How Firms Score When They Take On The SEC Or FINRA

Transcription

1 Portfolio Media. Inc. 860 Broadway, 6th Floor New York, NY Phone: Fax: How Firms Score When They Take On The SEC Or FINRA Law360, New York (July 10, 2014, 11:53 AM ET) -- Success is no accident. It is hard work, perseverance, learning, studying, sacrifice and most of all, love of what you are doing or learning to do. Edson Arantes do Nascimento, better known as Pele (regarded by many as the best soccer player of all time)[1] Every four years, the World Cup occupies the hearts and minds of soccer and football fans across the world. The team that ultimately wins will have played seven 90-minute games, in a progressively unforgiving format. The World Cup begins as a round-robin tournament and ends as an elimination round. The fate of each team depends on excellent performances during every minute of every game. Ultimately, there is little room for error. Litigating against the U.S. Securities and Exchange Commission or Brian Rubin the Financial Industry Regulatory Authority is a more unforgiving format. Instead of a round-robin tournament, SEC and FINRA litigation begins as a single elimination round one loss in a litigated proceeding and a respondent or defendant could be eliminated from the securities industry. Just as soccer teams and fans study the plays of past winners, so too can broker-dealers (BDs), investment advisers (IAs), and their representatives review past wins and losses to make better informed decisions about whether to litigate against the regulators. One such statistic is that of all respondents in this study who chose to litigate before an SEC administrative law judge (ALJ) or a FINRA hearing panel, 46.7 percent achieved at least some success by getting charges dismissed or by receiving a sanction lower than that requested by the staff.[2] Of course, while statistics can provide guidance, they cannot predict outcomes. As they say in soccer (or perhaps should say), past performance does not guarantee future results. Recent, highly publicized losses by the SEC may have given respondents and defendants greater hope that they can score against the regulators. Notably, the SEC suffered setbacks in three insider trading cases in the course of a week earlier this year. On June 6, 2014, a jury found the former chief executive officer of a technology company not guilty of insider trading.[3] On June 4, 2014, the SEC dismissed its case of alleged insider trading against the former chairman and chief executive of a health care company.[4] And on May 30, 2014, a federal jury found that a hedge fund manager and his codefendants had not engaged in insider trading.[5] Rather than rely on anecdotal, one-off results, since 2005, Sutherland Asbill & Brennan LLP has

2 conducted a study of litigated disciplinary proceedings that FINRA (formerly National Association Of Securities Dealers, or NASD) brought against firms, registered representatives and associated persons.[6] Since 2008, Sutherland has analyzed administrative proceedings the SEC brought against the same types of respondents. This year, Sutherland expanded the study to include SEC enforcement actions against IAs and their representatives. This study also includes potentially dispositive actions, trials or summary judgment decisions in litigated SEC enforcement actions against BDs, IAs, and their representatives in U.S. District Court. The current study analyzes the period from April 2012 through September 2013.[7] The Results of the Study 1. ALJ and Hearing Panel Findings of Violations A lot of football success is in the mind. You must believe you are the best and then make sure that you are. Bill Shankly (a Scottish footballer and manager, best known as manager of Liverpool)[8] When trying a case against the SEC and FINRA, while positive thinking is important, hard works that yields good facts and supporting law (in addition to a little luck) may be more critical. Many firms and their representatives fear litigating against the SEC or FINRA because the regulators have often spent years investigating the conduct. Respondents also perceive a 12th man on the field because the hearing site is the regulator s home field, and the hearing officers appear to be members of the same team. However, the statistics show that respondents are often successful convincing ALJs and hearing panels to dismiss certain charges or to sanction respondents less than the staff requested. a) SEC SEC administrative enforcement proceedings are conducted before an ALJ who issues an initial decision that includes findings of fact, legal conclusions and, where appropriate, a sanction.[9] In the current study, BD respondents (BD firms and their representatives) convinced SEC ALJs that the SEC staff did not prove 35.3 percent of the charges brought against them.[10] With regard to IA respondents, in fiscal year 2013, ALJs found that the SEC staff did not prove 43.5 percent of the charges.[11] In fiscal year 2012, ALJs found that the SEC did not prove 12.5 percent of the charges against IA respondents.[12] b) FINRA A FINRA disciplinary proceeding is tried before a hearing panel of two current or former industry members and one hearing officer, who is a FINRA employee.[13] In the current study, BD respondents were successful in convincing FINRA hearing panels that FINRA staff did not prove 16.2 percent of the charges brought against them.[14] 2. U.S. District Court Findings of Violations You have to show up in the World Cup, and in the World Cup anything can happen. Lionel Messi (an Argentinian who plays for Barcelona and for the Argentina national team and is currently one of the best players in the world)[15]

3 If you litigate, you have to show up with your best arguments and put your best foot forward (so to speak) to see what you can make happen. The study analyzed potentially dispositive actions in U.S. District Court trials or summary judgment decisions involving charges brought against BDs, IAs and their representatives. In fiscal year 2013, there were eight potentially dispositive actions in litigated enforcement actions against BDs and IAs in U.S. district court: one bench trial, one jury trial and six summary judgment decisions.[16] In its two trials, the SEC was successful on 56.3 percent of the charges.[17] The SEC was successful on 22.5 percent of the charges in summary judgment motions it brought.[18] Defendants were successful on 25.5 percent of the charges in summary judgment motions they brought.[19] In fiscal year 2012, there were two summary judgment decisions litigated in SEC enforcement actions against IAs in U.S. district court.[20] The SEC prevailed on 50 percent of the charges in those summary judgment motions.[21] 3. Sanctions Some people believe [soccer] is a matter of life and death. I m very disappointed with that attitude. I can assure you, it s much, much more important than that. Bill Shankly[22] In soccer, a red card or suspension (for biting a player, or otherwise) can change the outcome of a game or a tournament. Likewise, a suspension from the securities industry may permanently affect a career. As a part of its case, the staff generally will recommend what sanctions should be imposed on respondents for the alleged violations. The ALJ or hearing panel may follow or ignore the staff s request. This study demonstrates that firms and individuals should consider fighting the regulators if they believe a proposed sanction is not supported by the facts or law. a) SEC SEC BD respondents convinced ALJs to impose lower monetary sanctions 25 percent of the time in the current study.[23] The proposed sanctions were ordered against the other respondents.[24] Regarding industry or supervisory bars, ALJs granted enforcement s requests each time.[25] Enforcement did not request suspensions during the study period. In fiscal year 2013, ALJs imposed less-than-requested monetary sanctions for 100 percent of IA respondents.[26] By contrast, in fiscal year 2012, ALJs imposed higher-than-requested monetary sanctions for 66.6 percent of IA respondents[27] and same-as-requested for 33.3 percent of respondents.[28] In fiscal year 2013, ALJs imposed less-than-requested suspensions or bars for 16.7 percent of IA respondents,[29] and the requested sanction for the remainder. In fiscal year 2012, ALJs imposed lowerthan-requested suspensions or bars for 16.7 percent of IA respondents,[30] and the requested suspensions or bars for the remainder.[31] b) FINRA FINRA hearing panels imposed lower-than-requested monetary sanctions for 52.9 percent of respondents,[32] higher sanctions for 29.4 percent of respondents,[33] and the same sanctions for 17.7

4 percent of respondents.[34] Respondents were more successful in this study than during the previous study period, when hearing panels imposed lower monetary sanctions for one-third of respondents, higher sanctions for one-third, and the same sanctions for one-third.[35] FINRA hearing panels imposed less-than-requested suspensions for 55.6 percent of respondents,[36] higher-than-requested for 5.6 percent,[37] and the same-as-requested for 38.9 percent.[38] There were no requests for bars in the current study. 4. Appeals Player: What bloody game are you watching ref? Referee: The one where you ve had three shots and haven t hit the target. (Possibly apocryphal dialogue.)[39] When players don t like a call, they may appeal to the referee. Sometimes they are successful and sometimes not so much. The same thing happens in enforcement actions. The study finds that respondents and defendants who appeal must carefully weigh the risk of having a greater sanction imposed against the possibility that an appeal will result in reduced sanctions or a dismissal. a) SEC In SEC administrative proceedings, either party may appeal an ALJ s decision to the full commission.[40] Appeals are heard by the SEC chairman and the SEC commissioners. In the current study, only one BD respondent appealed. In that case, the commission affirmed the ALJ s findings, affirmed the bar, and increased the penalty. b) FINRA Either party may appeal a FINRA hearing panel decision to FINRA s National Adjudicatory Council (NAC), or the NAC may call the decision for review.[41] When FINRA respondents are unsuccessful before the NAC, they have the right to appeal to the SEC. In the current study, the NAC did not reverse any of the hearing panel s findings of violations.[42] In the two cases in which FINRA staff appealed a dismissal, the NAC affirmed the dismissals. The NAC imposed higher monetary sanctions against 53.3 percent of respondents,[43] lower monetary sanctions against 13.3 percent of respondents,[44] and did not modify the hearing panel s monetary sanctions decision for 33.3 percent of respondents.[45] The NAC imposed longer suspensions for 25 percent of respondents,[46] shorter suspensions for 18.8 percent of respondents,[47] and the same suspension for 56.3 percent of respondents.[48] In two cases, the NAC called the matter for review, where neither party appealed. Two respondents ended up with higher monetary sanctions, and one ended up with lower monetary sanctions. One respondent s suspension was affirmed; for the other respondent, the suspension was modified from a 12-month suspension in any principal capacity to a six-month suspension in all capacities.

5 In the current study, none of the seven respondents who appealed an NAC decision to the SEC had any success.[49] Conclusion The vision of a champion is someone who is bent over, drenched in sweat, at the point of exhaustion, when no one else is watching. Anson Dorrance (American college soccer coach)[50] While many securities professional envision themselves as champions to their clients, most would prefer to do without the sweat and possibly the exhaustion of litigating against the SEC or FINRA (although Thomas Edison, the great inventor who probably never played soccer, said, Genius is one percent inspiration and ninety-nine percent perspiration ).[51] When assessing whether to do battle against the SEC and FINRA, parties must try to assess whether they will leave the arena as a champion or whether they will leave bent over, drenched in sweat, and at the point of exhaustion, after putting forth their best case, with nothing to show for their efforts. To make these assessments, parties will have to carefully review the evidence, the law, and the track record of the regulators. Of all respondents considered in this study who chose to litigate before an SEC ALJ or a FINRA hearing panel, 46.7 percent achieved some success by either getting charges dismissed or by receiving a sanction lower than that requested by the staff.[52] Similarly, among defendants in U.S. district court who moved for summary judgment against the SEC or took their case to trial, 60 percent succeeded in proving that the SEC did not establish some of its charges.[53] Thus, the statistics show that it can sometimes pay to take on the SEC or FINRA and that defendants and respondents can come away from the World Cup of enforcement litigation as champions. By Brian Rubin and Lauren Shor, Sutherland Asbill & Brennan LLP Brian Rubin is a partner in Sutherland Asbill's Washington, D.C., office. Lauren Shor is a summer associate at the firm. The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice. [1] [2] 42 of 90. [3] Jean Eaglesham, SEC Loses Second Insider-Trading Case in Seven Days, WALL ST. J. (June 6, 2014, 6:35 PM), available at [4] Rachel Abrams, SEC Drops Insider Trading Case Against Health Care Executive, N.Y. Times (June 4, 2014), available at

6 [5] Christopher M. Matthews, SEC Loses Insider-Trading Case, WALL ST. J. (May 30, 2014, 6:30 PM), available at Nelson Obus, Opinion, Refusing to Buckle to SEC Intimidation, WALL ST. J. (June 24, 2014, 7:37 PM), available at [6] Sutherland s first study, The House That the Regulators Built: An Analysis of Whether Respondents Should Litigate Against NASD, was published in BNA s May 2005 Securities Regulation & Litigation Report, 2005 WL (May 2, 2005), and won the 2006 Burton Award for Legal Achievement. [7] Sutherland s previous study analyzed SEC and FINRA actions against BDs and their representatives over the 18-month period from October 2010 through March See Brian L. Rubin & Jae C. Yoon, Stepping Into the Ring Against the SEC and FINRA: Sometimes It Pays to Duke It Out Against the Regulators, 2012 SEC. REG. L J. 485, available at trr9tobddev0zdp0!/fileupload.name=/srlj_rubin_yoon.pdf. [8] Bill Shankly, [9] See 17 C.F.R (i). [10] 6 of 17. [11] 10 of 23. [12] 4 of 32. [13] See FINRA Rule 9231(b). [14] FINRA Hearing Panels dismissed 27 of 167 charges from April 2012 through September [15] fifa-world-cup/. [16] Some of these motions for summary judgment were cross-motions in the same cases. For this study, cross-motions are counted separately because a defendant s successful summary judgment motion has a different effect on a case s outcome than the SEC s successful motion. [17] 18 of 32. [18] The SEC was successful in nine of 40 summary judgment motions brought by the SEC. [19] Defendants were successful in 12 of 47 summary judgment motions brought by defendants. [20] The SEC did not litigate to resolution claims against BDs in fiscal year [21] The SEC prevailed on six of 12 charges in summary judgment motions. [22]

7 [23] 1 of 4. [24] 3 of 4. [25] 5 of 5. [26] 8 of 8. [27] 2 of 3. [28] 1 of 3. [29] 1 of 6. [30] 1 of 6. [31] 5 of 6. [32] 9 of 17. [33] 5 of 17. [34] 3 of 17. [35] See Brian L. Rubin & Jae C. Yoon, Stepping Into the Ring Against the SEC and FINRA: Sometimes It Pays to Duke It Out Against the Regulators, 2012 SEC. REG. L J. 485, available at trr9tobddev0zdp0!/fileupload.name=/srlj_rubin_yoon.pdf. [36] 10 of 18. [37] 1 of 18. [38] 7 of 18. [39] [40] See 17 C.F.R (a). [41] See FINRA Rule 9312(a)(1). [42] 42 of 42. The only nominal success came where the respondent convinced the NAC to reverse the hearing panel s finding that the respondent had engaged in market manipulation. Instead, the NAC found that the respondent had violated a rule that enforcement had charged as an alternative to its market manipulation charge, which the hearing panel had not considered. [43] 8 of 15.

8 [44] 2 of 15. [45] 5 of 15. [46] 4 of 16. [47] 3 of 16. [48] 9 of 16. Sanctions are considered the same where the respondent s sanction was effectively the same after NAC review, for example, if the NAC affirmed the hearing panel s decision ordering a bar for one charge but then reduced a bar to a suspension for another charge. [49] In one appeal from the NAC, the SEC remanded to the NAC to reconsider a bar for one of the respondent s two violations. However, the SEC affirmed the NAC s bar for the respondent s second violation. [50] [51] [52] SEC ALJs and FINRA hearing panels dismissed charges or reduced sanctions in 42 of 90 cases. [53] U.S. district court judges determined the SEC did not establish some of its charges in six of 10 cases. All Content , Portfolio Media, Inc.