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FINRA Defense: Exhaustion and Immunity

Posted by Larry Doyle on December 2, 2009 9:24 AM |

Let’s revisit the case of Standard Investment Chartered v. FINRA. While I have written extensively on a host of issues related to FINRA, I believe the issues embedded in this specific case drive to the very core of our financial regulatory system. For those unaware of this case, a recent memorandum (link provided at end of this commentary) filed on behalf of the plaintiff highlights:

At the core of the case is the FINRA Defendants’ issuance of a proxy statement on December 14, 2006 (the “Proxy Statement”), which contained out-and-out material falsehoods and omitted essential facts bearing on the Transaction and on a proposed “Special Member Payment” that was to be made upon its completion. The most important false representation was that federal tax authorities limited a payment to NASD Members to $35,000. Second Amended Complaint (“SAC” or the “Complaint”) ¶ 13. The FINRA Defendants magnified the falsehood that the Internal Revenue Service (“IRS”) limited NASD Member payments to $35,000 in many different forms, over and over, as if saying it enough times and wishing it to be true would somehow make it come true.

A claim of out-and-out material falsehoods against defendants, including then FINRA head and current SEC chief Mary Schapiro, is where the rubber meets the road. How have the defendants responded? Are they willing to embrace the virtues of transparency and integrity so badly needed to restore investor confidence? No, I don’t think so.

The defendants have filed a motion to dismiss this complaint. On what grounds do the defendants make their motion?  The memorandum highlights:

Defendants ask the Court to dismiss the SAC: (1) under Rule 12(b)(1), because Standard purportedly did not exhaust its administrative remedies through the Ninth Circuit, which they argue is required and exclusive; (2) under Rule 12(b)(6), because Defendants are absolutely immune from actions for damages in every circumstance; and (3) under Rule 12(b)(6), because the SAC fails to state a cause of action.

What does the defendants’ request entail?

Exhaustion: tie the case up within the Ninth Circuit, forcing the plaintiffs’ attorneys to pursue a number of legal arguments prior to elevating the case. What does this really mean? Defendants are employing a rope-a-dope strategy to wear plaintiffs down in hopes of wearing them out. Lot of integrity and transparency in that process, right?

Immunity: defendants claim that their actions in this situation are effectively above the law. Government agencies, such as the SEC, operate under the protection of immunity. FINRA is a non-governmental private corporation that reports to the SEC. For FINRA and individual defendants to claim immunity is the height of arrogance. The American public should be OUTRAGED by this defense. Did defendants knowingly and willingly lie and misrepresent material facts orally and in a proxy statement? Immunity? Are you kidding me? Don’t tell me that’s America.

Cause of Action: defendants claim that even if the evidence is accepted, it is not legally sufficient to state a claim. What? Lying in a proxy statement on a billion dollar plus transaction by the heads of our financial system’s self-regulatory head is not sufficient to pursue? Are you kidding me?

This case will next be in court in mid-December. For those who cherish the principles of truth, transparency, and integrity in our country, let’s hope that Judge Jed Rakoff disregards the defendants’ motions to dismiss and allows this case to go to trial. Sense on Cents will be monitoring closely.


For those who care to review the entire memorandum, please click on the image to access the pdf document:

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