FINRA Horse With No Name Named

January 2, 2018

There are times that FINRA's regulatory protocol confuses me. Other times, it confounds me. And other times, well, what can I say, try as I might, I can't understand why the self-regulatory-organization does or doesn't do something. As we embark upon a new year, the BrokeAndBroker.com Blog publishes a puzzling case that appears to start off with a wrongly named Respondent in a FINRA disciplinary proceeding. That Respondent wins at FINRA's Office of Hearing Officers trial phase. In response to his victory, FINRA apparently takes the appropriate step of striking his name from the caption of the dismissed proceeding. Inexplicably, that Respondent's name is named in FINRA's National Adjudicatory Council appellate decision -- or so it seems.

They've Given You a Number And Taken 'Way Your Name

Some eight years ago, FINRA published Department of Enforcement, Complainant, v. Respondent (Officer of Hearing Officers Hearing Panel Redacted Decision, Disciplinary Proceeding No. 2007010580702 / November 18, 2011). 
http://www.finra.org/sites/default/files/OHODecision/p126027_0.pdf  The OHO Hearing Panel dismissed the Amended Complaint based upon its finding that FINRA's Department of Enforcement had failed to prove by a preponderance of the evidence that Respondent violated Rules 8210 and 2110 by giving false information to both his firm and FINRA. No, that's not a typo in the official FINRA citation. In fact, there is no name listed for the "Respondent" in the caption for the above decision, which FINRA says should be "cited as OHO Redacted Decision 2007010580702."  FINRA took away the Respondent's name and simply lists the disciplinary proceeding number. 


According to the "PROCEDURAL HISTORY" section of the May 2011 OHO Redacted Decision [Ed: Footnote omitted]:

Enforcement filed the Complaint with the Office of Hearing Officers on December 1, 2010, and Respondent filed his Answer on December 17, 2010. On May 17, 2011, Enforcement filed an Amended Complaint, and Respondent filed his Answer to the Amended Complaint on May 23, 2011

In three Causes of Action, Enforcement alleged that Respondent, while registered with FINRA-registered firm, [] ("the Firm"), knowingly made a false and misleading statement to the Firm's' chief compliance officer ("CCO") during a FINRA investigation into the use of stock finders by the firm. According to Enforcement, Respondent, then the co-head of the Firm's stock lending desk, falsely told the CCO that the Firm had never used a stock finder, when it had in fact used the services of Respondent's father, who was a stock finder. The CCO repeated the allegedly false information in the Firm's response to a FINRA request for information made pursuant to Rule 8210. Respondent reviewed the response letter, but did not correct the false information. Enforcement alleged that by knowingly providing false information that he knew would be included in an 8210 response, Respondent violated Rule 8210. Further, Enforcement alleged that Respondent continued to make false statements about the Firm's use of stock finders to the firm's compliance and legal personnel, thereby acting unethically and violating Rule 2110. Finally, Enforcement alleged that Respondent gave false on-the-record ("OTR") testimony to FINRA when he stated that the Firm had never paid a stock finder, thereby violating Rule 8210.

The hearing was held in New York City on June 28 and 29, 2011, before a hearing panel composed of the Hearing Officer and two former members of the District 10 Committee. Enforcement called as witnesses JF (former Firm CCO), Kristen Conway (a FINRA case manager), MO (former Firm general counsel), and Respondent. Respondent called JA (former Firm stock loan desk employee) and RL (former Firm stock loan desk employee). Nine of Enforcement's exhibits, four of Respondent's exhibits, and 11 joint exhibits were admitted into evidence.

After a thorough review of the record, the Hearing Panel finds that Enforcement failed to prove by a preponderance of the evidence that Respondent violated Conduct Rules 8210 and 2110 by providing false information to his firm and to FINRA. Accordingly, the Hearing Panel dismisses the Amended Complaint.

Another Horse With No Name

Being the curious fellow that I am, I entered "2007010580702" into the FINRA.org website - you know, just to see if I could figure out who the now-redacted Respondent was. My search found an earlier FINRA document, which the regulator says "should be cited as OHO Order 11-06 (2007010580702)." That document is titled Department of Enforcement, Complainant, v. Respondent (OHO ORDER GRANTING ENFORCEMENT'S MOTION CONCERNING THE TESTIMONY OF MO, MB, AND JF, AND DENYING THE RESPONDENT'S MOTION TO EXCLUDE THEIR TESTIMONY, Disciplinary Proceeding No. 2007010580702 / May 18, 2011). http://www.finra.org/sites/default/files/OHODecision/p124551_0.pdf  As with the November 2011 OHO Redacted Decision, there is no Respondent named in the earlier May 2011 FINRA OHO Order. Which seems to be the same horse with no name.


The May 2011 OHO Order granted Enforcement's request to use the testimony of "MO (RLLC's general counsel), MB (RLLC's chief compliance officer), and JF (RSLLC's chief compliance officer)" and denied Respondent's request to exclude same on the basis that "their testimony violates his attorney-client privilege and his right to conflict-free counsel." Attorney-client privilege? Right to counsel in a FINRA hearing?? Wow . . . not everyday that someone asserts those rights in a self-regulatory proceeding. Why are those such dramatic issues? As noted among the reasons for OHO's denying the unnamed Respondent's requests to exclude are these [Ed: Footnote omitted]:

As an initial matter, the Sixth Amendment right to counsel -- which provides criminal defendants with the right to assistance of counsel, including the right to conflict-free counsel --  does not apply to FINRA disciplinary proceedings. The Securities and Exchange Commission has repeatedly held that respondents in FINRA disciplinary proceedings do not have a "constitutional or statutory right to the assistance of counsel." Moreover, courts have consistently held that the Sixth Amendment right applies only in criminal proceedings. As the subject of a FINRA investigation, the Respondent is allowed to be represented by counsel, but he does not have the "right" he claims was violated.

Pages 5 - 6 of the May 2011 OHO Order

The Name Game

As I continued to work through the online search results at Finra.org for "2007010580702," an unsettling thing happened: I found the link to In the Matter of Department of Enforcement, Complainant, vs. Dennis Thomas Palmeri, Jr. Rumson, NJ, Respondent (BEFORE THE NATIONAL ADJUDICATORY COUNCIL, DECISION, Complaint No. 200701058702 / February 15, 2013). http://www.finra.org/sites/default/files/NACDecision/p209251.pdf  (the "2013 NAC Decision")

In the 2013 NAC DecisionEnforcement appealed the 2011 Redacted OHO Decision to the NAC and requested that the appellate body reverse as to the First Cause of Action and impose a Bar upon Palmeri. Although the NAC disagreed with certain of the OHO Panel's findings, the FINRA appellate body affirmed the dismissal of  Enforcement's claims as alleged in the first cause of the amended complaint upon finding that Enforcement had failed to prove that respondent was responsible for his firm providing false information in response to a FINRA information request pursuant to Rule 8210. As further explained in the 2013 NAC Decision:

The Department o Enforcement ("Enforcement"), pursuant to FINRA Rule 9311, appeals a November 18, 2011 Hearing Panel decision that dismissed the amended complaint in this matter. The Hearing Panel found, among other things, that Enforcement failed to prove by a preponderance of the evidence that Dennis Thomas Palmeri. Jr. ("Palmeri") violated NASD Rules 8210 and 2110 by making a false statement to his firm, Ramius Securities, LLC ("Ramius"), or failing to correct a false statement, in connection with the firm's response to a Rule 8210 request for information issued during a FINRA investigation into the firm's use of stock finders.' After an independent review of the record, we affirm the Hearing Panel's findings, in part, and concur with its decision to dismiss the amended complaint.

Page 1 of the 2013 NAC Decision

[I]n the first cause of action. Enforcement alleged that Palmieri participated in his firm's false response to a request For information issued by FINRA pursuant to NASD Rule 8210. Specifically, Enforcement alleged that Palmeri falsely told .John Fiorello ("Fiorello"), the firm's chief compliance officer, that Ramius did not use stock finders, and Fiorello included that false statement in a draft response to the FINRA request for information. Enforcement further alleged that, when Palmeri reviewed the draft response prepared by Fiorello, Palmeri failed to tell Fiorello that the draft response was inaccurate and failed to correct the false statement before Fiorello sent the firm's response to FINRA staff. These actions, Enforcement alleged, violated NASD Rules 8210 and 2110, separately and distinctly.

Page 2 of the 2013 NAC Decision

Those facts in the 2013 NAC Decision sound like the fact pattern in the so-called "redacted" 2011 OHO Order and "redacted" 2011 OHO Decision but, gee,ummmm . . .how come the name of "Dennis Thomas Palmeri, Jr." appears as the "Respondent" in the published 2013 NAC Decision? Is this some sort of name-game that FINRA's playing or did someone at the self-regulator drop the old "redacted" ball or what????


A More Courtly Setting

Continuing with my legal research, I entered "Dennis Thomas Palmeri, Jr. " and was directed to Dennis T. Palmeri, Jr. Plaintiff/Appellant, v. Willkie Farr & Gallagher LLP, Defendant/Respondent (Order, NYS Supreme Court, Appellate Division, First Department; 2017 NY Slip Op 09252 / December 28, 2017) (the "2017 NYS App Div Order") http://www.courts.state.ny.us/reporter/3dseries/2017/2017_09252.htm 

A Twice Told Tale

As set forth in the 2017 NYS App Div Order, when preparing his responses to FINRA, Plaintiff Palmeri alleged that he had 

conferred with Ramius's General Counsel and its Chief Operating Officer, both of whom were attorneys. Plaintiff alleged that the GC and the COO informed him they were "there as his counsel," allegedly leading plaintiff to believe that an attorney-client relationship was formed."

After leaving Ramius, Palmeri retained Defendant Willkie Farr & Gallagher LLP to represent him in connection with the FINRA investigation. Before undertaking any representation of Palmeri, the Defendant purportedly informed him that:

Ramius, which was then a client of defendant, would not accept any situation in which defendant was adverse to Ramius. At the same time, defendant noted that it did not foresee any set of circumstances in which plaintiff would be adverse to Ramius. Defendant sent plaintiff an engagement letter dated January 14, 2009; the letter made no mention of any conflict of interest arising from defendant's representation of both plaintiff and Ramius, nor did it enumerate the rights plaintiff would have if he and Ramius were to become adverse. Approximately one month afterward, in connection with the same FINRA investigation, Ramius also retained defendant to represent it and certain of its current or former employees. 

On or about January 27, 2009, defendant represented plaintiff during his investigative examination before FINRA. In June 2009, however, defendant informed plaintiff that defendant could no longer represent him because of a conflict of interest concerning defendant's concurrent representation of Ramius and its current and former employees, and unilaterally terminated its representation of him on June 25, 2009. By letter dated September 23, 2009 from defendant to FINRA, defendant appeared to shift to plaintiff all or most of the responsibility for any alleged violations of FINRA's rules.

2017 NYS App Div Order

The rest of Plantiff Palmeri's tale is told via the FINRA orders and decisions above. As to how Palmeri came before the New York Courts, that is explained as follows:

In the complaint in this action, dated February 15, 2013, plaintiff asserted causes of action against defendant for breach of fiduciary duty, aiding and abetting breach of fiduciary duty, gross negligence, professional negligence, breach of contract, and breach of the implied covenant of good faith and fair dealing. Plaintiff alleged that defendant, during its representation of Ramius in the FINRA investigation, shifted all responsibility for any alleged violations of FINRA's rules to him, suggesting that plaintiff undertook certain wrongful actions without Ramius's knowledge. Plaintiff further asserted that defendant disclosed to FINRA his internal, privileged communications with Ramius's counsel, thus causing FINRA to assert charges against Palmieri. Moreover, plaintiff alleged that defendant disclosed information that it had learned during the time it represented him. Plaintiff also alleged that the FINRA complaint was primarily based on privileged statements he had made to counsel at Ramius, and that these statements were also disclosed during the course of Willkie's representation of Ramius after it ceased representing him.

Defendant moved under CPLR 3212 to dismiss the complaint as time-barred and for failure to state a claim. Plaintiff cross- moved for summary judgment in his favor. In its decision, which it read into the record, the IAS court found that all six of plaintiff's claims were premised on the same operative facts and sought identical monetary damages. Accordingly, the IAS court "merged" plaintiff's claims for gross negligence, breach of contract and breach of the implied covenant of good faith and fair dealing into his legal malpractice claim, leaving for consideration only that claim and claims based on breach of fiduciary duty.

The IAS court then dismissed both claims as untimely. Because plaintiff sought purely monetary damages, the court applied the three-year statute of limitations to the breach of fiduciary duty claim, rather than the six-year period. The court held that the claim was time-barred, since plaintiff filed it in February 2013, more than three years after defendant represented him from January through June 2009.

2017 NYS App Div Order

Although the Individual Assignment System part dismissed Palmeri's claims as untimely, on appeal the NYS App Div found that the IAS court:

should have permitted the breach of fiduciary duty claim to proceed. The IAS court correctly noted that the claim was subject to a three-year statute of limitations. The court was mistaken, however, in finding that the allegedly wrongful conduct ended on June 25, 2009, when defendant unilaterally terminated its representation of plaintiff. On the contrary, defendant's conduct extended through at least June 29, 2011, during which time it represented Ramius and its employees in their participation at plaintiff's FINRA disciplinary hearing.

Here, plaintiff alleges not only that defendant breached its fiduciary duty when it terminated its professional relationship with him, but also when, until at least June 2011, it acted in a manner directly adverse to his interests. Where there is a series of continuing wrongs, the continuing wrong doctrine tolls the limitation period until the date of the commission of the last wrongful act . . .

. . .

Here, plaintiff has presented evidence of a "continuing wrong," which is "deemed to have accrued on the date of the last wrongful act" (Leonhard v United States, 633 F2d 599, 613 [2d Cir. 1980], cert denied 451 US 908 [1981]; Harvey, 34 AD3d at 364). Indeed, the record contains evidence sufficient to create an issue of fact as to whether defendant breached its fiduciary obligations to plaintiff after June 2009 and well into June 2011 during its ongoing representation of the Ramius parties. 

For example, as noted, the record contains evidence that in the early portion of 2011, defendant helped Ramius identify witnesses who would testify against plaintiff at his FINRA disciplinary hearing. Similarly, defendant was present on behalf of Ramius and Ramius employees who testified at plaintiff's FINRA hearing on June 28 through 29, 2011 - a hearing at which the employees gave testimony that was generally adverse to plaintiff's interests. This evidence is sufficient for a fact-finder to determine that defendant breached its duty of loyalty to plaintiff, a former client (see Cooke v Laidlaw, Adams & Peck, 126 AD2d 453, 456 [1st Dept 1987] [ethical standards applying to the practice of law impose a continuing obligation upon lawyers to refuse employment in matters adversely affecting a client's interests, even if the client is a former client]).\

2017 NYS App Div Order

Bill Singer's Comment

Somebody . . . anybody . . . explain to me whether the purported "redacted" Respondent in the FINRA OHO proceeding is the same "unredacted" and named Respondent in the FINRA NAC proceeding and, if so, what the hell was or is the point of redacting a Respondent's name in an OHO proceeding only to publish that same name in an NAC appeal?  As to the New York State Court case, that's a whole horse of another color . . . or of another name.