Here's a little news that might interest you: Sometimes it pays to litigate against the Financial Industry Regulatory Authority (FINRA, formerly NASD), rather than settle. In fact, when a firm or rep decides to settle with FINRA rather than go to trial before a Hearing Panel, the sanctions are often just as severe as they would have been in trial, says a recent study by law firm Sutherland Asbill & Brennan LLP. Occasionally, settlement sanctions are even more severe, says the study. So much for the so-called settlement discount-a carrot often waved in front of member firms and advisors to encourage settlement.
"The conventional wisdom is that the staff has spent a long time on the investigation and they have a lot of resources to bring upon litigants, so individuals and firms often think it does not make sense to litigate," says Brian Rubin, a partner at Sutherland, a former Deputy Chief Counsel with the NASD's Enforcement Department and a former senior counsel in the SEC's Division of Enforcement.
The study compared 31 Hearing Panel decisions in 2007 involving 42 respondents and 73 total charges to previous years (2000 to 2006) to see how often FINRA wins, and gets the sanctions it asks for. Although the study found the vast majority of the time the FINRA staff won (only 11 percent of the 72 charges litigated during 2007 were dismissed), Rubin says that about 50 percent of the time, respondents were successful in convincing the Hearing Panel to order a lower monetary or suspension sanction.
Specifically, the study found that, on average, respondents convinced the panel to reduce suspensions by 55 percent—from about 7.8 months to 3.6 months—and fines were reduced by over 60 percent on average—from $16,000 sought to $6,000 awarded. Furthermore, while settlements offered by FINRA staff are assumed to be less harsh, in fact, 83 percent of the time they are equal to—or more severe than—the Hearing Panel's sanctions.
"People should tend to fight if they don't get a reasonable settlement offer from FINRA because they have at least a 50 percent shot at doing better at a Hearing Panel," says Jacob Zamansky, an attorney with Zamansky & Associates, who works with financial advisors. Even so, Zamansky says respondents generally have an uphill battle when fighting at any level—from the case before the Hearing Panel, through an appeal heard by the National Adjudicatory Council (NAC), to an appeal of NAC's decision heard by the SEC and, from there, to the Federal Court of Appeals.
Of course, litigating does not make sense for every case; it requires resources, and the process can take months or years to resolve. Not to mention that respondents face long odds on appeals. In fact, 81 percent of the time respondents were unsuccessful when they appealed the Hearing Panel decisions heard by NAC. Furthermore, it's not too surprising the study found that since b/ds have more resources than individuals they were more successful in getting charges dismissed: Firms were successful 29 percent of the time compared to 5 percent of the time for individuals.
Bill Singer, a former NASD regulatory attorney who practices at Stark & Stark, says that probably 90 percent of the cases that any regulator brings are valid. As a result, an overwhelming number of regulatory cases settle. What usually needs to be negotiated is not whether the party is guilty or not, but rather the severity of the suspension or fine. "When the staff does try a case it is, more often than not, a slam dunk; they have the proof, and they don't have to work very hard," says Singer. However, it's the other 10 percent of the cases that Singer says are worth contesting; the respondents are either not guilty, or the guilt is in debate.
"Since the staff comes out with the highest settlement and then they go down, it's usually best to contest the case if you're in that 10 percent of the cases where you're innocent, or it is not a clear case. You're forcing the regulatory staff to really try a case," Singer says.