By Bill Singer
You know all those pesky requests you get from regulators to produce documents? And you know how some times Regulator A asks you to produce a truckload of stuff and then Regulator B comes in a few days later and asks you to produce the exact same stuff, or at least most of it? And you know how sometimes Examiner #1 from Regulator A asks for a gazillion pieces of paper (which you know is never fully read) and then Examiner #2 from the same Regulator A asks you to produce the same gazillion pieces again--and then gets nasty when you complain about the waste of your time and money?
If you are nodding your head in knowing approval and exasperation, consider the incredibly petty, petulant, and inane case of In the Matter of Byron S. Rainner (1934 Rel. No. 59040/ December 2, 2008, 1940 Rel. No. 281 1 / December 2, 2008,Admin. Proc. File No. 3-12828) http://sec.gov/litigation/opinions/2008/34-59040.pdf
Essentially, former Registered Representative Byron S. Rainner comes up with an apparently harebrained wire fraud scheme involving, of all targets, the Sheriff's Office of Fulton County, Georgia. Rainner gets caught, pleads guilty to a felony count, goes to prison, enters into probation, and agrees to restitution. As you industry regulatory/compliance types know, a conviction for any felony results in a registered person becoming statutorily disqualified. Please visit this page for more details.
Consequently, the SEC starts proceedings to bar Rainner. Hard to imagine a more open and shut case.
While in prison and with apparently little else to do, Rainner receives notice of the SEC's proceeding and asks to see its investigative file. While Rainner may have had lots of time on his hands and figured he would spend some of it looking through the typically voluminous SEC investigative file, there is this other little point to consider. The SEC's rules require that it make available for inspection and copying by any party documents obtained by the regulator prior to the institution of proceedings, in connection with the investigation. See, SEC Rule of Practice 230.
Now things get really silly.
Rainner asked to see his entire investigative file. The SEC's Division of Enforcement provided him with copies of materials from his criminal case (which he likely had), copies of the relevant uniform registration and termination forms (again, if he didn't have these he certainly knew the details of his background); and two documents concerning the organization structure of his former employer. As to the balance of documents, some 20 banker's boxes, the Division apparently determined that it was too inconvenient to comply with the SEC's rules and informed the Administrative Law Judge that Rainner could pay $7,500 in copying charges if he wanted to see what they were hiding. Oddly, and despite the rules to the contrary, the ALJ bought the staff's position and barred Rainner without giving him access to the files that he was entitled to see (at least) and copy.
In reviewing the ALJ's decision to bar Rainner, the SEC remanded the case back with instructions compelling compliance with the rules and requiring a reasonable amount of time for Rainner to review the file. Most likely, after this ordered review, Rainner will once again find himself barred--frankly, as he should be and as is provided for under the rules. What will not be undone is the colossal waste of taxpayer dollars and the loss of regulators' time (which could be spent on far more critical matters). While it would be comforting to think that such gamesmanship is not common among Wall Street's regulators, the fact is that it is often embedded in those institutions. Worse, while it is simple enough to blame this nonsense on over-zealous staff, the fact of the matter is that more senior staff supervisors likely signed off on this stupidity.
Make no mistake. As a convicted felon, Rainner should be statutorily disqualified. However, convicted felon or not, he and all other respondents are entitled to the due process protections imposed upon our government regulators and as mandated under our pesky Constitution. Thankfully, it is not up to the prosecutor to decide what is okay to produce and what is okay to hold back. The law and the judge retain that prerogative. Less funny and more troubling is that educated individuals (likely with law degrees) failed to appreciate the ramifications of charging a respondent for document production when such production is obligatory. Our systems of regulation and justice must ensure that all respondents and defendants have a full and fair opportunity to defend themselves. When prosecutors and regulators "game" the system, it cheapens the importance of their work and undermines the integrity of the process.
Here's a thought! Next time FINRA, the SEC, or some state regulator wants your brokerage firm to produce documents, your firm should produce only what is convenient and then send the regulator a bill for the cost of copying everything else.
Yeah, right. Let's see how long it takes before the regulators go beserk with that one. On the other hand, if you turn the tables on them, maybe they will have that "ah ha!!" moment. If nothing else, they may enjoy the epiphany.