Lawsuit Says FINRA Guilty of Deliberate, Retaliatory,and Malicious Conduct

February 2, 2015

In 2014, FINRA was hit with a Complaint alleging that the SRO had engaged in a number of improper acts in an effort to secure its role as Wall Street's dominant self regulator and as an ongoing course of harassment against a member firm and its principals. John J. Hurry et al. v. Financial Industry Regulatory Authority, Inc. (Amended Complaint, DAZ, CV-14-2490-PHX-JWS, November 26, 2014). Given my historic bias and animosity towards both self-regulation and FINRA, I have decided to allow the litigants to speak for themselves via the excerpts below and my commentary follows at the end. Let me clearly note that I do not take ANY personal or professional position on the merits of the parties' respective positions.

Amended Complaint

Under the introductory "NATURE OF THE ACTION" set forth in the Amended Complaint, Plaintiffs offer this explantion: 

1. This action stems from deliberate, retaliatory, and malicious conduct by the Financial Industry Regulatory Authority, Inc. ("FINRA"), a self-regulatory organization ("SRO") acting under authority of the U.S. Securities and Exchange Commission ("SEC"); Scott M. Andersen ("Andersen"), FINRA's regional deputy counsel; and several other FINRA staff members whose identities are currently unknown. (Andersen and unknown Does are collectively referred to as the "Individual Defendants." Individual Defendants and FINRA are collectively referred to as "Defendants").

2. John and Justine Hurry (the "Hurrys") are successful entrepreneurs who own or operate several businesses in Arizona, Montana, Nevada, Utah, and California. Two of these businesses, non-parties Scottsdale Capital Advisors Corporation ("SCA"), and Alpine Securities Corporation ("Alpine"), are registered broker-dealers and members of FINRA. (Alpine and SCA are collectively referred to as the "Member Firms.") The Hurrys' other businesses include commercial and residential real estate ventures, retail operations, and prospective ventures in aerospace, defense, technology, professional services, and innovative consumer goods.

3. John Hurry's role in the securities industry extends beyond any ownership interest he has in the Member Firms. In his capacity as an experienced industry leader, he has sought to improve the industry through the creation of a new self-regulated organization, "Association of Securities Dealers LLC" or "ASD," a potential competitor to FINRA. ASD's purpose includes the laudatory goals of removing barriers to and preserving a free and open market and a national market system, while adhering to securities laws.

4. In November of 2012, FINRA and Andersen improperly gained entry to the Hurrys' office at Investment Services Corporation ("ISC"), a non-member company, and coerced access to the computers and hard-drives the Hurrys use for their non-securities related business and personal pursuits ("ISC computers"). Defendants unlawfully accessed and copied the sensitive, private, confidential, attorney-client privileged, attorney work product, and proprietary computer data, including trade secrets, contained in the ISC computers. 

5. FINRA regularly and explicitly relies upon the potential for a lifetime ban to coerce compliance from its members and associated persons. When FINRA and Andersen were sued for unlawfully accessing and copying the non-member computer data, Defendants coerced the Hurrys into dropping the lawsuit under threat of disciplinary action against the Hurrys and/or those associated with the Member Firms. 

6. Dropping the lawsuit did not mollify the Defendants. Instead, Defendants pursued an unlawful course of conduct designed to prevent the Hurrys from expanding in the over-the counter ("OTC") sector, shrink their sphere of influence in the securities industry, and, ultimately, drive them out of business altogether. Through an orchestrated campaign of harassment, defamatory statements, press leaks, and capricious interference with the Hurrys' business relationships, Defendants have caused and continue to cause unwarranted reputational damage to the Hurrys and the numerous closely held businesses in which the Hurrys have a direct or indirect interest. 

7.  FINRA's executive leadership has shown nothing but callous disregard to entreaties to investigate and stop these reputational injuries. FINRA knows or should know that such reputational injuries inevitably interfere with the target's ability to stay in business by, among other things, causing a loss of essential banking relationships. On information and belief, this is the precise consequence Defendants have pursued through direct and indirect means utilizing tactics consistent with those relied on by the federal government in its Operation Choke Point. With no other recourse, the Hurrys and several of their businesses now seek relief in this Court.

FINRA Motion to Dismiss

In contrast to Plaintiffs' allegations, FINRA asserts that the Complaint is little more than a smokescreen attempting to cover up a history of serious misconduct under the guise of a purported victimization by a regulator seeking to protect the investing public. On January 9, 2015, Defendants filed their Motion To Dismiss, which sets forth the following in the "Introduction":  

This case is an attempt to interfere with an investigation by the Financial Industry Regulatory Authority, Inc. ("FINRA") into Scottsdale Capital Advisors Corporation ("SCA"), a broker-dealer and FINRA member, which is owned and operated by plaintiffs John and Justine Hurry (collectively, the "Hurrys"). [See First Amended Complaint ("FAC") at ¶¶ 2, 60, 72.] Although the Hurrys nominally brought this case on behalf of their businesses that are not FINRA members, this action challenges the manner in which FINRA exercised its regulatory authority during the investigation of SCA and the Hurrys. Indeed, this case is a thinly veiled attempt by the Hurrys to circumvent the fact that there is no private right of action against FINRA for alleged violations of FINRA's Rules or the Exchange Act. See Jablon v. Dean Witter & Co., 614 F.2d 677, 681 (9th Cir. 1980) ("No provision in the Securities Exchange Act explicitly provides for a private action for violations of stock association rules . . . [and] we conclude there is no implied right of action for [a FINRA] rule violation."); Sparta Surgical Corp. v. NASD, 159 F.3d 1209, 1212 (9th Cir. 1998) ("[T]here is no private right of action for breach of a self-regulatory organization's rules.").  

In November 2012, FINRA-which "has regulatory power, delegated from Congress through the [Securities and Exchange Commission (the "SEC")] in the Securities Exchange Act of 1934 ("Exchange Act"), over broker-dealer firms . . . and their registered associated persons"-made a "surprise onsite examination of SCA at its headquarters." [FAC at ¶ 72;] see Charles Schwab & Co., Inc. v. FINRA, 861 F. Supp. 2d 1063, 1065 (N.D. Cal. 2012). The onsite examination of SCA was part of an ongoing investigation by FINRA regarding potentially serious regulatory violations.  

As part of its onsite examination of SCA, FINRA issued what is known as a Rule 8210 Request for, among other things, the inspection and copying of computers in the Hurrys' possession. [See FAC at ¶¶ 79, 84, 86.] Pursuant to that Rule 8210 Request, FINRA copied the hard drives of computers located at SCA's offices, 7170 E. McDonald Drive, Suite 6, Scottsdale, Arizona 85253 (the "Copied Computers"). [See id. at ¶ 72, 101.] Plaintiffs argue that because the Copied Computers are purportedly owned by one of the Hurrys' other companies, Investment Services Corporation ("ISC"), FINRA somehow exceeded its regulatory authority by inspecting the Copied Computers. [See id. at ¶ 102.] But Rule 8210 permits FINRA to "inspect and copy the books, records, and accounts of [a] member or person [associated with a member] . . . [or] in such member's or person [associated with a member's] possession, custody or control." FINRA Rule 8210(a) (emphasis added). And the Copied Computers were plainly in the Hurrys' possession. [See FAC at ¶¶ 67-69 (admitting that "the Hurrys use the [Copied] Computers in the ISC Office . . . [and] the Hurrys access the [Copied] Computers remotely").]  

Plaintiffs also argue that FINRA should be deemed to have "hacked" the Copied Computers because the Hurrys provided FINRA access to those computers only after FINRA allegedly threatened to issue a Wells Notice.1 [See id. at ¶¶ 94-100.] But plaintiffs do not-and cannot-dispute that under the circumstances the issuance of a Wells Notice would have been well within FINRA's regulatory authority. Indeed, FINRA allegedly made reference to the issuance of a Wells Notice only after the Hurrys refused to comply with the Rule 8210 Request for the inspection of the Copied Computers and thereby prevented FINRA from conducting its investigation. [See id.] It was not until over nine months later that FINRA actually issued a Wells Notice to John Hurry, and plaintiffs concede it was unrelated to "any of the [allegations] in this Complaint." [See id. at ¶¶ 252-53.]  

Next, plaintiffs argue that FINRA's investigation of SCA and the Hurrys purportedly exceeded FINRA's regulatory authority because (1) a news outlet, Deal Pipeline, reported SCA's involvement with Biozoom and Mr. Hurry's negotiations to buy broker-dealer Wilson-Davis & Co., and (2) FINRA purportedly interfered with that transaction. [See id. at ¶¶ 240-45.] But a news outlet reporting on regulatory activity concerning a publicly traded company has no bearing on whether FINRA exceeded its regulatory authority. And despite their many allegations regarding the Wilson-Davis transaction, the plaintiffs do not contend such allegations form the basis for any of their claims for relief. [See, e.g., id. at ¶¶ 240-45, 328-33.] Yet plaintiffs still ask this Court to order FINRA to lift interim restrictions placed on the Wilson-Davis transaction and enjoin FINRA from placing any other restrictions on it-that is, they ask this Court to intervene in FINRA's regulatory activity without giving any reason for doing so.  

Instead of challenging FINRA's actions pursuant to the comprehensive administrative scheme, which the Hurrys were required to do by agreement, the Hurrys caused dozens of companies they control to file this action against FINRA and its employee, Scott Andersen ("Andersen"), and to demand, among other things, a preposterous $50 million in punitive damages. [See id. at p. 63.] That this action merely attacks the manner in which FINRA exercised its regulatory authority is further made plain by the fact that the relief plaintiffs seek includes, among other things, (1) an injunction precluding FINRA from investigating information contained on the Copied Computers, and (2) a judgment declaring "unlawful, arbitrary, and capricious" FINRA's restrictions on the sale of Wilson-Davis & Co., and requiring FINRA to remove such restrictions. [See id. at p. 62.]  

In addition to merely being an attack on FINRA's exercise of its regulatory authority, all the claims plaintiffs assert fail as a matter of law for multiple independent reasons, including because FINRA and Andersen are immune from any claim relating to FINRA's exercise of its regulatory authority, and because the Hurrys have failed to exhaust their administrative remedies. See Sparta, 159 F.3d at 1213 ("[A] party has no private right of action against [FINRA] for violating its own rules or for actions taken to perform its self-regulatory duties . . . ."); First Jersey Sec., Inc. v. Bergen, 605 F.2d 690, 695 (3d Cir. 1979) ("[I]t is Ďa long settled rule of judicial administration that no one is entitled to judicial relief for a supposed or threatened injury until the prescribed administrative remedy has been exhausted.'") (quoting Myers v. Bethlehem Shipbuilding Corp., 303 U.S. 41, 50-51 (1938)).

1 "A Wells Notice notifies the recipient that [FINRA] is close to recommending to the [SEC] an action against the recipient and provides the recipient the opportunity to set forth his version of the law or facts." SEC v. Internet Solutions for Business, Inc., 509 F.3d 1161, 1163 n.1 (9th Cir. 2007) (quotation omitted).

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Bill Singer's Comment

I have long argued that the SRO construct, which was promulgated in the late 1930s, has not kept pace in this age of high frequency trading, the rigging of FOREX and LIBOR, and an explosion in market manipulation and insider trading. Falling behind and failing to keep up is just not working. Among the reasons for this failure to timely detect and deter is the paleolithic and monolithic nature of Wall Street's self regulation, which has essentially been reduced to the Financial Industry Regulatory Authority ("FINRA"). Where some market pundits see benefits from the consolidation of regulatory oversight into FINRA, I see a regulatory monopoly that inhibits regulation and dampens innovation through a lack of competition.  A SRO landscape of FINRA and only FINRA is an unhealthy concentration of power.

I have had and continue to play multiple roles on Wall Street. In the early 1980s, I started out in the legal department of Smith Barney, Harris Upham & Co.  Thereafter, I became a regulatory attorney for both the American Stock Exchange and NASD (FINRA's predecessor). My next job was as an in-house lawyer for a mutual fund complex and investment advisory firm. Finally, I became a Series 7 and 63 registered representative and also entered the private practice of law, where I have represented industry participants, defrauded public investors, and, more recently, whistleblowers. On top of that background, I am an active investor and trader. Given the panoramic perspective of my three decade career, I understand and appreciate the concerns and interests of all market participants. My goal is not to further the influence of one interest group or market participant but to foster a more inclusive and effective regulatory regimen. For a more expansive explanation of my developing position, please read: 

SEC Commissioner Gallagher Says FINRA. Bill Singer Says Finito ( Blog, September 18, 2014)

Reappraising Self-Regulation: