Taking the Fifth At FINRA -- Not What You Might Think

August 2, 2011

In response to a Financial Industry Regulatory Authority ("FINRA") Complaint filed by that self-regulatory organization ("SRO") in April 2010, and without admitting or denying the allegations of the Complaint but consenting to the findings of fact and the imposition of sanctions, Respondents  Sorbara  and Markowitz submitted separate Offers of Settlement ("OS") which FINRA accepted.

SIDE BAR: Respondent Sorbara was first registered in January 1985 and ultimately became the Chief Executive Officer of Joseph Stevens & Company, Inc. ("JSC").

Respondent Markowitz  was first registered in March 1985 and ultimately became the President and Chairman of JSC.

JSC was a full-service retail brokerage firms with offices in New York. Respondents Sorbara and Markowitz remained with JSC until the firm filed a Form BDW on June 20,2008.  Its FINRA registration was terminated on July 21, 2008.

FINRA Investigation

In connection with an investigation by FINRA's Deparment of Market Regulation Staff to determine whether JSC and persons formerly associated with the member had violated the anti-fraud provisions of the federal securities laws and FINRA Rules, the Staff requested that Respondent Sorbara and Respondent Markowitz provide testimony pursuant to FINRA's rules.

Claiming a Fifth Amendment privilege against self-incrimination, Respondent Sorbara and Respondent Markowitz refused to testify.  FINRA alleged that such a refusal constituted a violation of FINRA Rules and imposed a sanction of a Bar upon each Respondent. 

SIDE BAR: The Fifth Amendment to the US Constitution states:

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.

FINRA's Department of Market Regulation, Complainant, v. Joseph Sorbara, Respondent (OS/20070113664-03, July 26, 2011)

FINRA's Department of Market Regulation, Complainant, v. Steven Alan Markowitz, Respondent (OS/20070113664-03, July 26, 2011)

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 SROs are private investigative organizations incapable of triggering the self-incrimination rights attributable to government entities. The Court declined to deem the NYSE, 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 . . ."

Bill Singer's Comment

Among the dangers of hiring a lawyer is that not all lawyers are necessarily familiar with the nuances and arcana of all areas of the law - just as you wouldn't want to put delicate neurosurgery in the hands of a dermatologist.  One area that trips up some lawyers unfamiliar with Wall Street's regulatory arena is the misconception that SROs are somehow public, governmental actors and, as such, a client can freely take the Fifth Amendment before FINRA.

Of course, you can take 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 with your FINRA case.  It's not so much that FINRA will take a negative inference from your assertion (as would be permissable in civil trials).  What will likely happen at FINRA is that the SRO will simply deem your assertion of the Fifth as more or less akin to your refusal to cooperate in their investigation and you will be barred on that basis.  If you subsequently have a change of heart, FINRA may lessen the Bar to a suspension and/or fine but that's going to depend upon the substance of your testimony and its timing.

Since Solomon was decided, Wall Street has dramatically changed and the interrelationships between and among the SROs. governmental regulators, and criminal prosecutors has 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).  Consequently, as long as there is a governmental hand in the SRO glove, I do not believe that respondents should be punished with Bars merely for asserting a constitutional right.  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 simple.  Eliminate the SROs and transfer their regulatory role to state and federal government organizations that are required to respect Fifth Amendment rights, or, recognize at least the quasi-governmental role of SROs and require quasi-governmental due process rights.

In this day and age of rightful investor outrage at Wall Street, there will be little sympathy for those barred by FINRA for asserting Fifth Amendment rights. I get that. I respect that. However, 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.