & Police Pension Association and the Nevada Public Employees' Retirement System.

The manager has acknowledged the losses and has "intensified [its] disciplines with regard to credit in general."


New York City Sergeants Benevolent Association Annuity Fund has filed a $27 million lawsuit against its former investment adviser, Monitoring and Evaluation Services, and its investment manager, Trainer Wortham, for breach of fiduciary and contractual duties. The suit alleges that the defendants failed to follow asset allocation guidelines and retained commission revenue that should have been returned to the fund. The suit also claims that the investment manager failed to monitor the investment manager's performance.

Trainer Wortham denies the charges.

"Practical Considerations For Representing Your Clients Who Have Been Damaged by Wall Street Analysts' Conflicts of Interest"
by SNSFE partner James J. Eccleston

Securities regulators have opened a Pandora's box for the major brokerage firms. Apart from the significant fines imposed and restitution funds created by the recently announced global settlement, Wall Street firms face continued civil liability from securities arbitration claims as well as from class action litigation claims. Indeed, class actions already are being filed, and the pundits predict that the number of securities arbitration filings will increase by as much as 2,500 for year 2003 alone. As I write this article, the daily news reports that one of the first arbitration claims (if not the first) has resulted in an award in favor of the brokerage firm customer and against Morgan Stanley Dean Witter, in part because the firm "engaged in acts and practices that created conflicts of interest for its research analysts with respect to investment banking activities and considerations."

To assist practitioners in representing their clients, this article first overviews the brokerage firm research analyst conflict, and then describes the avenues available to seek legal recourse.

I. Brokerage Firm Research Analyst Conflict

On April 28, 2003, state and federal securities regulators as well as securities self-regulatory organizations announced that they had reached a settlement with ten of the nation's top investment firms. Some brokerage firms never were the subject of the regulators' probe and other firms (such as Deutsche Bank Securities) failed to reach an agreement with the regulators.

The ten settling brokerage firms were alleged to have committed various degrees of wrongful acts. Most egregious was the conduct of Credit Suisse First Boston (CSFB), Merrill Lynch and Salomon Smith Barney. These firms allegedly had issued "fraudulent research" (as well as the lesser evils detailed below). Other firms were accused as follows:

Firms That Issued Unfair Research, or Research Not in Good Faith:
Bear Stearns, Goldman Sachs, Lehman Brothers, Piper Jaffray, UBS PaineWebber, Credit Suisse First Boston (CSFB), Merrill Lynch and Salomon Smith Barney.

Firms That Received or Made Undisclosed Payments for Research:
J.P. Morgan, Morgan Stanley, UBS PaineWebber, Piper Jaffray, and Bear Stearns.

Firms That Engaged in Acts and Practices That Created or Maintained Inappropriate Influence by Investment Banking Over Research Analysts:
All firms noted above.

Firms That Failed to Supervise:
All firms noted above.

It should be noted that, in December 2002, the federal securities regulator (the SEC) as well as two self-regulatory organizations (the NASD and the NYSE) levied an $8.25 million fine upon five brokerage firms for failing to preserve email communications. Those firms were: Morgan Stanley, Deutsche Bank Securities, Goldman Sachs, Salomon Smith Barney and Piper Jaffray.

II. Remedies for Your Clients as Customers of the Brokerage Firms
A. The SEC's Global Settlement

In announcing the global settlement with the ten brokerage firms, SEC Chairman William Donaldson said, "I am profoundly saddened - and angry - about the conduct that's alleged in our complaints … and it cannot be tolerated."

For details regarding the global settlement, practitioners should visit the SEC website (www.sec.gov). There one will find material regarding each settling brokerage firm (complaints and settlement agreements, for example) as well as information regarding the claims process, such as the publication, "Questions and Answers Regarding the Distribution of Funds in the Analysts Cases."

The ten brokerage firms will pay a total of $1.4 billion. Of that total, $399 million will be earmarked for the Distribution Funds to be established for payment of claims filed by investors. It is important to note that investors may recover from the Distribution Funds only for covered stocks at particular brokerage firms (however, as discussed below, securities arbitration claims may be filed for other claims as well as for larger losses on covered stocks). The covered stocks and the covered firms are:


  • Agile Software
  • Atmel
  • Concord/EFS
  • eBay
  • Loudcloud
  • Sabre Group
  • Veritas Software
  • iBeam Broadcasting
  • Transmeta
  • AT&T Latin America

  • Buca, Inc.
  • Comverse Technology
  • Emisphere Technologies
  • Esperion Therapeutics
  • JDS Uniphase
  • Natural Microsystems
  • Metromedia Fiber Network, Inc.
  • Onyx Pharmaceuticals
  • Therasense
  • Triton Network Systems

  • Broadwing
  • DDi Corp
  • Razorfish
  • RealNetworks
  • RSL Communcations

  • 24/7 Media
  • Aether
  • [email protected]
  • GoTo.com
  • Homestore.com
  • InfoSpace
  • Internet Capital Group
  • LifeMinders

  • Technology Partners International
  • International Rectifier
  • Infineon Technologies
  • Epicor Software Corporation
  • CCC Information Services
  • Participate.com
  • Vicinity
  • Intertrust
  • Mypoints
  • Concord EFS

  • StorageNetworks
  • Loudcloud
  • GeneProt
  • Crosswave Communications
  • Willis
  • Crown Castle
  • Exodus
  • WebEx
  • Global Crossing
  • AT&T
  • WorldCom
  • 360Networks
  • Winstar Communications

  • Triangle Pharmaceuticals
  • Atmel
  • Espeed
  • Netopia
  • Flextronics
  • Interspeed
  • Avant Immunotherapeutics
  • JDS Uniphase

  • Level 3 Communications
  • Williams Communications Group
  • XO Communications
  • Focal Communications
  • Adelphia Business Solutions
  • RCN Communications
  • Metromedia Fiber Networks
  • AT&T
  • Global Crossing
  • Qwest
  • Rhythms NetConnections

  • Digital Impact Inc
  • Synopsys Inc.
  • Numerical Technologies, Inc
  • Numerical Technologies
  • Agilent Technologies, Inc
  • Winstar Communications, Inc.
  • NewPower Holdings
  • Aether Systems
  • Razorfish

  • Sonicwall
  • Muse
  • CAIS Internet, Inc
  • Digital River
  • Internet Security Systems
  • Packeteer
  • CacheFlo
  • Agilent Technologies
  • Andrx Corp
  • Pets.com
  • There actually will be not one but ten different Distribution Funds. For each brokerage firm there will be a fund (with the exception of Merrill Lynch, because its $100 million penalty has been paid to the states and not to the SEC's distribution fund). The Distribution Funds are:

    Citigroup Global Markets (Salomon Smith Barney and Jack Grubman): $157.5 million; CSFB: $75 million; Bear Stearns: $25 million; Goldman Sachs: $25 million; J.P. Morgan: $25 million; Lehman Brothers: $25 million; Morgan Stanley Dean Witter: $25 million; UBS PaineWebber: $25 million; U.S. Bancorp Piper Jaffray: $12.5 million; and Henry Blodget (to be applied to claims filed by Merrill Lynch customers): $4 million.

    Although the SEC has not yet appointed a fund administrator, it is doing so "as soon as practicable". Once the SEC does so, that person will prepare distribution plans for approval by the SEC and a court of law. The fund administrator will determine the final terms of distribution. The entire process, through funds distributions to investors, probably will take one and one-half years. The fees, costs and expenses of the fund administrator will be borne by the brokerage firms. This is a significant fact as those expenses may approximate $100 million.

    It is expected that the brokerage firms will provide account information, including names, addresses, and purchase and sales dates of stocks, directly to the fund administrator. At this time, investors need not submit any information. There are certain minimum requirements that investors must meet before receiving any money. They are that the investor must have bought the stock through the particular brokerage firm that improperly promoted the stock; the investor must have lost money; and the investor must have bought the stock during the "relevant period" as defined by the fund administrator. Generally, the relevant period will relate to how soon after the misleading research opinion the investor bought the stock.

    The process still is unfolding. Practitioners should consult the SEC website (or the author's website, www.FinancialCounsel.com) for further developments.

    B. Filing Securities Arbitration Claims Instead or In Addition to Fund Claims

    Securities arbitration claims have mushroomed in the last few years. Customers typically file claims before the NASD Office of Dispute Resolution or the New York Stock Exchange Arbitration Department. Claims may allege a host of wrongs, such as that the investments recommended were not suitable for the particular needs of the customer, or that there were misrepresentations or omissions of material facts, or that there was churning, unauthorized trading, broker negligence or failure to supervise.

    The brokerage firm research analyst conflict claims most clearly would fall into the category of an omission of a material fact. That is, this type of claim involves the brokerage firm's failure to disclose a conflict of interest and the failure to disclose the existence of contrary opinions and research regarding whether a particular stock should be purchased. In most cases, the individual broker servicing the customer's account probably was duped as much as the customer by the brokerage firm's wrongdoing. If so, the broker would not properly be named as a respondent in the arbitration claim.

    Practitioners should note that it is permissible to file claims with the SEC distribution funds as well as with NASD or NYSE arbitration. I would recommend this course of action especially with larger claims. Additionally, there likely will be situations in which a client has lost money on a particular stock, but his or her brokerage firm's distribution fund does not cover that stock. In those cases arbitration would be your client's only recourse.

    For more information on issues highlighted here, please contact one of the following Shaheen, Novoselsky, Staat & Filipowski professionals:

    Raymond Shaheen º
    Henry N. Novoselsky º
    Lawrence G. Staat º
    Steven C. Filipowski º
    James J. Eccleston º
    William E. Hofmann º
    Scott E. Galbreath º
    Michael D. Weis º
    Jack L. Haan º
    Sharyn B. Alpert º
    Jeffrey M. Gershon º
    Ronald M. Amato º
    April J. Lindauer º
    Scott A. Sissel º

    For more information about our firm and our services, visit our website:

    For additional alerts, articles and other material of interest, visit our sister website: www.financialcounsel.com

    20 N. Wacker Ste. 2900 Chicago, IL 60606-3192
    Phone: (312) 621-4400 Fax: (312) 621-0268 email: