The law firm’s study also found that it might pay for member firms and registered representatives to litigate rather than settle. The authors, partner Brian L. Rubin and associate Christian J. Cannon of Sutherland, analyzed cases from January 2007 to December 2007 where FINRA charged respondents with violating National Association of Securities Dealers (NASD) and Securities and Exchange Commission (SEC) rules.
“Many firms and registered representatives fear litigating against FINRA because its staff has often spent months or even years investigating the conduct,” said co-author Rubin, former Deputy Chief Counsel of Enforcement for FINRA’s predecessor. It is also well-funded, with its own procedural rules, and every hearing panel is headed by a FINRA employee. Respondents fear that ‘the house that the regulators built’ gives FINRA a home field advantage. Our studies have shown that it often pays for member firms and registered representatives to litigate, rather than settle.”
Broker/dealer firms, which presumably have more resources than individuals and often retain counsel, were far more likely to succeed than individuals at hearing panels, the study said. In 2007, approximately 29% of the charges against firms were dismissed, compared with approximately 5% for individuals. In 2006, the difference was even starker: Approximately 44% of charges were dismissed against firms, while individuals were successful approximately 6% of the time.
Similarly, respondents who have resources to hire counsel are more successful. In 2007, respondents represented by counsel succeeded in dismissing approximately 17% of charges, while respondents who litigated without the benefit of counsel succeeded in dismissing only 3% of charges.
“Settlement discount” refers to the benefit of settling rather than choosing to litigate. It is often assumed that sanctions proposed as part of a settlement are less severe, providing an incentive to settle, but the study found that is not necessarily true.
“The staff commonly negotiates by stating that they will seek and obtain a harsher sanction at the hearing if the respondent refuses to settle,’ said Cannon, co-author of the study. “But this claim is often hollow. The staff does not always seek a harsher penalty and, in any event, the hearing panel does not always award the sanction sought by the staff.”
Sutherland surveyed 20 counsel to determine whether there is a settlement discount. Although the firm admits the sample might not be very representative, responses were received by six counsel, who defended six respondents against nine charges brought by FINRA.
Of those who responded, 33% said that FINRA did not seek more severe sanctions at the hearing than it had offered in pre-hearing settlement negotiations. That indicates that in 33% of the cases the staff did not offer a “settlement discount.” In approximately 83% of the cases, the hearing panel ordered sanctions that were equal to or less severe than those sought by the staff during settlement negotiations.
Where respondents lost on liability, approximately 50% of the time they were successful convincing the panel to order a lower monetary sanction than demanded by FINRA, the study said. When this happened, fines were reduced on average from approximately $16,000 to $6,000. The amount of reduction in 2007 was similar to prior years.
The FINRA staff was successful in convincing hearing panels that respondents committed a fraud in 2007, the study said. In fact, liability was found in all nine instances where fraud was alleged. In contrast, during the previous seven years, respondents were successful in beating fraud charges approximately 25% of the time, meaning that fraud charges were more than twice as likely to be dismissed as other charges.
Respondents are sometimes successful in preventing FINRA from publicizing their liability. In general, decisions imposing a fine of less than $10,000 and no suspension or bar are published in “redacted” form and do not identify the respondents. During 2007, approximately 14% of respondents were able to “win” a redacted decision, a rate comparable to 2006, the study said.
Respondents faced long odds on appeal to the National Adjudicatory Council (NAC). In 2007, respondents were unsuccessful approximately 81% of the time. Approximately 19% of appeals resulted in increased sanctions, while the sanctions were affirmed approximately 62% of the time. During 2006, the percentage of losses by respondents on appeal was even higher: 92% of appeals resulted in affirmed or increased sanctions.
Respondents who are unsuccessful before the NAC have the right to appeal to the SEC, and from there to the appropriate Federal Court of Appeals. In 2007, 72% of SEC appeals were either dismissed without briefing or were affirmed. The remaining 28% were reversed or remanded to the NAC for further findings. In 2006, 38% were reversed or remanded, the study said.
During 2007, only one FINRA/NASD disciplinary appeal was decided in the federal courts (the same number as in 2006). It was a success for the respondent because it remanded the case to the SEC to reduce or justify the sanctions imposed.
The study, by law firm Sutherland Asbill & Brennan LLP, reviewed 31 Hearing Panel decisions from 2007, involving 42 respondents and 73 total charges—and compared those results with the previous seven years (2000-2006), including the 40 decisions litigated during 2006, which involved 47 respondents and 89 total charges. In addition, the study reviewed 28 appellate decisions by the NAC addressing the cases of 31 respondents, and 11 SEC decisions addressing the appeals of 18 respondents. The analysis of these appeals was compared with a similar analysis of the prior years.