Skip navigation

Brokers Claim Virtual FINRA Hearings Unfair

A handful of cases from brokers argue COVID-19–mandated virtual hearings in disciplinary and arbitration cases violate their rights to a fair defense.

A broker filed a suit in Utah federal court that claims holding FINRA hearings over remote videoconferencing denies his right to a fair defense. 

In the suit, previously reported by Law360, Alpine Securities, a Salt Lake City–based broker/dealer, said the regulatory agency had accused the firm in August 2019 of charging “unreasonable” fee increases on customers. The b/d is run by John Hurry, who also owns Scottsdale Capital Advisors and frequently combats with regulators in the courtroom, according to Law360. The firm also faces trouble with the SEC, which won a $12 million fine against Alpine last year concerning the firm's alleged failure to report suspicious transactions, totaling 2,700 violations in all. FINRA also fined Scottsdale Capital Advisors $1.5 million in 2017 for the same kind of violations. Hurry was barred from the industry by FINRA, though he has appealed and there is a stay on that decision, according to BrokerCheck.

After FINRA brought disciplinary charges against Alpine, the broker responded by requesting a disicplinary hearing, which occurred on Feb. 18, 2020, in Salt Lake City. According to the complaint, FINRA’s Enforcement division was able to call several witnesses before the end of that day but planned to continue the hearings in April.

But the spread of COVID-19 put a stop to all such in-person hearings (FINRA has since postponed all in-person FINRA arbitration and mediation hearings through Jan. 31 of next year).

FINRA scheduled a remote hearing via Zoom videoconferencing. Alpine demurred, arguing the firm was “entitled to a hearing in person” and that continuing via a virtual meeting threatened its due process (FINRA had no comment regarding this story). Brent Baker, an attorney with Parsons, Behle & Latimer who is representing Alpine in the suit, said virtual hearings were very unusual prior to the pandemic, and said the setup of FINRA Zoom hearings could affect an attorney’s abilities to provide effective counsel.

“It’s the logistics, but when you have deficient logistics for conducting an investigation, there is a higher likelihood that you’re going to make a mistake,” he said. “(The issue) really is the process, the right to present evidence, as well as testimony. And until we are able to freely travel, it’s almost impossible to have a full and fair regulatory hearing.”

Alpine is not the only firm questioning FINRA’s use of teleconferencing in hearings through civil suits. Carlos Legaspy, a broker and owner of the Illinois-based firm Insight Securities, faced FINRA disciplinary proceedings with claimants seeking $2.7 million in damages. FINRA scheduled a Zoom arbitration hearing for August, but Legaspy filed suit against the agency, claiming the complexities of the case and the need for a translator would make remote proceedings untenable, according to a note from the law firm Bryan Cave Leighton Paisner. In May, Wunderlich Securities sought to vacate an $11 million FINRA arbitration award in part by claiming panelists during the remote proceeding were “inattentive,” with one arbitrator allegedly looking at other screens, another blocking the camera, and one walking away from the proceedings.

Courts have not been swayed by these arguments. According to the Bryan Cave note, the judge in the Legaspy case believed that while remote hearings may not work as well as in-person hearings, they don’t prevent parties from putting up a defense, and it’s possible that a claimant would face steeper challenges in a virtual setting than a defendant.

“The court sympathized with FINRA, holding that it should not be required to ‘choose between either holding in-person hearings that exposed’ all the parties to COVID-19, or indefinitely delaying its hearings,’” the note read. “The balance of equities further favored the claimants in the arbitration, who should not have to wait another half-year for a hearing on their claims when FINRA is providing a mechanism to hold the hearing as scheduled.”

The pandemic has indeed created a tension between the needs of someone who has potentially been defrauded and the defendant, according to Bill Singer, a securities attorney and author of the blog. A defrauded investor has no reason to want to wait for a decision, but a broker may want the ability to agree to the proceedings only if it can be with their lawyer physically present, he said.

“What COVID-19 has done is it’s creating a compelling rationale for claimants and respondents for why we should go forward with teleconferencing, and for why we shouldn’t,” Singer said.

But defendants and their attorneys face drawbacks during virtual proceedings, Singer said, from being unable to observe the demeanor of all parties involved to losing the ability to effectively go off the record and confer privately with a client who may be testifying. To Singer, there is no remote equivalent to those actions.

He also questioned what would happen in the event of a substandard virtual connection during witness testimony. What if a client was testifying and the attorney's ability to hear cuts out? The attorney could lose the chance to object to a question or statement, he said.

“I’m not going to say for a moment we can’t litigate digitally. That may be the future,” he said. “But it’s not now, and with a quarter million of Americans dead, this isn’t time to learn on the run.”

Singer said that some accused brokerage firms would probably try to use concerns about teleconferencing as an excuse to delay proceedings, but brokers with such concerns who were required to participate in a digital hearing might have standing for an appeal (as Wunderlich Securities tried to do). At some point, Singer reasoned, an appellate court could determine that a broker’s due process had been violated; FINRA and affected investors would have to restart the entire process in that case.

The outcome of Alpine’s suit remains to be seen; the firm has requested that FINRA either delay the hearing until in-person proceedings resume across the country or allow it to go forward in FINRA’s single in-person location for hearings in Washington, D.C., that is better equipped with COVID-19 safety protocols, according to the complaint. Baker acknowledged that brokers and investors, like everyone else, are learning to navigate a world in the midst of a pandemic.

“We realize that and make accommodations, and do what we can, but at some point we need a fair tribunal,” he said. “It’s a difficult scenario, and we’re not trying to pick on FINRA, but they happen to be a good example of regulators not recognizing the difficulties we have to live with.”

But brokers should be prepared that challenges to FINRA remote proceedings may result in decisions like Legaspy’s unsuccessful suit, according to a note from the law firm Chilivis Grubman Dalbey & Warner.

“While other challenges to virtual hearings may yet prove successful, this ruling suggests that courts are not likely to allow litigants to use the COVID-19 pandemic and the prospect of a virtual hearing as an excuse to indefinitely delay the resolution of their disputes,” the note read. “After all, justice requires that claimants be afforded the right to recover their damages, and justice delayed is justice denied.”

TAGS: Industry
Hide comments


  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.