Former Lek Employee Suspended For Taking The Fifth At FINRA

March 16, 2015

In October 2011, the Financial Industry Regulatory Authority's ("FINRA's") Department of Market Regulation purportedly began investigating potentially manipulative trading activity occurring from an  "Avalon FA" account maintained at Lek Securities Corporation. In alleged furtherance of its investigation, Market Regulation demanded pursuant to FINRA Rule 8210 that Alex Lubetsky appear at an On-The-Record interview ("OTR"). FINRA Department of Market Regulation, Complainant, v. Alex Lubetsky, Respondent (Hearing Panel Decision, FINRA OHO, Expedited Proceeding No. FPI140011; STAR No. 20110297130-02 / March 12, 2015).

Here is how FINRA summarizes the matter, as preliminarily set forth in its Office of Hearing Officers ("OHO") Decision. [Ed: Footnotes omitted]:

I. Introduction

During 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.

Page 1 - 2 of the OHO Decision

What's At Stake?

As set forth in the Decision's "Introduction," FINRA was conducting an investigation into possible market manipulation and demanded the OTR testimony of former Lek employee Lubetsky. For starters, let's be clear: FINRA likes to present these OTR cases as if the self-regulatory organization ("SRO") merely "asked" or "requested" on-the-record testimony. That's not my perspective: FINRA is demanding the testimony pursuant to Rule 8210 and the price of non-compliance is a likely suspension and, thereafter, a Bar. I see very little indication that the circumstances are akin to a polite invitation to testify.

When asked substantive questions during the OTR, Lubetsky asserted his constitutional right against self incrimination based upon his position that FINRA and the SEC were acting in concert and, as such, FINRA essentially was placed in the role of a state actor.  What many layperson readers of the Decision will likely miss is that Lubetsky was suspended not because FINRA proved during a hearing that he was guilty of market manipulation but, to the contrary, FINRA only proved that he asserted his Fifth Amendment right against self incrimination and he was sanctioned for his silence and not any conduct attendant to the alleged manipulation.

Let me be clear -- up front -- I fully understand and respect that for many, in this case, FINRA is viewed as a righteous regulator acting in an appropriate manner to protect the public. I respect your opinion in that regard; however, Lubetsky raises equally valid issues about both governmental and quasi-governmental circumvention of constitutionally guaranteed rights. Ultimately, you need to be aware that Lubetsky may lose his career not for what he did or didn't do in alleged furtherance of market manipulation; Lubetsky has been sanctioned for no other reason than he took the Fifth. He chose to stand silent and, in essence, demand that FINRA find him guilty based upon proof of substantive misconduct that the regulator has against him -- he will not, however, voice words from his mouth that he fears may incriminate him. FINRA argues with merit that it is not capable of criminally prosecuting Lubetsky and, accordingly, he can't assert a right against self incrimination within its forum. On the other hand, if, as Lubetsky alleges, FINRA is acting at the behest of the SEC, then the assertion of the Fifth may be appropriate.  Let's examine in greater depth some of the circumstances at play.

The OTR

On September 9, 2014, Lubetsky, represented by counsel, appeared for his FINRA OTR and answered several "preliminary" questions. In response to a question asking if he was known by any other names, however, Lubetsky invoked the Fifth Amendment and refused to answer further questions.

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 Baby

In 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 . . ."

In response to Lubetsky's assertion of his Fifth Amendment rights, FINRA informed him that [Ed: Footnote omitted]:

(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."

Page 3 of the OHO Decision

Lubetsky stood his ground and countered that [Ed: Footnotes omitted]:

[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."

Pages 3 - 4 of the OHO Decision

In response, Market Regulation told Lubetsky that his [Ed: Footnotes omitted]:

[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.

Pages 3 - 4 of the OHO Decision

Notice of Suspension

Based on Lubetsky's refusal to testify, on November 7, 2014, FINRA issued a Notice of Suspension pursuant to FINRA Rule 9552.

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 Taken
If 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 Suspension
Except 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 Notice
A 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 Suspension
The 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 Hearing
A 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 Suspension
A 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 Procedure
Uncontested 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) Defaults
A 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.

In response to FINRA's proposed suspension, Lubetsky requested a hearing, thus staying the suspension. At the November 24, 2014, hearing, Lubetsky asserted that he had evidence that demonstrated that [Ed: Footnotes omitted]:

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 4 - 5 of the OHO Decision

In response to Lubetsky's assertions of SEC/FINRA coordination, Susan Tibbs, a Vice President in the Quality of Markets Section of Market Regulation and manager of the Market Manipulations Group ("MMG") within Quality of Markets submitted under penalty of perjury a Declaration stating FINRA's demand for Lubetsky's OTR testimony was not the result of any SEC request, encouragement, suggestion, intimation, or other influence or coercion.

OHO Orders Suspension

OHO rejected Lubetsky's arguments and found that he had failed to carry his burden of proof. Accordingly, OHO ordered Lubetsky suspended from associating with any FINRA member firm in any capacity for refusing to provide OTR testimony as of the date of the Decision and, thereafter, if he fails to comply within three months, the suspension automatically converts to a Bar.

The Decision concluded that, at best, Lubetsky had merely noted an "overlap" of an SEC and a separate FINRA investigation. Further, the Decision admonished that the Fifth Amendment right against self-incrimination only applies to "state actors," and noted that as an SRO, FINRA did not fall into that category.  

The Decision did concede, however, that FINRA can engage in state action if it becomes "significantly involved with a government investigation." In characterizing "significant involvement," the Decision stated that what was required was a showing that a "nexus between the government and the challenged action by a private party is so close "that the seemingly private behavior may be fairly treated as that of the State itself." Pointedly, the Decision concluded that Lubetsky [Ed: Footnotes omitted]:

[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.

Pages 7 - 8 of the Decision

Bill Singer's Comment

Be careful not to misunderstand Lubetsky. You can still assert the Fifth at FINRA.  It may well protect you against subsequent or ongoing local, state, or federal criminal investigations; however, it's just not going to have much impact towards dissuading FINRA from seeking your suspension for not testifying -- and, thereafter, seeking a Bar.  Essentially, FINRA went after Lubetsky not for what he may or may not have done in terms of the cited brokerage account; to the contrary, FINRA went after Lubetsky and sought his suspension and ultimate Bar because he asserted a constitutional right that the SRO does not recognize within the context of its investigative mandate.

Without question -- and, frankly, with much understanding -- public investor advocates and victims of Wall Street criminality and fraud have no sympathy for the circumstances of Lubetsky.  For such market participants, the goal for regulators is to press and force those suspected of misconduct into telling what they know. The desire of such an approach is to curtail further fraud and to bring swift justice into play. On the other hand, Lubetsky has not obstructed justice: He has not lied to FINRA or told them anything false. To the contrary, he has kept his mouth shut.

Lubetsky may be concerned that there is a Department of Justice criminal investigation underway and/or a separate SEC investigation, and until he has a better understanding of what, if any, exposure he personally has, he doesn't want to compromise his defense (or a future settlement) by providing a mere SRO (a purportedly non-governmental actor) with potentially damning testimony. If Lubetsky were asked questions by the SEC or the Department of Justice, he would be within his legal rights to decline to answer based upon his Fifth Amendment right. At that point, he is further protected by Due Process, another constitutional protection denied to him at FINRA. Although Lubetsky could be criminally prosecuted for his conduct in connection with the trading account, he could not be criminally prosecuted merely for asserting his right against incrimination. As to any SEC civil proceeding, the federal regulator could charge him with whatever violations it believes it can prove by a preponderance of the evidence and a negative inference might be drawn from Lubetsky's refusal to testify; however, he could not merely be charged for taking the Fifth. At FINRA, however, he has been suspended and will likely be barred for his silence.

I know that for many, the above legal concerns reek of a cynical, academic posture. Given the view that much of the Great Recession's devastation was wrought upon the economy and investing public by Wall Street, many folks have no sympathy for the likes of Lubetsky. For those holding such a perspective, the option is quite simple: If Lubetsky doesn't want to answer FINRA's questions, to hell with him -- throw him out of the business. Ultimately, we come to a divide between those seeking what is perceived as swift justice at any cost, and those who advocate for the vigilant respect of constitutionally guaranteed civil rights.  This landscape is not uncommon and we frequently find ourselves on such shifting ground.

Since 1975 when Solomon was decided, Wall Street has dramatically changed and the interrelationships between and among the SROs, governmental regulators, and criminal prosecutors have similarly been transformed.  Personally, I find the logic of Solomon no longer persuasive because I believe that SROs are not private actors but quasi-governmental (at best) and often act as agents of governmental organizations (at worst).  I do not believe that respondents should be punished with Bars merely for asserting a constitutional right because there is something offensive about barring an individual solely for seeking the protection of the Constitution.  The remedy for such an imbalance of our civil rights is to eliminate the SROs and transfer their regulatory role to state and federal government organizations that are required to respect Fifth Amendment rights; or, to recognize at least the quasi-governmental role of SROs and require quasi-governmental due process rights.

Our Constitution only has meaning and value when it acts as a bulwark against transitory calls for short-cuts and convenience. If SROs are not government prosecutors, then their burden of proof is not "beyond a reasonable doubt" (as is the standard in criminal cases) but the lesser "preponderance of the evidence."  I would much prefer that Wall Street respondents are timely charged and brought to trial  based upon substantive allegations, rather than what I view as dangerous due-process winks.

Reappraising Self-Regulation: