Sutherland Annual Study Finds That It Sometimes Pays to Litigate Against FINRA

Business Wire, May 12, 2008

Broker-dealer firms that litigated saw great success

Study questions "settlement discount"

WASHINGTON -- Sutherland Asbill & Brennan LLP announced that it has completed its fourth annual analysis of litigated disciplinary proceedings brought by the Financial Industry Regulatory Authority (FINRA, formerly NASD) against broker-dealer firms and registered representatives. The study, authored by partner Brian L. Rubin and associate Christian J. Cannon, analyzes cases from January 2007 to December 2007 where the self-regulatory organization charged respondents with violating NASD and Securities and Exchange Commission (SEC) rules and statutes. The study also compares 2007 results with prior years.

Rubin, former Deputy Chief Counsel of Enforcement for FINRA's predecessor, stated: "Many firms and registered representatives fear litigating against FINRA because its staff has often spent months or even years investigating the conduct. It is also well-funded, with its own procedural rules, and every Hearing Panel is headed by a FINRA employee. Respondents fear that 'the house that the regulators built' gives FINRA a home field advantage. Our studies have shown that it often pays for member firms and registered representatives to litigate, rather than settle."

The study also calls into question the so-called "settlement discount," presenting evidence that, based on the available data, the sanctions imposed by Hearing Panels are usually not more severe than the terms offered if the firm or representative settles prior to trial. Cannon, a former registered representative, points out, "The staff commonly negotiates by stating that they will seek and obtain a harsher sanction at the hearing if the respondent refuses to settle. But this claim is often hollow. The staff does not always seek a harsher penalty and, in any event, the Hearing Panel does not always award the sanction sought by the staff."

The Results of the Study

Trials

FINRA disciplinary proceedings begin when a complaint is filed, and culminate in a trial before a Hearing Panel with two current or former industry members and one Hearing Officer, who is a FINRA employee. The Hearing Officer serves as Chair of the Hearing Panel and oversees the proceedings with authority to make all rulings about the schedule, the procedures, and what evidence will be admitted. The Hearing Officer also writes the decision of the Panel.

The study found the following regarding Hearing Panel decisions during 2007, and how they compared with other years:

Liability

* 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 is similar to the previous seven years (2000-2006).

* Resources appear to have an impact on the success of the respondents.

* Broker-dealer firms, which presumably have more resources than individuals and often retain counsel, were far more likely to succeed than individuals. In 2007, approximately 29% of the charges against firms were dismissed, compared with approximately 5% for individuals. In 2006, the difference was even starker: approximately 44% of charges were dismissed against firms, while individuals were successful only approximately 6% of the time.

* Similarly, respondents who have resources to hire counsel are overwhelmingly more successful. In 2007, respondents represented by counsel succeeded in getting approximately 17% of charges dismissed, while respondents who litigated without the benefit of counsel succeeded in getting only approximately 3% of charges dismissed. In 2006, retaining counsel made an even bigger difference. Respondents represented by counsel succeeded in getting approximately 13% of charges dismissed while pro se respondents struck out every time.

* The staff was unusually successful in convincing Hearing Panels that respondents committed a fraud in 2007--liability was found in all nine instances where fraud was alleged. In contrast, during the previous seven years, respondents were successful in beating fraud charges approximately 25% of the time, meaning that fraud charges were more than twice as likely to be dismissed as other charges.

* Respondents are sometimes successful in preventing FINRA from publicizing their liability. In general, decisions imposing a fine of less than $10,000 and no suspension or bar are published in "redacted" form and do not identify the respondents. During 2007, approximately 14% of respondents were able to "win" a redacted decision, a rate comparable to 2006.

Sanctions

* Where respondents lost on liability, approximately 50% of the time they were successful convincing the Hearing Panel to order a lower monetary sanction than that demanded by FINRA staff. When this happened, fines were reduced on average from approximately $16,000 sought to $6,000 awarded. In 2006, where respondents lost on liability, they were more successful in getting a lower monetary sanction. That happened approximately 74% of the time. The amount of reduction in 2007 was similar to prior years.