A Pawn Takes the Queen

Sometimes it pays to take on securities regulators, despite their financial and legal heft. Consider the case of Charles Elliott. In a rare victory for a broker in a settlement dispute with the SEC, Elliott last week won recovery of over $100,000 in legal fees after an SEC lawsuit against him was dismissed.

Sometimes it pays to take on securities regulators, despite their financial and legal heft. Consider the case of Charles Elliott. In a rare victory for a broker in a settlement dispute with the SEC, Elliott last week won recovery of over $100,000 in legal fees after an SEC lawsuit against him was dismissed.

While it represents a relatively small low-profile case, it is at least a ray of hope at a time when the number of regulatory charges against securities firms and individuals in the business is growing. The SEC’s budget has doubled since the 2002 enactment of Sarbanes-Oxley, which reduced the audit cycle from every six or seven to every three or four years. And while countless firms and individuals have already settled with the SEC and NASD in the past several years, the whirlwind of investigations into mutual fund and broker/dealer sales practices continues unabated.

“Really the implication is that it certainly pays to consider your alternatives before flatly deciding to settle with regulators without going to trial,” says Michael Quinn, an associate in the Los Angeles office of Kirkpatrick & Lockhart who represented Elliott. “I think in most cases, firms and individuals when getting sued by SEC, say, ‘Hey, we’re not going to win here, let’s get the best possible settlement because beating the government is too hard, too costly.’”

At issue in Elliott’s case was the fact that he continued to work in the securities business even though he was subject to a nine-month suspension, starting April 1999, for failure to supervise while working in management at Dominion Capital Corporation, a Texas-based b/d. But even before that order was in place, the attorneys in the proceedings sent a letter to the SEC discussing the business engagements that Elliott intended to participate in, and asking whether they would be appropriate. The SEC didn’t respond until four years later, when it decided to sue.

Because of the SEC’s failure to respond to that letter, the judge in last week’s case wrote in his decision that the SEC’s filing of its suit against Elliott in 1999 “raises a question of fundamental fairness.” That left the door open for Elliott to try to get reimbursed for his legal fees, Quinn said. Under the Equal Access to Justice Act, an individual who wins a trial against the government can recover the costs of that trial if the government cannot prove they were substantially justified in bringing the case, he said.

“I don’t think it’s going to happen every day, but it might give some defendants some incentive to at least try,” Quinn said. “It has happened. It does happen. It just certainly doesn’t happen very often.” The SEC said it doesn’t have any record of how often this kind of thing occurs.

In the meantime, a recent study, sponsored by Atlanta-based law firm Sutherland Asbill & Brennan, suggests that litigating against the NASD can often help reduce monetary sanctions and suspension times. While close to 96 percent of cases are settled, respondents who litigated got lower sanctions than those recommended by NASD staff 54 percent of the time.

The mantra these days in the b/d industry is that the regulators are unfairly writing new rules through lawsuits and litigation. If they really believe that’s true, maybe they should put up more of a legal fight.

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