Tuesday, July 31, 2012

Fighting FINRA and the SEC

Securities litigators have always debated the concept of whether or not to take FINRA or the SEC to the mat in enforcement proceedings. After all, the downside is significant for our clients, the costs are significant, and there is this thought that the regulators do not bring cases that they will lose. After all, they have the ability to investigate the charges, in a private setting, for years, and can select the case that they want to bring. I have written about it before - Taking the SEC To Trial.

On the defense side, we do not have that luxury, and cannot force a regulator to litigate a case - or can we?

In recent years there has been an anecdotal trend towards fighting FINRA and the SEC. Years ago when the NASD changed the structure of its hearing panels, we think we saw an increase in decisions in favor of the broker or firm. We never seem to have a full set of statistics, but over recent years, we have seen evidence of FINRA and the SEC losing more often.

Just a few months ago I successfully represented a broker in a FINRA enforcement proceeding. For a variety of reasons we had to go to a hearing, and we did. FINRA came at my client with all the vigor it could muster, for a case that did not warrant half the time and effort. My client was accused of mis-marking order tickets - to the benefit of his customers, with the knowledge of his firm.

A silly case, it truly was, but FINRA would not back off, and there was a risk for my client.  If FINRA had prevailed my client would have received a significant suspension, a fine, a regulatory mark on his license, and other collateral damage. But it was a winnable case for us.

And we did win. After two days of hearing, and multiple submissions, the Hearing Panel dismissed the complaint against my client. My new colleague, Jim Sallah in Florida represented a client in an SEC insider trading case last year, and won - case dismissed, and earlier last year took a FINRA enforcement to trial and won.

But again, this is anecdotal. However, today Sutherland Asbill & Brennan LLP today announced the results of its 2012 Sutherland SEC/FINRA Litigation Study – an annual review of the litigated cases brought by the Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA) against broker-dealers and associated persons. 

The study demonstrates that while most firms and individuals choose to settle, litigation is often a wiser choice. The attorneys analyzed cases in Fiscal Year (FY) 2011 and the first half of FY 2012 (October 2010 through March 2012) and found that:

  • 15% of all litigated SEC and FINRA charges were dismissed. When represented by counsel, FINRA respondents were successful almost 20% of the time.
  • Nearly 1/3 of the time, the administrative law judge (ALJ) or the Hearing Panel imposed lower monetary sanctions than the SEC or FINRA prosecutors sought.
  • In FINRA hearings, 50% of the time Hearing Panels imposed shorter suspensions and 33% of the time Hearing Panels imposed lower monetary sanctions than those sought by FINRA staff.
  • Nearly 43% of SEC respondents were successful in getting charges dismissed or sanctions reduced when they appealed to the Commission from an Administrative Law Judge decision. 
While there still needs to be a case by case decision, clearly fighting might be the way to go for more than a handful of cases. 
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