FINRA Loses Landmark Federal Appeals Case on Collection of Fines

October 7, 2011

On October 5, 2011, the United States Court Of Appeals For The Second Circuit issued a dramatic Decision in John J. Fiero and Fiero Brothers, Inc. v. FINRA.  The Court ruled that the Financial Industry Regulatory Authority, Inc. ("FINRA") lacked the authority to bring court actions to collect its disciplinary fines. Accordingly, the Court reversed the dismissal of the Fiero Complaint by the federal District Court and vacated FINRA's money judgment.

In New York State Courts

When the Fieros refused to pay a fine imposed by the self-regulatory organization NASD (the predecessor to FINRA), the regulator sought collection through the New York State court system and in 2005 was awarded $1,329,724.54 by the New York State Supreme Court. 

On appeal, the First Department of the New York Appellate Division affirmed the Supreme Court's award Nat'l Ass'n of Sec. Dealers, Inc. v. Fiero, 827 N.Y.S.2d 4, 5 (Order and Judgment, 1st Dept., October 26, 2006).  Thereafter, the New York Court of Appeals granted the Fieros leave to appeal. 

On February 7, 2008, the Court of Appeals reversed the lower court on the ground that state courts lacked subject matter jurisdiction.  Financial Industry Regulatory Authority, Inc., Formerly Known as National Association of Securities Dealers, Inc., Respondent, v. John J. Fiero et al., Appellants. (Opinion, New York State Court of Appeals, February 7, 2008) The Court of Appeals found that the FINRA complaint constituted an action to enforce a liability or duty created under the Exchange Act, and therefore, fell within the exclusive jurisdiction of the federal courts. 

In the Federal Courts

On February 8, 2008, the day after the New York State Court of Appeals issued its ruling, the Fieros sought a declaratory judgment in federal District Court that FINRA has no authority to collect fines through judicial proceedings. In reply, FINRA filed a Counterclaim to enforce its fine under a breach of contract theory.

On March 30, 2009, the District Court granted FINRA's motion to dismiss, denied the Fieros' motion to dismiss FINRA's counterclaim, and ordered a judgment in FINRA's favor. The case then proceeded on appeal to the Second Circuit.

Circuit Court Rationale

In John J. Fiero and Fiero Brothers, Inc., Plaintiffs/Counter-Defendants/Appellants/Cross-Appellees, v. Financial Industry Regulatory Authority, Inc., Defendant / Counterclaimant/Appellee/Cross-Appellant (Opinion, United States Circuit Court for the Second Circuit, 09-1556-cv(L), 09-1863-cv(XAP) / October 5, 2011) , Second Circuit reversed the District Court's dismissal of the Fieros' Complaint and vacated FINRA's million dollar judgment on its unpaid fine. Second Circuit largely based its rationale upon the following analysis (as set forth starting at page 11 of its Decision):

[F]irst, FINRA's sanctions are appealable by an aggrieved party to the SEC and thereafter to the United States Courts of Appeals. Had Congress intended judicial enforcement, it would surely have provided for some specific relief other than leaving SRO's to common law proceedings in state courts or in federal district courts under diversity jurisdiction. Second, where FINRA enforces statutory or administrative rules, or enforces its own rules promulgated pursuant to statutory or administrative authority, it is exercising the powers granted to it under the Exchange Act. Indeed, FINRA's powers in that regard are subject to divestment by the SEC under Section 19(g)(2) of that Act. However, Congress gave the federal courts exclusive jurisdiction to enforce the Exchange Act, 15 U.S.C. § 78aa, and FINRA's breach of contract theory undermines that provision. FINRA contract enforcement actions may bristle with Exchange Act legal issues because the most serious fines levied by FINRA will be for member violations of the Act. For example, the Fieros were charged with a violation of Section 10(b) of that Act. State court enforcement of FINRA fines might well, therefore, entail interpretation of the Exchange Act notwithstanding the exclusive jurisdiction of the federal courts.


Plaintiffs' Brief

NOTE:  The law firm of Gusrae Kaplan Nusbaum, PLLC represented  Fiero in this case.  I was a partner in that law firm.


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