I. IntroductionDuring an investigation into possible market manipulation occurring in an account at Lek Securities Corporation ("Lek"), the Department of Market Regulation sought the on-the-record testimony ("OTR") of Alex Lubetsky, formerly an associated person at Lek. At his OTR, Lubetsky invoked the Fifth Amendment to the U.S. Constitution and refused to answer questions. Because FINRA is not a governmental entity, an associated person may not ordinarily refuse to answer questions on that basis. Lubetsky, however, claimed that Market Regulation had requested his testimony at the behest of the U.S. Securities and Exchange Commission ("SEC") and that the two regulators were engaging in joint action in connection with their respective investigations of Lek. As a result, according to Lubetsky, FINRA's request constituted state action, thereby entitling him to assert the Fifth Amendment as a basis for not answering questions.Market Regulation disputed Lubetsky's state action accusation and sent him a Notice of Suspension from associating with any FINRA member firm based on his refusal to answer questions. Lubetsky requested a hearing, which stayed his suspension. In his hearing request, Lubetsky re-asserted his state action defense. On January 8, 2015, a telephonic hearing was held before a Hearing Panel during which the parties introduced exhibits but called no witnesses to testify. The primary issue before the Panel with respect to liability is whether Lubetsky established his state action defense. The Panel concludes that Lubetsky failed to do so; finds that he violated FINRA Rule 8210 by refusing to testify; and imposes the sanctions set forth herein.
SIDE BAR:The Fifth Amendment to the US Constitution:
No person shall be held to answer for a capital, or otherwise infamous crime, unless on a presentment or indictment of a Grand Jury, except in cases arising in the land or naval forces, or in the Militia, when in actual service in time of War or public danger; nor shall any person be subject for the same offense to be twice put in jeopardy of life or limb; nor shall be compelled in any criminal case to be a witness against himself, nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.
Solomon's BabyIn United States of America v. Alan C. Solomon, 509 F.2d 863, (2nd Cir. Jan. 14, 1975), the Second Circuit ruled that Wall Street's self-regulatory organizations ("SROs") are private investigative organizations incapable of triggering the self-incrimination rights attributable to government entities. The Court declined to deem the New York Stock Exchange (then an SRO) to be an agent of the Securities and Exchange Commission (a public governmental entity) and held that:
Most of the provisions of the Fifth Amendment, in which the self-incrimination clause is embedded, are incapable of violation by anyone except government in the narrowest sense. No private body, however close its affiliations with the government, can hold a person 'to answer for a capital or otherwise infamous crime' without an indictment . . ."
(1) he was "obligated, under FINRA rules, to answer all questions asked by FINRA staff;" (2) FINRA "is not a governmental agency, and thus, does not recognize the Fifth Amendment privilege against self-incrimination in any of its proceedings, including an OTR;" (3) should he "refuse to answer any questions based on an assertion of the privilege, [he] may be subject to a FINRA disciplinary action and the imposition of sanctions, including a bar from the securities industry, suspension, censure, and/or fine;" and (4) "FINRA is subject to oversight by the SEC and routinely provides the SEC with access to its files."
[H]e had been ''informed that there is ample evidence to determine that there is a coordination between the SEC and the [sic] FINRA and their investigation of Lek Securities." Lubetsky claimed that "[t]his coordination combined with the addendum to the 8210 request demonstrates that indicates [sic] -- that in this case the 8210 request is a state action, thereby allowing the assertion of the Fifth Amendment right to any questions. He stated further that he had "decided to follow my counsel's instruction and decline to testify based on my Fifth Amendment Constitutional right. Finally, Lubetsky informed the staff that he declined to answer any questions on this basis until such time as all of his activities "are fairly aired and when I get the opportunity to explain my actions in a setting that will not compromise my ability to defend myself in any legal proceedings arising out of my activities."
[F]ifth Amendment claim was meritless; that FINRA was not a governmental agency and did not recognize the Fifth Amendment; and that if he refused to answer questions by asserting this privilege, he may be subject to disciplinary action, including a bar. Additionally, Market Regulation denied that it was coordinating its investigation with the SEC, and represented that its inquiry was independent 21 of, and separate from, any existing governmental inquiry relating to his conduct. Market Regulation then asked Lubetsky a few additional questions, including where he worked before joining Lek, but Lubetsky declined to answer these questions, relying on the Fifth Amendment. Market Regulation again reminded Lubetsky that his refusal to answer questions could lead to disciplinary action, including a bar. Lubetsky reaffirmed his decision not to answer any more questions, and Market Regulation terminated the OTR.
FINRA Rule 9552. Failure to Provide Information or Keep Information Current(a) Notice of Suspension of Member, Person Associated with a Member or Person Subject to FINRA's Jurisdiction if Corrective Action is Not TakenIf a member, person associated with a member or person subject to FINRA's jurisdiction fails to provide any information, report, material, data, or testimony requested or required to be filed pursuant to the FINRA By-Laws or FINRA rules, or fails to keep its membership application or supporting documents current, FINRA staff may provide written notice to such member or person specifying the nature of the failure and stating that the failure to take corrective action within 21 days after service of the notice will result in suspension of membership or of association of the person with any member.(b) Service of Notice of SuspensionExcept as provided below, FINRA staff shall serve the member or person with such notice in accordance with Rule 9134. A copy of a notice under this Rule that is served on a person associated with a member also shall be served on such member. When counsel for the member or person, or other person authorized to represent others under Rule 9141 agrees to accept service of such notice, then FINRA staff may serve notice on counsel or other person authorized to represent others under Rule 9141 as specified in Rule 9134.(c) Contents of NoticeA notice issued under this Rule shall state the specific grounds and include the factual basis for the FINRA action. The notice shall state when the FINRA action will take effect and explain what the respondent must do to avoid such action. The notice shall state that the respondent may file a written request for a hearing with the Office of Hearing Officers pursuant to Rule 9559. The notice also shall inform the respondent of the applicable deadline for filing a request for a hearing and shall state that a request for a hearing must set forth with specificity any and all defenses to the FINRA action. In addition, the notice shall explain that, pursuant to Rules 8310(a) and 9559(n), a Hearing Officer or, if applicable, Hearing Panel, may approve, modify or withdraw any and all sanctions or limitations imposed by the notice, and may impose any other fitting sanction.(d) Effective Date of SuspensionThe suspension referenced in a notice issued and served under this Rule shall become effective 21 days after service of the notice, unless stayed by a request for a hearing pursuant to Rule 9559.(e) Request for HearingA member or person served with a notice under this Rule may file with the Office of Hearing Officers a written request for a hearing pursuant to Rule 9559. A request for a hearing shall be made before the effective date of the notice, as indicated in paragraph (d) of this Rule. A request for a hearing must set forth with specificity any and all defenses to the FINRA action.(f) Request for Termination of the SuspensionA member or person subject to a suspension pursuant to this Rule may file a written request for termination of the suspension on the ground of full compliance with the notice or decision. Such request shall be filed with the head of the FINRA department or office that issued the notice or, if another FINRA department or office is named as the party handling the matter on behalf of the issuing department or office, with the head of the FINRA department or office that is so designated. The head of the appropriate department or office may grant relief for good cause shown.(g) Settlement ProcedureUncontested offers of settlement shall be permitted under this Rule and shall conform to the requirements of Rule 9270, except that, if an uncontested offer of settlement, made under Rule 9270(e) after a hearing on the merits has begun, is accepted by the Hearing Officer, the Hearing Officer shall issue the order of acceptance, which shall constitute final FINRA action. Contested offers of settlement shall not be considered in proceedings initiated under this Rule.(h) DefaultsA member or person who is suspended under this Rule and fails to request termination of the suspension within three months of issuance of the original notice of suspension will automatically be expelled or barred.
FINRA and the SEC coordinated their respective Lek investigations. According to the hearing request, this coordination included FINRA and the SEC: (1) interviewing or deposing virtually the same witnesses from Lek; (2) seeking virtually the same documents from Lek and its associated persons; and (3) contacting Lubetsky's counsel, within days of each other, to request Lubetsky's testimony. Lubetsky also references the language in the Addendum, noted above, that FINRA routinely provides the SEC with access to its files. He further asserts that the SEC/FINRA coordination transformed FINRA's Rule 8210 request for his testimony into state action. Accordingly, Lubetsky contends that he properly asserted the Fifth Amendment in response to FINRA's questions at his OTR.
Pages 7 - 8 of the Decision[S]howed merely that during contemporaneous FINRA and SEC investigations, the two regulators sought information, close in time, from the same two persons, i.e., Lubetsky and SP, and that Lubetsky was advised in the Rule 8210 request that FINRA routinely shares information with other regulators. This evidence is insufficient to establish state action. Cooperation and information sharing between the SEC and FINRA "will rarely render [FINRA] as state actor, and the mere fact of such cooperation is generally insufficient, standing alone, to demonstrate state action. Further, the temporal proximity of the FINRA and the SEC testimony requests and information sharing do not, by themselves, constitute joint activity sufficient to render FINRA a state actor. Nor is there any other evidence in the record suggesting that FINRA engaged in state action, or even that FINRA or the SEC had any involvement in each other's investigation.