Nasty FINRA Lawsuit Gets Nastier

June 10, 2015

It's a slugfest. No way about it. FINRA finds itself in a legal tussle in federal court as it responds to a Complaint about its conduct of an examination and/or investigation. As first reported in "Lawsuit Says FINRA Guilty of Deliberate, Retaliatory,and Malicious Conduct" (BrokeAndBroker.com Blog, February 2, 2015), Plaintiffs' allegations in Hurry raise questions about heavy-handed regulatory practices, press leaks, and an allegedly thinly disguised coordination between FINRA and the Securities and Exchange Commission. In response, FINRA will have none of it and gives back as good as it gets.  As the punches fly, the blows land, and the blood splatters, underneath it all is some truly superb lawyering and the presentation of a number of excellent arguments about the limits on and the nature of Wall Street self regulation. Recently, Plaintiff's responded to FINRA's Motion to Dismiss. You may need to take a shower after you read this latest document.

FINRA Motion to Dismiss

In its January 9, 2015, Motion to Dismiss, FINRA asserted that the Complaint was little more than a smokescreen attempting to cover up a history of serious misconduct. Moreover, the self-regulatory organization rejected the depiction by Plaintiffs' of their purported victimization and, to the contrary, the regulator argued that its conduct was in furtherance of its mandate to protect the investing public. 

In the News

Referenced in the lawsuit is "The Deal: FBI, Securities Officials Investigate Biozoom Trading, Source Says" (The Deal, By Bill Meagher, December 9, 2013) in which the following assertions were made:

The FBI, the Securities and Exchange Commission and the Financial Industry Regulatory Authority have opened investigations into the involvement of Scottsdale Capital Advisors and Alpine Securities in the trading of Biozoom, according to a person familiar with those investigations.

Investors in Biozoom lost some $300 million after the SEC halted trading in the stock in June. The commission cited "a lack of current and accurate information" about the stock and suspicions that the company and some shareholders may have illegally sold unregistered shares to the public.

. . .


Finra and SEC officials declined to comment for this story. An FBI spokesman would neither confirm nor deny the existence of a criminal probe tied to Biozoom trading.

But a source who has spoken to investigators said the investigations are ongoing. The probes by Finra and the SEC began in May, prior to the trading halt.

The brokerage firm Scottsdale Capital is owned by Scottsdale Capital Advisors Holdings LLC and the Hurry Family Irrevocable Trust. Alpine is owned by SCA Clearing LLC. Both Scottsdale and Alpine are controlled by John Hurry, who is a director of both companies. Hurry's wife Justine is a director with Scottsdale and a minority owner.

. . .

Finra, who has worked with the SEC on the probe, has had several "on-the-record" conversations with Scottsdale staff regarding the trading of Biozoom shares, the process by which the accounts were opened for the Argentine nationals and how assets were moved offshore, according to a person who has spoken with investigators. "OTRs," as they are known in the brokerage industry, are sessions in which Finra staff ask specific questions of registered representatives who must answer them or face disciplinary actions..

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Response to the Motion to Dismiss

On June 1, 2015, Plaintiff's filed their Response to Motion to Dismiss All Claims. In keeping with the incendiary tone and scope of the Complaints, the Response fires an opening salvo [Ed: footnotes omitted]:

I. INTRODUCTION

Defendants are not comfortable with the facts of this case as alleged in the First Amended Complaint [37 ("Complaint")], so they've rewritten it to allege facts they are more used to seeing. But the facts as alleged actually matter. They cannot be tweaked, altered, or ignored just because they are getting in the way of an otherwise familiar argument. For example, citing the Complaint, Defendants assert they "copied the hard drives of computers located at SCA's offices" and then define those as the "Copied Computers." [46 ("Motion") at 2.] But the Complaint doesn't allege the computers were located at SCA's offices. It alleges the three password-protected computers and numerous hard drives within them were located in the separate, locked offices of ISC, a business Defendants concede is outside their direct regulatory control. According to the Complaint, Defendants used threats against SCA personnel to coerce their way into the Hurrys' offices at ISC and make copies of each and every one of the ISC computers within. 

Defendants' desire to obscure these facts as alleged is understandable. They know there is no meaningful distinction between a registered person's office at a separate, non-member business, and a registered person's home or even the home of his family member. If they permissibly can coerce access to one-and copy every document, computer, and hard drive within-they permissibly can coerce access to the others and do the same. They're understandably uncomfortable with such a result and so, as with many other key allegations, they have recast the facts to avoid the issue. Defendants may be used to getting their way, but they should know better. They are stuck with the well pleaded facts of the Complaint. As demonstrated in each section below, when those facts are considered and properly viewed, Plaintiffs state legally viable claims against Defendants. The Motion must be denied

Pages 1 - 2 of the Response

In presenting the context of the events at issue and the rationale for its claims, the Response explains that:

Plaintiffs do not allege the Hurrys were ever served with a written Rule 8210 request seeking access to and copying of the ISC Computers-let alone a written 8210 request related to an investigation of undisclosed outside business activities. The only written Rule 8210 request issued before Andersen's 15-minute ultimatum addressed an onsite examination of SCA and its books and records. Even if FINRA could have theoretically requested certain documents from the Hurrys as part of some hypothetical investigation into outside business activities, there are no facts suggesting they did. And there is no question the ISC Computers contained extra-jurisdictional material. As alleged: "[m]ost of the data on the hard drives relates to the private and personal affairs of the Hurry family, e.g., medical records, school records, trusts and estate planning, to the private and personal affairs of employees and tenants of Hurry-owned, non-member businesses, and to the Hurrys' non-member businesses themselves, i.e., businesses other than SCA, including privileged and confidential attorney client communications." [FAC ¶ 22(d).] When Defendants accessed and copied these materials, they exceeded any access to the ISC Computers that might otherwise have been authorized under Rule 8210 and impermissibly "use[d] such access to obtain or alter information in the computer that the accesser is not entitled so to obtain or alter." 18 U.S.C. § 1030(e)(6). 

Page 5 of the Response


Lastly, any consent was vitiated by Andersen's 15-minute Wells Notice threat, which improperly induced any consent that was given "under the influence of such fear as preclude[d] [the Hurrys] from exercising [their] free will and judgment." Inter-Tel, Inc. v. Bank of Am., Arizona, 195 Ariz. 111, 117, ¶ 35, 985 P.2d 596, 602 (App. 1999) (quoting Restatement (Second) of Contracts § 492). As alleged, this threat understandably "caused enormous duress for John and Justine, compounding the severe emotional strain with which they were burdened because of Justine's life-threatening medical condition and her impending surgery and convalescence." [37 ¶ 100.] 

Page 7 of the Response


[T]he November 2012 raid is illustrative. As alleged, Defendants were informed the computers in ISC's office were not on SCA's premises, did not belong to SCA, were used for purposes unrelated to SCA, and contained Plaintiffs' sensitive, private, confidential, and trade-secret information as well as attorney-client-privileged communications and attorney work product that belonged to Plaintiffs. [37 ¶ 91]. Defendants were also informed that, to the extent there was any SCA-related information on the ISC computers, it would consist of e-mails that could readily be obtained from the SEC-approved electronic data depository maintained by Smarsh, Inc. [37 ¶ 92]. Yet Defendants still demanded access to them. Worse, Defendants threatened to take draconian action against any SCA employee who dared to question their authority. They threatened to issue Wells Notices12 to everyone in the building if Defendants' demands were not met within 15 minutes. [37 ¶ 94]. In short, Defendants knowingly used-indeed, abused-their position as regulators in order to gain access to information they had no authority to obtain. Defendants are also alleged to have leaked non-public, confidential, and misleading information to Deal Pipeline, a news service distributed on the Internet. Defendants told Deal Pipeline the Hurrys or their companies were engaged in illegal activities, including insider trading, and were the target of various criminal investigations, none of which was true. [37 ¶¶ 176-220]. No reasonable FINRA official could conclude the law authorized the dissemination of false and defamatory information about Plaintiffs to the media. These acts served no legitimate purpose. They were designed solely to embarrass and discredit John and Justine Hurry.

Page 12 of the Response


Furthermore, Plaintiffs allege FINRA and Andersen issued a Rule 8210 request in October 2013 seeking personal and business records from the Hurrys, including bank, phone and flight records. [37 ¶ 171]. Just days after the Hurrys produced the records to FINRA in redacted form, the SEC issued a subpoena to Pinnacle Aviation for the very same flight records. [37 ¶ 175]. It is more than reasonable to infer the SEC directed the initial inquiry from FINRA, only to follow up on its own just days later when FINRA returned with redacted records from the Hurrys. Plaintiffs also allege Deal Pipeline published an article on December 6, 2013, entitled "FBI, securities officials investigating Scottsdale Capital, Alpine Securities, source says," which it attributes to leaks by Andersen and FINRA. [37 ¶ 192]. The article added that "FINRA 'is work[ing] with the SEC" on investigations involving SCA, Alpine and the Hurrys.'" [37 ¶ 195]. The allegations do not merely describe parallel investigations as Defendants imply. If true they establish joint action between Defendants, including Andersen, and federal authorities.18. . .

Page 24 of the Response

Bill Singer's Comment

Industry regulatory, compliance, and legal professionals will likely find the Response a provocative document. 

Critics of FINRA will surely enjoy the aggressive attack against what they sometimes view as heavy-handed regulation, particularly as the arguments pertain to whether there are cognizable lines between individuals and entities clearly subject to the self-regulator's jurisdiction and, on the other hand, individuals and entities that may (or may not) be affiliated or control entities. At its nastiest -- and make no mistake about it, the Response pulls no punches -- questions are raised about the propriety of FINRA's conduct in alleged concert with the Securities and Exchange Commission, and about FINRA's purported trampling on various Civil and Constitutional Rights.

Supporters of FINRA will view the Hurrys' Complaint as merely another in a long line of similarly nasty but ultimately futile efforts to sidetrack and derail meaningful regulation. Those in this camp will champion the self-regulatory organization for doing its job and will cite the heated rhetoric in the Complaint as proof that FINRA is no mere paper tiger but an effective regulator.  In the end, FINRA's proponents will pooh-pooh this lawsuit as little more than a high-priced bit of litigation designed to mischaracterize the truth and designed to delay and impede.  

Solely based upon prior decisions, the likely outcome of Hurry v. FINRA is that the federal District Court will rule in FINRA's favor. As to whether such an outcome is merited by the facts and circumstances in dispute, I will leave that to each reader to determine without my frequently barbed and often cynical commentary when it comes to the present state of self-regulation. I urge all serious participants in the securities industry to read the Amended Complaint, Motion to Dismiss, and Response.

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