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Cypen & Cypen
NOVEMBER 29, 2007

Stephen H. Cypen, Esq., Editor

Never Forget - September 11, 2001


Invoking jurisdiction of FINRA Dispute Resolution under the Federal Arbitration Act, the City of South Miami Pension Plan Board of Trustees has filed a statement of claim against its former consultant, Merrill Lynch, Pierce, Fenner & Smith, Incorporated. The statement of claim alleges:

1. Violation of Section 10b of the Securities and Exchange Act of 1934 and Rule 10b-5 promulgated thereunder.

2. Breach of fiduciary duty.

3. Negligence.

4. Failure to supervise.

5. Violation of the Investment Advisors Act of 1940.

6. Common law fraud.

7. Violation of Florida’s Securities and Investor Protection Act.

The Board demands the following relief against Merrill Lynch:

A. Compensatory damages in excess of $1,500,000.

B. An award of punitive damages in an amount sufficient to address Merrill Lynch’s reckless and egregious conduct.

C. Disgorgement and restitution of all earnings, profits, compensation and benefits gained by Merrill Lynch as a result of the unlawful acts described in the statement of claim in an amount according to proof.

D. As to all claims, recovery of all applicable costs, opportunity costs, interest, attorneys’ fees and such other and further relief as the arbitration panel deems just and proper.

As we learn about progress of the case, we will report it here. By the way, FINRA is the Financial Industry Regulatory Authority, Inc., formerly known as National Association of Securities Dealers, Inc. (NASD).


The cover story in the December 2007 issue of International Foundation’s Benefits & Compensation Digest recognizes that individuals and institutions are increasingly reluctant to delegate all investment decisions to their investment managers. Investors want more control over how their proxies are voted and whether investments to be consistent with their social, political or environmental interests. Socially responsible investing has come of age. But just what is it and what are its prospects? Socially responsible investing (SRI) is the practice of taking “social” benefits into account when investing or, put positively, following practices that will lead to making investments expected to realize social benefits. Broadly construed, the range of SRI concerns extends beyond what some may consider purely social matters to include environmental, social and governance issues (ESG). However defined, SRI deals with all types of investments -- stocks, corporate/public entity bonds, mortgages, etc. To keep the discussion manageable, the article is limited to SRI in the corporate equity market, which takes several forms:

  • Applying screens to identify companies that are in objectionable lines of business (for example, tobacco) and/or engaged in unacceptable activities (for example, abuse of worker rights), or, are socially responsible because of their lines of business (for example, green power) and/or follow responsible corporate policies.
  • Using share ownership (for example, shareholder initiative, proxies) to influence company behavior and corporate governance.
  • Making “targeted” investments designed to promote particular social goals, such as financing affordable housing.

Although SRI is a process, not a well-defined set of investments, it is meant to lead practitioners to make investments in socially responsible companies. It should come as no surprise that in a country as diverse as the United States there is limited consensus about the criteria one should employ in an SRI process, and even less agreement as to which companies are in fact socially responsible. Getting down to specifics, there are two main (and several subsidiary) reasons why agreement about importance of SRI in the abstract rapidly erodes:

1. The range of potential social concerns is too large for there to be anything like universal agreement on the list of socially responsible companies or industries. The following are examples of deep disagreements:

  • South Africa. Institutions that followed the 1977 Sullivan Principles shunned investing in most, if not all, companies doing business in South Africa as long as it practiced apartheid. Others, however, argued that this sort of capital blockade hurt the wrong people, and that to stimulate political reform one should practice “engagement,” by investing in progressive companies doing business there. Today, the countries are different (for example, Iran, Sudan, Myanmar), but the division of opinion is the same.
  • Weapons. Should one shun weapons manufacturers, or, rather, invest in them as essential for the defense of the country?
  • “Green” Industries. Should one not invest in companies that manufacture or own atomic power plants?
  • Emerging Markets. Does investing in companies doing business in (or based in) countries with substandard labor conditions encourage labor exploitation, or does it instead foster rising living standards?
  • Retail. Do the benefits of low everyday prices outweigh the social costs of substandard wages, skimpy benefits and virulent opposition to unionization?
  • Liquor. Is it responsible to invest in companies whose products are popular but often abused and implicated in a large percentage of automobile deaths?
  • Drug Companies. Is it responsible to invest in companies that charge extremely high prices for new drugs, but develop lifesaving therapies?
  • Lumber Companies, Contraceptive Manufacturers, Rap Music Producers, etc. The list is almost infinite.

2. Investors differ in their social concerns, priorities and tactics.

  • The range of concerns is frequently quite narrow. No investor considers (or could possibly consider) every conceivable investment-related social issue.
  • Investors differ on their priorities. The longer the list of SRI criteria that a company has to meet before qualifying for investment, the more restricted is the universe of eligible companies.
  • Investors differ on tactics. For instance, some will not invest in companies that fail to pass their SRI screens; others deliberately invest in such companies to have “a seat at the table.”

In short, even if investors had identical social concerns and identical investment policies and objectives, the way in which they implement SRI made lead them to very different portfolios. According to finance theory, reducing the universe of eligible securities on non-financial grounds is suboptimal because the smaller the universe of choice, the fewer opportunities there are to increase returns or to diversify risk. But theory tells us nothing about whether actual SRI portfolios do worse than less-constrained ones. The data are mixed. Depending on construction and time period, some SRI accounts have out-performed less-constrained ones, some have not; some SRI managers have done better than appropriate unconstrained benchmarks, some have not. The variables are so many and the number of SRI portfolios still so relatively small that evidence is simply inconclusive. Given the impediments discussed, SRI is not likely to become a major factor in participant-directed defined contribution plans anytime soon. For the foreseeable future, the greatest growth will continue to come from foundations, endowments and public defined benefit pension plans. Even though these institutions may (and almost certainly will) disagree on just which companies and practices are acceptable, there is hope that consensus can be reached on general investment procedures and objectives. The United Nations has sponsored development of basic SRI/ESG principles. The principles ask institutional investors, investment managers and related financial professionals to commit themselves publicly to six procedural principles relating to environmental, social and governance issues:

1. To incorporate ESG factors into investment analysis and decision-making procedures.

2. To be active investors and to incorporate ESG issues into ownership policies and practices.

3. To seek appropriate disclosure on ESG issues by entities in which they invest.

4. To promote acceptance and implementation of the principles by institutional investors.

5. To work together to enhance effectiveness of the principles.

6. To report on the group’s activities and progress toward implementing the principles.

How deeply and broadly SRI will inform or change actual investment decision making is yet unclear. Nevertheless, as the 1950s group Danny and the Juniors said about rock and roll, SRI is here to stay.


Vodia Group LLC, a research and consulting firm focused on financial services and financial technology, has issued “Eliminating Unknowns in Transition Management Costs: The Importance of Market Volatility and Broker Selection.” Transition management has become a vital service for institutional investors when moving large blocks of assets due to fundings, rebalancing, distributions and asset manager changes. The mandate of a transition manager is to minimize trade execution costs by optimizing the risk, liquidity, timing and exposure of trades. Over $3 Trillion is transitioned annually, and savings through those changes can make a substantial impact on a fund’s return for the year. The institutional investor community has rightly asked about the value and cost of transition management services. Generally, transition commission costs are minimal compared to trade execution costs (that is, timing and market impact costs), regardless of whether trades are executed quickly or held longer to achieve a cross-trade. Transition commission costs can be negotiated. However, it is less clear how investors should control for trade execution costs. Thus, investors must ask the following key questions:

  • Are the fees charged by Transition Managers worth the services they provide?
  • How do investors determine when these services add the most value?
  • How can investors work to control for the major determinants of potential savings?

The article looks at these questions and hypothesizes that the value of transition management depends largely on volatility in the market, broker selection and broker techniques, including trade strategies and liquidity sources. To test the idea, the author evaluated a series of studies on transaction cost analysis conducted over the years, including new data produced for the report. Transition Managers have consistently stated that “no transition is alike,” and therefore, investors cannot really have a standard expectation of results. The analysis, however, proves that the foregoing statement is not entirely true: transaction cost averages generally follow the level of volatility, particularly in equity markets where a sizeable trade sample indicates likely averages over time. Outside of the averages, ranges of returns suggest that other variables, principally broker selection, will impact returns regardless of volatility.


Equilar, which benchmarks executive compensation and board of director pay, has published its “2007 CEO Benefits & Perquisites Report.” The report includes an analysis of chief executive perquisites at Fortune 100 companies. Featured in the report are in-depth overviews of five key perquisites offered by leading public companies, including: financial planning and other professional services; flexible perquisite accounts; personal and home security; personal use of corporate aircraft; and tax reimbursements. Some key findings are

  • From 2005 to 2006, the median value of total other compensation for Fortune 100 CEOs declined by 1.3%, falling from $339,000 to $334,000;
  • In 2006, 16.1% of Fortune 100 companies disclosed that they will eliminate some executive perquisites in 2006 or by start of 2007;
  • In 2006, 80.2% of Fortune 100 companies reported values for accumulated pension benefits for their CEOs, the median value of which is almost $13 Million, while 85.2% of Fortune 100 companies reported a nonqualified deferred compensation plan balance for their CEOs, the median value of which is over $5 Million;
  • In the most recent year, the median value of aircraft-related perquisites for Fortune 100 chief executives reached over $121,000, representing a 12.1% increase over the median of almost $109,000 in 2005.

For those of you interested in more complete data, visit


Buying whatever Billionaire Warren Buffett bought, often months after his share purchases, delivered twice the return of the Standard & Poor’s 500 Index during the last three decades. Investors would have earned an annual return of 24.6% by buying the same stocks as Buffett after he disclosed his holdings and regulatory filings as much as four months later, according to Bloomberg News. The S&P 500 rose 12.8% a year in the same period. Buffett’s Berkshire Hathaway had $77.9 Billion invested in stocks at the end of September 2007.


Conference Room: A place where everybody talks, nobody listens and everybody disagrees later on.


“I never met a man so ignorant that I couldn’t learn something from him.” Galileo

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Items in this Newsletter may be excerpts or summaries of original or secondary source material, and may have been reorganized for clarity and brevity. This Newsletter is general in nature and is not intended to provide specific legal or other advice.

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