FINRA Sued In Case Involving E*TRADE, Deceased Father, And Lost Inheritance

September 15, 2014

Sometime in February 2014, Jeffrey S. Conover sent a written complaint to the Financial Industry Regulatory Authority ("FINRA") in which he asserted that his deceased father's assets had been illegally transferred to an ETRADE account. Conover apparently believed that just before his father's death, the cited brokerage assets had been wrongfully transferred to other individuals. Upon the completion of its investigation in April 2014, FINRA notified Conover that it had considered ETRADE's responses and decided to take no further action. Among the factors that likely weighed heavily in FINRA's conclusion was the advice from ETRADE that it had no record of an account for Conover, his father, or any of the individuals cited in the complaint.

NDCA Civil Suit

In response to FINRA's declination, Conover sued the regulator in the United States District Court for the Northern District of California ("NDCA") and sought permission to issue a subpoena to obtain the regulator's investigative file in order to "negotiate the rightful transfer of my rightful inheritance."Jeffrey S Conover v. Financial Industry Regulatory Authority Inc. (NDCA, 14-CV-03065, August 28, 2014).

FINRA filed a Motion to Dismiss the Conover's Complaint and cited five supportive points:

  1. Conover lacked standing because he had cited not connection between his alleged tort and any FINRA conduct;
  2. FINRA had, in fact, sent a copy of its investigative file to Conover, thus rendering his claim moot;
  3. There is no subject matter jurisdiction for a federal district court, only a state law claim;
  4. There is no private right of action against FINRA for conduct it takes pursuant to its regulatory authority; and
  5. FINRA is immune from any damages claims arising out of its regulatory function

NDCA made quick work of FINRA's motion, and granted a dismissal with prejudice. The Court concurred with the self regulatory organization that Conover's claims were a state law personal injury tort, which did not federal raise a federal question. Further, the Court found Conover lacked standing because of his inability to demonstrate any causal connection between his injury and FINRA's conduct. Also, the Court deemed the matter moot based upon the production of the very file that served as the basis for the Complaint.

In enunciating its rationale for finding that Conover had failed to state a claim and in support of FINRA's claim of immunity, NDCA offered two paragraphs that sum up the current state of the law on such issues:

B. Plaintiff Fails to State a Claim

1. There is No Private Right of Action Under the Exchange Act

Even if the Court found that subject matter jurisdiction exists, dismissal is proper because Plaintiff's claim is untenable. No private right of action exists against an SRO, like FINRA, for actions it takes pursuant to its regulatory authority. Sparta, 159 F.3d at 1213 ("[A] party has no private right of action against an exchange . . . for actions taken to perform its self-regulatory duties under the Act.") (citing Jablon v. Dean Witter & Co., 614 F.2d 677, 681 (9th Cir. 1980)).Thus, as FINRA's investigation of Plaintiff's complaint falls within its regulatory functions to investigate and regulate its members, Plaintiff cannot pursue a private right of action against FINRA.

2. FINRA is Entitled to Immunity

Plaintiff's claim is also properly dismissed on the basis of immunity. "[A] self-regulatory organization is immune from liability based on the discharge of its duties under the Exchange Act." Id. Thus, FINRA is immune "when acting in an adjudicatory, prosecutorial, arbitrative or regulatory capacity." Id. at 1214-15 ("[W]hen Congress elected 'cooperative regulation' as the primary means of regulating the over-the-counter market, the consequence was that self-regulatory organizations had to enjoy freedom from civil liability when they acted in their regulatory capacity."); see also P'ship Exch. Sec. Co. v. NASD, 169 F.3d 606, 608 (9th Cir. 1999) (holding that the NASD was protected by absolute immunity for its actions taken "under the authority delegated to it by the Exchange Act"). Here, Plaintiff's Complaint centers on his request for FINRA's case file. However, to the extent it could also be read to allege a claim for damages based on FINRA's discharge of its duties under the Exchange Act, this falls with its regulatory function to investigate and regulate its members. Thus, FINRA is immune from any such claim. Sparta, 159 F.3d at 1213.

Page 7-8 of the Order

Bill Singer's Comment

Among the more common calls that I get from disgruntled employees and public customers are those that express a desire to sue FINRA. Fact is, be it industry participants or public customers, a lot of folks have a lot of issues with a lot of things that FINRA does or doesn't do. Overwhelmingly, FINRA is successful in deflecting most gripes brought against it in the courts.

Among the reasons that FINRA has had so much litigation success is enunciated in the two quoted paragraphs from the NDCA Order. For starters, the proposition could not be more stark or clearer: No private right of action exists against an SRO, like FINRA, for actions it takes pursuant to its regulatory authority

In plain English, the courts routinely rule that when FINRA is acting as a regulator there is virtually no right vested in a registered person or public customer to sue the self regulatory organization. There are, however, times when FINRA does not act in a regulatory capacity. Though many of us might wish that the courts did not routinely protect FINRA behind the formidable armor of no-private-right-of-action, sadly, that is as established a legal principle as there is.

Assuming that you could surmount the ramparts of the whole private right of action issue, you would then come face to face with a nearly impenetrable wall of immunity. As NDCA admonishes: Thus, FINRA is immune "when acting in an adjudicatory, prosecutorial, arbitrative or regulatory capacity." 

Consequently, even if you had a private right of action against FINRA, you then must confront the immunity protection that the self regulatory organization is afforded by the courts -- provided that it is acting as a judge, prosecutor, regulator, or in the conduct of its arbitration forum.  After ticking off that list of roles, there isn't much left in the form of how FINRA manifests itself.

All of which may explain that those of us lawyers who would even consider taking on FINRA in the courts, typically are happy to do so on the basis of a billable hour. Contingency fees for such battles are rare.

READ the full-text Complaint