Finra Weakened by Appellate Court Ruling

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.

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  1. Linus Huber

    This is exactly the wrong way to go. Looters MUST be made accountable on a personal level and things do not change until the looters have to realize that they cannot get away with the loot.

    It’s like a bankrobber is being punished to never be allowed again to enter a bank but whatever he was able to rob in the first coup, well, that is for his enjoyment.

  2. vlade

    So, in other words, if you steal in a shop, as a punishment you’re banned from stealing in the same shop again (or, at worse, the same type of a shop), but can keep whatever loot you made off with, and happily go steal somewhere else.

  3. jake chase

    Well, the truth is the NASD is a fascist bureaucracy dedicated to running out of business anyone not connected with a major firm. Selective enforcement is what it’s all about and has been for forty years that I know of. It believes fraud begins and ends with penny stocks, and has made it all but impossible for small companies to raise money. The whole organization should be dismantled but this will never happen because the big brokers love it.

    1. decora

      jake chase: that’s funny, a lot of people said almost exactly the same thing about the CFTC (Commodity Futures Trading Commission) in Leah McGrath Goodman’s book about the New York Mercantile Exchange

  4. Jardinero1

    If Fiero Brothers possess ill gotten gains, then for justice to be done, those gains should be returned to those who were bilked; not FINRA. For Finra to collect the fine would do absolutely no justice to those who were bilked and would prevent those who were bilked from maximizing their recovery through court at law.

  5. Fraud Guy- Also

    This ruling goes to the heart of the whole concept of delegated “Self-Regulatory Authority” enshrined in the securities laws and SEC regulation. Everybody needs to now understand that there is no real “self-regulatory authority” under the law, as self-regulatory organizations (SROs) like FINRA lack the fundamental power of a regulator, which is to legally enforce fines.

    The self-regulatory system, which was always crummy, is dead. We all need to talk about it that way in order to remove the industry-serving fig leaf that it exists.

  6. Fraud Guy- Also

    Further, the court probably naively believes that being thrown out of Finra leaves a broker dealer subject to SEC direct enforcement for trading securities without a license. As a practical matter, NOT TRUE. The ABA itself, in cooperation with the SEC, authored a report five years ago that addressed the reality that THOUSANDS of unlicensed broker dealers operate openly in the U.S., and the SEC has no program of taking action against them. See the report at :

    The ABA report recommended that the SEC take steps to address this situation of pervasive unlicensed broker dealers, which the report pointed out, represents a fundamental challenge to the integrity of the securities laws and capital formation. What did the SEC do in response? Surprise, surprise–nothing.

    You can find all the unlicensed broker dealers you care to just by putting into Google “boutique investment bank”. They are everywhere. The SEC doesn’t care.

  7. Fraud Guy- Also

    Further still, lest you think that the unregistered broker dealers exist only at the periphery of the markets, I call your attention to the transaction fees private equity firms collect for doing deals. No major private equity firm is a broker dealer/Finra member, yet they collect BILLIONS of dollars in commissions that they charge portfolio companies (“issuers” in SEC-speak). The private equity firms claim to be exempt from registration/Finra membeship via the tortured logic of the so-called “issuer’s exemption” , whereby the PE firm is equated with the portfolio company as the “issuer”. However, I guarantee you, if the SEC would examine how commission money moves around within PE firms, they would find that very few firms actually fall within the “issuer’s exemption”, and that PE firms should therefore register as broker dealers.

    Why don’t the PE firms just register as broker dealers to avoid the regulatory risk? That’s easy: broker dealers have to give their customers commission reports, and currently, most private equity firms refuse to tell their investors how much money they earn in transaction fees, because they get to keep most of it themselves. Fessing up about the amounts would provoke severe push back by investors about the practice.

    As I said, the SEC has no interest in enforcing the law regarding who has to be a registered broker dealer/Finra member.

  8. aet

    Hey where’s Congress when you need them?

    They could regulate if they wished, could they not? After all, that inter-state commerce clause must mean that they could pass all necessary and proper laws to give their regulatory powers effect.

    So…where’s the Congress when you need them??

  9. ambrit

    This is why I love this site; I learn so much about how the system actually works by reading the comments section. Thank you Insiders for continuing my financial education. Now, if I could only find the funds to apply the lessons…

  10. Jeff Z.

    Where’s Congress? Dining at the trough of bribery . . er… campaign contributions from industry insiders, that’s where!

  11. beowulf

    There ought to be a law against it Part XXXVII

    Pursue criminal charges against the firms based on Martha Stewart law violations (documents filed with a federally regulated exchange would fall 18 USC 1001 false statements law). Indict the corporate officers who signed said filings as well as the corporation itself. Dismiss personal charges on condition that corporation cough up BIG fine and, if it stays in business, probation (which can establish all sorts of otherwise unavailable legal remedies).

  12. MichaelC

    I went down to Zuccoti park early last night to see for myself what was going on.

    The chant “we are the 99%” made a powerful impression on me and I think it best sums up the mood and diversity of the OWS crowd’s interests. The 1% is peacefully being put on notice that they are isolated, that the looming disaster is not going to be tolerated quietly.

    Pure projection on my part, but my impression was that one objective of the 99s particpating was just to connect before the collapse hits, before leaving the next larger wave isolated and in crisis. Ironically, the 2nd and 3rd tier workers in that neighbohood are going to be put into crisis with this quarters coming layoffs.

    FWIW The 99ers chanting were mostly not “hippy-dippy” by any stretch. They struck me as a pretty sober crowd of people annoyed, but not yet digusted nor even close to furious.

    How many rallies have you attended where professional women of a certain age (who no doubt worked as officers in compliance at the banks) could mill around unmolested and occasionally cheered with tags hanging around their neck supporting “Protect our whistleblowers,org.”

  13. steelhead23

    Liz Warren should loudly comment on this ruling. Generally, rulings like this are based on the legislation authorizing the agency. If agency regs exceed its authority, the regs could get tossed. It sounds like in this case it was the form of the reg. change (somewhat informal) that led the court to throw them out.

    But let’s not rush to bury FINRA here. OK, so they could not fine a firm that naked shorted another company to death after rescinding its membership in NASD. Is not shorting absent a commitment of shares a fraud? (If not, it sure as hell should be). Isn’t fraud a violation of U.S. Code? Then screw fining Mr. Fiero, indict his ass for fraud. What would Machiavelli do? If I ran the zoo, that’s just what I’d do.

  14. decora

    maybe FINRA should be allowed to declare them drug users or terrorists, as part of the “Global War on Drugs and/or Terror”.

    hell, maybe you can even just declare them enemies of the state, like Anwar Al-Alwaki – who needs a trial anymore am i right? this is the new america, where the law is an inconvenience easily ignored.

    1. decora

      not that i advocate violence. just pointing out the hypocrisy. a woman down here sold a little weed a while back, got like 25 years in the slammer. you go one state over, weed is legal with a ‘license’.

      now these guys are stealing millions and millions, nobody gives a shit.

      Fraud Guy has really layed it out well in his comment, expanding on the story.

  15. Martskers

    FINRA is, was and always has been a shill for the
    industry. Take a look at the relationship between
    Bernie Madoff (and his family) and the NASD, as
    just one example. The fact that Mary Schapiro got to
    “fail up,” namely to go from the NASD to the SEC
    was a travesty.

    Now that FINRA has no enforcement authority to speak
    of, the next shoe that needs to drop is for its
    bogus arbitration facility to be exploded as well.
    Its record of ruling against customers is legendary.
    It’s time to get back to giving customers the
    right to go to court.

  16. Pro Fiero

    Fiero Brothers never had any customers. they were short sellers that worked against the boiler rooms that fleeced the public. they should be given credit for playing the opposite side of the criminals while flushing out these crooks.

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