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Sense on Cents Calls on US Supreme Court to Hear Standard Chartered v. FINRA

Posted by Larry Doyle on December 6, 2011 9:09 AM |

I first started writing about Wall Street’s not-for-profit self regulatory organization, aka the Financial Industry Regulatory Authority (FINRA), in early 2009.

In late 2009, I first referenced Standard Chartered v. FINRA, the case in which the plaintiff alleges that FINRA and its senior executives — including current SEC Chair Mary Schapiro — lied both verbally and in writing in the merger which formed FINRA.

Why would Mary and her friends lie? 

Well, I could highlight the fact that there were somewhere between 175 and 350 million reasons why these executives would intentionally misrepresent the facts in that merger, and did highlight as much in my October 2009 commentary, NASDAQ Sale: Why Schapiro and FINRA Execs Lie?:

Writing about the integrity, or lack thereof, of a senior governmental official and other high ranking financial regulators is a serious topic. Given the seriousness of this topic, I do not treat it lightly. For newer readers here at Sense on Cents, I am referring to the commentary I wrote this past Monday entitled, Attorney Richard Greenfield Brands Mary Schapiro and FINRA Execs As “Liars.”

If, in fact, Ms. Schapiro and her FINRA colleagues lied, what was their motivation? We learn more about this amazing financial intrigue as on Tuesday a redacted version of a Second Amended Complaint brought on behalf of Standard Investment Chartered and all others similary situated  v FINRA, NYSE Group, Mary L. Schapiro, Richard F. Brueckner, T. Grant Callery, Todd Diganci, and Howard M. Schloss was made public.

Recall that the core of this complaint is a charge made by plaintiffs against defendants regarding the inappropriate allocation of proceeds generated from the sale of the Nasdaq Stock Exchange. That sale generated approximately $1.5 billion. FINRA paid out $35k per firm to approximately 5100 member firms for a total of approximately $175 million.

Why would the defendants be motivated to withhold the balance, or a large percentage of the balance, of those funds from the member firms?

The plaintiff’s attorneys represent that Ms. Schapiro and the other defendants orally and in writing repeatedly maintained that the IRS mandated that the $35k per firm was the absolute maximum that could be paid in order for FINRA to maintain its not-for-profit status.

The plaintiff’s attorneys represent that assertion is a blatant misrepresentation and that the IRS did not provide a full review of this matter until a few months after FINRA’s member firms had voted on the consolidation of the NASD with NYSE Regulation to form the entity now known as FINRA.

Against that backdrop, the question still begs as to why these defendants would have chosen to misrepresent this situation and not properly allocate these funds. Let’s navigate this Second Amended Complaint. We learn the following about the plaintiff’s allegations:

pg 3 Point 9: “The Individual Defendants abused their positions of trust and authority, misrepresented key facts repeatedly, orally and in writing, and sacrificed the interests of the Plaintiff and members of the Class (“Members”) so that the Officer Defendants could line their pockets.”

WOW! Strong charges and certainly deserving of real public attention. Why haven’t they received that attention? Well, perhaps key friends in the right places. You think? Perhaps.

In the spirit of full disclosure, Judge Jed Rakoff (he of recent note for his ruling in the settlement between the SEC and Citigroup) did uphold a prior court’s ruling that this case should not proceed. That said, the plaintiff’s attorneys have been dogged in their pursuit of this case.

Fast forward two years and we now learn that the Standard Chartered v FINRA case has on appeal been brought to none other than the United States Supreme Court. Will the Supreme Court hear the case in which our current SEC chair et al are alleged to have lied in order to ‘line their pockets’? Let’s navigate as Forbes’ Emily Lambert writes, Why FINRA Needs to Charm the Supreme Court:

A lawsuit filed against Finra by a small broker-dealer, Standard Investment Chartered, has been appealed to the high court. It’s up to the justices to decide whether or not to take the case. Finra has until tomorrow, Tuesday Dec. 6, to file a brief explaining why it believes the Court shouldn’t hear the matter. A surprising array of groups that lean both left and right has filed friend-of-the-court briefs siding with Standard, which says Finra has been granted unchecked power. At issue is how much immunity Finra, a non-profit, non-governmental regulator, should receive from private lawsuits. Because Finra performs regulatory duties on behalf of the Securities and Exchange Commission, the courts have granted it similar immunity. Finra has immunity for anything “incident to” its regulatory activities, a standard established by the federal appeals court in New York.

But Standard argues its case has nothing to do with Finra’s regulatory activities. It says leaders of Finra (then called the National Association of Securities Dealers) lied to its members to ultimately get them to approve a merger with the regulatory arm of the New York Stock Exchange. Standard says that Finra’s leaders, including current Securities and Exchange Commission Mary Schapiro, falsely told members that they could receive a one-time payment of $35,000, and no more, to pass a bylaw amendment that would make the merger possible. Finra has not admitted to or denied those allegations in court.

“This issue of accountability at Finra is not a right or left thing, it’s a right or wrong thing,” says William Anderson, a lawyer representing Standard.

While Finra’s brief needs to convince five justices to leave the issue alone, the odds remain in the agency’s favor.  Last term, less than 1% of cases appealed to the Superme Court got heard. But so far, the number of filed friend-of-the-court briefs favoring Finra is – zero.

I am truly humbled by the fact that in one of the amicus curiae written on behalf of Standard that my work referencing FINRA’s liquidation of its auction-rate securities position is referenced.

I certainly hope that the justices on the Supreme Court will see to it that our nation deserves to learn the truth in this case and in the process determine if our SEC Chair and her then fellow FINRA executives knowingly and intentionally lied in the midst of this merger.

Are we a nation of laws? If so, then they need to be upheld.

John, Antonin, Clarence, Anthony, Sam, Elena, Ruth, Sonia, Stephen, do the right thing. HEAR THIS CASE!!!

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets, our economy, and our political realm so that meaningful investor confidence and investor protection can be achieved.



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