11th Circuit Raises FINRA Due Process Dilemma in Busacca Appeal

January 6, 2012

Former North American Clearing, Inc. President John B. Busacca, III, appealed pro se to the United States Court of Appeals for the 11th Circuit concerning a Securities and Exchange Commission ("SEC")Final Order sustaining a Financial Industry Regulatory Authority ("FINRA") disciplinary actionagainst him. FINRA had imposed a $30,000 fine and six-months' suspension in Principal capacities.John B. Busacca, III v. Securities and Exchange Commission (Opinion, 10-15918, 11th Circuit Court of Appeals, December 28, 2011).

Failure to Supervise

FINRA found that Busacca failed to exercise reasonable supervision over North American's operations and compliance functions in violation of NASD Conduct Rules 3010 and 2110. Specifically, the self-regulatory organization found that Busacca knew that North American's conversion to a new computer program for preparing required books and records had created widespread errors in the firm's fundamental operations and would continue to do so in the future, yet he failed to take reasonable steps to solve the problems.

Four Points

In Busacca's appeal to the Circuit Court, he asked whether:

  1. substantial evidence supported the SEC's finding that he failed to exercise reasonable supervision;
  2. FINRA denied him due process when it rejected his request to compel the production of certain North American documents;
  3. the SEC erred in rejecting his claim that he was subject to selective prosecution by FINRA; and
  4. the SEC abused its discretion in sustaining the sanctions FINRA imposed.

After the Fact?

Although Busacca conceded that North American's conversion to a new back-office software system in February 2004 resulted in various operational problems, he argued that the conversion predatedhis tenure as the firm's president.  Further, Busacca contended that once he became aware of problems, he sought to rectify the issues. Notwithstanding the apparent reasonableness of Busacca's contention, the Circuit Court found that:

Contrary to Busacca's position, FINRA and, on review, the SEC made it clear that Busacca was only being held accountable for his failure after he became North American's president in March 2004 adequately to address the operational problems wrought by the firm's prior conversion to the new back-office system. Moreover, substantial evidence supports the finding that Busacca, while president of the firm, failed to act with the requisite vigor, decisiveness, and vigilance to address known operational deficiencies, as well as to prevent the occurrence of future regulatory violations.

Due Process

As to Busacca's claims that FINRA and then the SEC denied him due process of law by concealing evidence and denying his request to compel North American to produce documents "vital to his defense," the Circuit Court ruled that (some citations omitted):

The Fifth Amendment's Due Process Clause generally requires "notice and the opportunity to be heard incident to the deprivation of life, liberty, or property at the hands of the government." We have not yet determined whether FINRA is a government actor subject to the Clause's requirements. Other circuits have reached conflicting holdings on this question. See, e.g., D'Alessio v. S.E.C., 380 F.3d 112, 120 n.12 (2d Cir. 2004) (noting that the NASD, FINRA's predecessor, "is not a state actor subject to due process requirements"); Rooms v. S.E.C., 444 F.3d 1208, 1214 (10th Cir. 2006) (finding that due process requirements apply to the NASD). To the extent the Due Process Clause applies to FINRA proceedings, its core demand is an opportunity to be heard "at a meaningful time and in a meaningful manner." . . .

[A]ssuming that FINRA constitutes a governmental entity subject to the Due Process Clause, Busacca was not deprived of any process he was due. He was afforded a meaningful opportunity to be heard during the disciplinary proceedings and, despite ample opportunity to obtain the requested documents from North American, failed to satisfy the requirements of Rule 9252 by, for example, explaining the materiality of the broad category of documents sought and detailing any prior good-faith efforts to obtain the documents directly from the firm. When he reiterated his request for the documents, and finally demonstrated his failure to obtain them from North American, FINRA was unable to compel their production from the court-appointed trustee who, in the interim period, had been charged with liquidating the firm. . .

Selective Prosecution

Busacca's "Selective Prosecution" argument fared no better. In making short shrift of that position, the Circuit Court held:

The SEC properly rejected Busacca's suggestion that he was subject to selective prosecution. Busacca has not presented any evidence that FINRA's prosecution was based on a constitutionally impermissible motive, rather than the numerous customer complaints and operational violations uncovered during its investigation of North American. Moreover, although he suggests that similarly situated individuals in the securities industry were not targeted by FINRA, there is no evidence in the record regarding whether these individuals engaged in the same type of misconduct in substantially the same manner, let alone the strength of the evidence against them.. .

Unfair Sanctions

Finally, as to Busacca's assertion that the sanctions imposed by FINRA and sustained by the SEC were excessive and unwarranted, the Circuit Court stated:

The SEC did not abuse its discretion in concluding that the disciplinary sanctions imposed by FINRA, which fell well within those recommended by the Guidelines, were neither excessive nor oppressive, but appropriately remedial in light of the relevant considerations. In upholding the sanctions, the SEC appropriately gave significant weight to Busacca's failures to ensure that North American's chief compliance officer was properly registered and to adequately respond to known operational problems at the firm, which were not only numerous and protracted, but placed the security of customer accounts in jeopardy . . .

Bill Singer's Comment

As a veteran Wall Street regulatory lawyer, I always approach with great trepidation what I view as amateur-hour cases where non-lawyers attempt to maneuver the hearing and appellate phases of securities industry regulatory proceedings.  Which does not meant that I do not understand what drives folks such as Busacca to represent themselves pro se; to the contrary, I get it. The cost of retaining a lawyer for a FINRA disciplinary hearing can easily run mid- to upper-five figures. The cost of an appeal at FINRA and then to the SEC can bring the total fees to six figures.  As to taking things into the final federal court forum, if you were able to afford getting through the SEC appeal, chances are you're close to broke by now.  On the other hand, many a high-priced lawyer has screwed up a federal appeal, so, who's to say?

Nonetheless, the ramification of a pro se appeal goes far beyond the loss in this one case.  Consequently, if a pro se case is badly argued, it can cause far-reaching damage for future litigants similarly situated.  The 11th Circuit's Opinion in Busacca is now persuasive among lower federal courts and is controlling for those within the circuit.

Not having first-hand familiarity with the FINRA, SEC, or Circuit Court phases of Busacca, I can't say that the appellant did himself a service or disservice by handling his own defense.  To reach such a conclusion would require me to read all the pleadings, all the motions, and to have participated in the hearings in order to determine what was probative and which witnesses were credible.  As such, I can neither wag a finger at nor offer a pat on the back to Busacca.

What does deeply trouble me about the Circuit Court's Opinion is the reference to the issue of Due Process at FINRA - essentially the only self-regulatory organization for Wall Street. When I warn my clients that there are no Due Process guarantees at FINRA - and that FINRA does not recognize the assertion of the Fifth Amendment - I often encounter odd looks.  If nothing else, Busacca gives me yet another case to hand to a disbelieving client.

Yet again, the unsettled nature of Due Process at FINRA reminds us that the core issue of  "whether FINRA is a government actor subject to the Clause's requirements," is still in dispute among the circuits.  In the 2nd Circuit,D'Alessio holds that the NASD (FINRA's predecessor self-regulatory organization) "is not a state actor subject to due process requirements."  In contradistinction, the 10th Circuit held in Rooms that  "due process requirements apply to the NASD."  Given the split in the circuits, tt some point, hopefully the Supreme Court will weigh in on this threshold issue.  As I have long advocated, FINRA should be deemed at least a quasi-governmental actor and, as such, should be obligated to provide Due Process protections.