Finra (the successor to the NASD plus the enforcement arm of the NYSE) suffered a major blow in a ruling on what should have been a routine matter: an enforcement action against a penny stock operator, Fiero Brothers. In 2000, the NASD charged Fiero with breaking federal fraud laws. Not only did the then NASD expel Fiero and its owner John Fiero from the organization, but it also fined it $1 million. John Fiero refused to pay, and Finra went to court to collect the money.
The ruling is astonishing and guts one of Finra’s disciplinary tools. From the New York Times:
In an opinion written by Judge Ralph K. Winter Jr., the [three judge] panel[for the Court of Appeals for the Second Circuit] unexpectedly overturned a lower court and ruled that neither the nation’s foundational securities laws, adopted in 1934, nor a “housekeeping” rule adopted by Finra in 1990 gave it the right to pursue its monetary sanctions in court.
“The principal issue is whether the Financial Industry Regulatory Authority Inc. has the authority to bring court actions to collect disciplinary fines,” Judge Winter wrote. “We hold that it does not and reverse.”…
“The decision neuters Finra,” said John C. Coffee Jr., a securities law professor at Columbia who has been a consultant both to regulatory agencies and to private defendants appearing before them. “It has been trying to show that it has teeth and could hold its members more accountable — now, those teeth have been surgically removed.”
The court contended that Firna still possessed “draconian” power by being able to expel firms from membership in the organization. But that does nothing to hurt the owners of firms who engage in abuse practices and can now retain their ill gotten gains even if excommunication by Finra forces them to shutter their businesses.
The New York Times notes that Finra in fact seldom went as far as suing to collect unpaid fines, but also notes that industry incumbent assumed Finra could collect, which presumably would have considerable deterrent value:
Since banned brokers cannot return to the industry unless they pay any unpaid fines, it has been extremely rare for Finra to sue to recover unpaid penalties.
Until now, both Finra and its members assumed that it had the power to do so if necessary. If it does not, its misbehaving members need no longer fear that a stiff fine will follow them into Wall Street exile.
Finra is licking its wounds and issued the usual statement that it is considering its options. Let’s hope it comes up with some. Even though this is not a major front in the battle against bankster malfeasance, any losses have the potential to encourage more efforts to fight regulators.