Fight the Power

Ever wonder whether you could take on the Financial Industry Regulatory Authority (FINRA) and actually come out better than if you had settled? The answer, according to a recent study, is yes, a decent percentage of the time, if you are willing to offset a lower penalty with the legal and psychological costs associated with litigation.

Washington, D.C. law firm Sutherland Asbill & Brennan’s fourth annual study on litigated disciplinary proceedings brought by FINRA against broker/dealer firms and registered representatives’ attempts to peel the layer of fear and concern in fighting FINRA (formerly NASD) charges by revealing the efforts may pay off.

The study itself is authored by the former deputy chief counsel of enforcement for NASD, Brian Rubin, a partner with Sutherland, and co-authored by associate Christian Cannon, and it does, coincidentally or not, affirm the use of expert legal counsel or having the luck to be backed by a firm in increasing the chance for success in FINRA litigation.

Rubin and Cannon analyzed 72 charges that were litigated in 2007, using mostly data sliced and diced from FINRA’s Web site.

The analysis revealed that firms are doing better than individuals and those represented by counsel are doing better than those not represented by counsel at challenging FINRA, says Rubin, who was with NASD for seven years and the SEC before that for four years. “It is harder for the staff to make their case against a litigator with lots of resources.”

Of the 72 charges that were litigated during 2007, firms and representatives were successful in getting 11% of the charges dismissed by the Hearing Panel. This statistic has remained basically the same over the previous seven years. But chances of succeeding soar when a respondent is backed by professional muscle, the study found.

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Broker/dealer firms were far more likely to succeed than individuals. Approximately 29% of the charges against firms were dismissed, compared with approximately 5% for individuals. Those represented by counsel succeeded in getting approximately 17% of charges dismissed, while those without counsel succeeded in getting only 3% of the charges dismissed.

Even with lowered fines, litigation will cost you. “It is a matter of what you are valuing,” Rubin says. “It obviously costs money if you litigate but you (may be) reducing the charges.” Weigh everything, including public image, he says.

There are lots of reasons why you should settle, he says, mentioning the language and the fine can be negotiated and it brings certainty to the matter, whereas if you litigate, the case could go on for a year or longer. Also there are psychological costs involved in waiting for the decision. “You need to ask whether the costs of litigation out weigh the costs of sanctions. Sometimes they do and sometimes they don’t,” he says.

FINRA staff believes it has sufficient evidence to bring charges but they do have attorneys able to litigate if necessary, but they also need to justify the sanctions they are asking for before a hearing panel, Rubin says. But, “you can argue that the evidence is not strong or you were acting in good faith or the supervisor told you to do it or you didn’t know the rule.”