As a matter of firm policy, we have always recommended that our clients cooperate with securities regulators.

Since 2009, the Central Review Group, Office of Fraud Detection and Market Intelligence of the Financial Industry Regulatory Authority or FINRA “performs preliminary investigations on certain matters and analyzes regulatory filings, investor complaints and other sources of regulatory intelligence for potential misconduct.”

Accordingly, almost invariably, at least in the past, but not so much recently, shortly after filing a customer initiated, investment related arbitration claim on behalf of a public customer, our office would receive a telephone call from a FINRA District Office that was supposedly investigating the broker or brokerage firm based upon, among other things, the customer complaint or in some cases, a series of customer complaints.

We generally tell our clients that although FINRA generally does not take action, at least while our arbitration is pending, if they do take action, it helps with the establishment of the facts we seek to prove in connection with our arbitration case.

Accordingly, routinely we will allow FINRA unfettered access to our clients for telephonic interviews, provide the Staff with important documents, and on at least more than one occasion allow the Staff to obtain our client’s testimony in person, in the presence of a court reporter.

Generally, statements made by customers to FINRA are subject to an investigatory privilege belonging to FINRA, meaning that FINRA will not disclose information to provided staff in connection with an investigation to third parties.

Conversely, when FINRA requests documents or information from the broker or securities broker-dealers, in connection with to any investigation or inquiry, generally pursuant to FINRA Rule 8210, these statements are “admissions” under at last the Federal Rules of Evidence 801(d)(2), even though the Rules of Evidence are not binding in arbitration.

Moreover, these documents may also admissible at the time of hearing. See, e.g. Option Resource Group v. Chambers Development Co., 967 F. Supp. 846 (W.D. Pa. 1996), holding that SEC’s factual findings, including its opinions and conclusions was admissible. Findings of the AWC might be presentable under type of analysis suggested by Fed. Rule of Evidence 803(8)(C) as “factual findings resulting from an investigation made pursuant to authority granted by law.” See, also,, In re Japanese Electronic Products Antitrust Litigation, 723 F. 2d 238, rev’d on other grounds, 475 U.S. 574 (1986) (agency reports containing factual findings could come into evidence).

In the old days, or at least prior to 2002, we were fearful that cooperating or even complaining to FINRA, then the NASD, could seriously hurt customer claims in arbitration.

Most customers are unaware but when someone complains to FINRA, FINRA takes the complaint and sends it to the offending broker-dealer. Most customers are also unaware, which is not obvious from FINRA regulation’s customer complaint portal on its website, that complaining to FINRA will not get the customer’s money back – that can only be accomplished through arbitration.

Generally, the customer may complain about the wrong issue or make admissions in a complaint, without the benefit of counsel, that now the other side has and can use against the customer, as an “admission” as set forth above.

At a hearing, the Claimant may be shown and asked to authenticate the complaint, and generally cross examined: “you told FINRA the truth?”, “you told them everything there was no know?”, “but you never mentioned failure to supervise?”, “was that your lawyer’s idea?”

And of course, FINRA or the NASD, generally would not do anything, and of course, everyone, including the broker-dealer would receive a close out letter invariably stating that “upon investigation of this matter FINRA has found insufficient evidence to support a finding of the violation of self-regulatory rules or the federal securities laws.”

Generally, Respondent’s counsel would also show this letter to the customer and ask, “who is FINRA or the NASD?”, “it is their job to enforce the Rules?”, “they have complete authority to investigate, request documents, obtain testimony, right?” “But you are aware that after their full investigation of this matter, they found no wrong doing?”

“You and your lawyer over there think you know better than FINRA [NASD]”?

Of course, all that changed in 2002. In 2002, the NASD released, Notice to Members 02-53,which specifically states that “when a determination is made to close an investigation without further disciplinary action,” to address “the concern that a letter declining further action would be offered as exculpatory evidence in an arbitration, mediation, or judicial proceeding” the customer now has the option not to receive a close-out letter.” Also that the NASD considers it inconsistent with just and equitable principles of trade for a member or associated person to attempt to introduce the letter, or the fact that NASD declined further action, as evidence in a subsequent legal proceeding.”Nonetheless, opposing counsel still gets to ask about the complaint, and the inconsistencies in the complaint versus the Statement of Claim, etc., so we tell our clients, often after it is too late, to never complain to FINRA. It is a giant waste of time and is likely to harm your case.

However, that is not what this article is about. What if FINRA calls you?

Although FINRA will conduct, at least superficially, its investigation or inquiry whether the customer participates or not, but the problem is once again, what happens when FINRA generally, and unfortunately often, does nothing.

FINRA’s enforcement failures have harmed many of our cases, but here are some glaring examples. The names have been changed to preserve confidentiality.

The Widow Jane

“Jane Jones” is an artist, and is married to “John Jones,” a lawyer in Northeastern Pennsylvania. John, age 54, is found dead on his couch watching television. He has a multimillion dollar estate. Jane calls one of John’s former stockbrokers, “Tom” from Pittsburgh.

Tom makes numerous trips to Northeastern Pennsylvania to help “consolidate” John’s Estate. The married and 20 years younger, Tom, in between selling the widow, several high commission variable annuity products, on his increasingly frequent trips across the Commonwealth to help Jane, starts buying Jane various “presents,” including spa treatments, and expensive dinners, culminating in a romantic intimate relationship. Tom also takes Jane, of course sans Mrs. Tom, on various “business trips.”

Each time they meet, Tom has a new “wonderful investment” to sell Jane, including the unregistered offering of certain oil and gas wells by Tom’s best friend back in Western Pennsylvania. After Jane’s inheritance is substantially depleted, Tom of course ends the relationship.

We sue Tom and his employers for fraud, negligence, breach of fiduciary duty, the sale of unsuitable investments, the sale of unregistered securities, and of course the failure to supervise. Among Tom’s extracurricular activities, Tom is engaging in “selling away” or private securities transactions, because Tom does not have permission from his employer to sell the unregistered oil and gas securities to Jane. (The best part is that Tom used his firm e-mail address to engage, in let us say, less than professional communication with Jane).

FINRA sees our complaint alleging selling away, and of course we cooperate. We provide FINRA with details and documents concerning the unregistered securities, expensive gifts Tom purchased for Jane, and additional evidence that Jane, the artist, had no prior independent investment experience of any kind.

Tom of course lied that he knew nothing of Jane’s investment, even though Tom and several of his other clients made the same investment.

Respondents resisted any discovery into what we knew that FINRA’s inquiry. Respondents also went through great lengths to expedite the hearing before any adverse finding or enforcement action would be brought against Tom, or arguably his employer for failure to supervise or review Tom’s e-mails.

Respondents were also eager to settle the case, and did so notwithstanding that their enthusiasm waned after FINRA issued a secret “Letter of Censure,” not appearing on Public Disclosure that Tom merely failed to disclose his personal investment in the unregistered oil well offering. Tom’s lawyers convinced the FINRA staff that they would have to work in connection with an enforcement action against Tom, so of course, Tom, even after lying to FINRA, was absolved with a “Letter of Censure.”

Hedge Fund Harry

“Harry Smith” never graduated college, but got a job selling securities at the old bucket shop, First Jersey Securities. Harry worked his way up and down the securities firm food-chain until he ended up with his own independent office of a small franchise broker-dealer, where he pays his own expenses in Northeastern Pennsylvania.

Harry’s wife divorced him, and sued his sales assistant, as correspondent. Harry took an on-line course with Investors Business Daily, and decided without the knowledge or documented formal approval of his employer, that Harry was going to start a hedge fund.

Harry put together an offering memorandum, and over the course of almost ten years, sold an interest in his hedge fund to at least a dozen of his customers. Harry forgot to file SEC Form D, each year, failed to file any documents in Pennsylvania, and sold an interest in his hedge fund to at least a dozen, including many non-accredited, investors.

Harry was supposed to make short term investments in highly liquid securities and options, using the trading strategy he learned from his Investors Business Daily course, and was supposed to provide his customers with annual audited statements.

Of course Harry did none of this. Instead Harry invested 90% of the hedge fund in some $3 stock that he and his friends owned, Harry charged the hedge fund for his office expenses, and in addition to management fees, Harry was making commissions by trading in the hedge fund through an account at his broker-dealer. Harry’s sales assistant was promoted to become his supervisor, who also got a piece of the action, and Harry and used his personal e-mail account to pull off the whole scam.

We filed an action in arbitration on behalf of at least five of Harry’s customers, all of whom did not know each other. They all had the same story. Harry’s shenanigans were less than transparent. Miraculously, all the clients purchased the same stock in their own accounts, “unsolicited.” Harry sold his stock before everyone else when the stock tanked. Everyone lost most of their investment, and of course, right after filing our first case, we received a call from FINRA wanting to speak to our clients.

The cases were highly litigated, and were ultimately resolved in mediation.

However, almost a week before the mediation, FINRA issued a close out letter stating that there was insufficient evidence that Harry violated self-regulatory rules or the federal securities laws. Respondents were elated. Coincidentally, the same lawyers that represented Harry represented Tom, and of course the FINRA staff, concerned that it would once again be made to work, were happy to let Harry off and ignore his sale of unregistered securities, private securities transactions, e-mail violations, and the mis-marking of firm books and records, including the unsolicited order tickets, in connection with Harry’s multimillion scam.

Bad Broker Barry

Since 1999, we sued “Bad Broker Barry,” at least ten times.

We were not the only ones, as Barry had more than thirty complaints against him.

Each time Barry changed firms, working his way down the food chain, a complaint or two slipped through the cracks. Each time Barry was sued, a state regulator would inquire about the case, and Barry would withdraw from that state. Pennsylvania never seemed to care, and neither did Barry’s employer, because Barry was a multimillion producer. Periodically paying his customers was just the cost of doing business.

Sometime in 2008, we filed one of our last cases against Barry. Barry had churned the accounts of a 88 year-old widow in a nursing home, and when questioned by his employer actually showed up at the home for the widow to sign “happy letters” that she approved of Barry’s unauthorized trading and that Barry was a nice man. We were hired by the widow’s son who lived in another country. FINRA called us, we cooperated with FINRA. Found out in discovery that Barry was on super secret double probation, and that all his customer complaints would be forwarded to one particularly FINRA supervisory in Philadelphia. We settled the case, Barry’s manager was fired, and thought we would never hear about Barry again.

Less than a year later, we received a call from a disabled doctor and his wife. Barry had churned the living daylights out of their account trading bonds as principal, and reaping several hundred thousands of dollars in fees. Barry even made fake statements to show that the couple was making money, when in fact their portfolio was almost rendered worthless.

We sued Barry’s employer, who had the sense to quickly settle the case. The same FINRA supervisor called us wanting to speak with our clients. Not only did the clients want to speak to the supervisor, they also came in for an interview and we produced all the fake statements that Barry had manufactured.

More than two years went by and we never heard from FINRA. We saw additional complaints being filed against Barry on Public Disclosure, but never heard from FINRA.

Last year, after being featured in the Wall Street Journal with 32 customer complaints, Barry “retired.” Following or at our about the time of Barry’s retirement, FINRA sent us a letter stating that they were closing their inquiry into Barry because after all, there was insufficient evidence that Barry violated self-regulatory rules or the federal securities laws.

Nicholas J. Guiliano has over twenty years experience representing investors before the Financial Industry Regulatory Authority, the New York Stock Exchange and before the National Association of Securities Dealers, Office of Dispute Resolution. Over the last twenty years, he has represented more than a thousand investors from all across the United States and from several foreign countries, in claims against stockbroker and broker-dealers for fraud, breach of fiduciary duty, churning or excessive trading, the sale of unsuitable investments, the sale of defective investments, the sale of unregistered securities, and the failure to supervise. He is frequently quoted in the national media on securities and investment related issues, most recently on National Public Radio. He offers his services on purely a contingent fee basis, and is also a member of Public Investors Arbitration Bar Association.

Comments are closed.