FINRA Statement of Corrective Action Defamation Lawsuit Slams Brokerage Firm

February 5, 2016

Attendant to entering into an Acceptance, Waiver and Consent ("AWC") regulatory settlement with the Financial Industry Regulatory Authority ("FINRA"), respondents are permitted to attach to the formal AWC settlement agreement a Corrective Action Statement to demonstrate the steps taken by a respondent to prevent future misconduct subject to the understanding that such an attachment may not deny the charges or make any statement that is inconsistent with the AWC. The Corrective Action Statement does not constitute factual or legal findings by FINRA, nor does it reflect the views of FINRA or its staff.

Regular readers of the Blog know that I am no fan of Corrective Action Statements and rarely, if ever, advocate their use.  Given that the premise of an AWC is a settlement made without admitting or denying the findings, barring extreme circumstances, I don't understand why anyone would prepare a voluntary statement that tends to typically make admissions, promises to correct situations that have not necessarily been acknowledged, and, in the end, simply draws more undesired attention to the matter. If you feel compelled to attach a Corrective Action Statement, then you may want to pause before signing the AWC and ask yourself if you might not be better advised to argue your case before a Hearing Panel and, if necessary, on appeal afterwards.  A recent civil lawsuit now confirms the wisdom of my legal opinion.

Case In Point

On September 30, 2014, attorney F. Chet Taylor filed a civil lawsuit alleging Defamation Per Se against FINRA member firm Feltl and Company, Inc. F. Chet Taylor, Plaintiff, v. Feltl and Company, Inc. Defendant (Complaint, State Of Minnesota District Court, County of Hennepin, Fourth Judicial District, September 30, 2014). As set forth in the "Introduction" section of the Complaint:

1. Plaintiff F. Chet Taylor ("Taylor") has practiced law since 1988. In 1996, Jack Feltl hired Taylor as the general counsel for R.J. Steichen & Company, a Minneapolis-based securities firm. In 2002, Taylor returned to private practice. Also in 2002, defendant Feltl & Company ("F&C") was established. In 2008, F&C hired Taylor as its general counsel.  

2. In 2011, Taylor proposed to F&C that he return to full-time private practice, and handle F&C's legal matters as an outside attorney. F&C rejected the proposal, preferring to keep Taylor in his role as in-house general counsel. In August 2012, Taylor renewed his proposal, and F&C again rejected it, expressing its strong desire to keep Taylor in his role as in-house general counsel. Despite F&C's preference, Taylor voluntarily resigned from F&C's employment effective September 30, 2012 in order to focus his full-time efforts on his private law practice. F&C continued to send most of its arbitration work to Taylor after his resignation.

3. On August 14, 2014, F&C executed a settlement agreement with the Financial Industry Regulatory Authority ("FINRA"). The settlement was the result of certain deficiencies in F&C's "penny stock" business. F&C agreed to pay a fine of $1,000,000.00. Also as a part of the settlement, F&C issued the "Corrective Action Statement of Feltl & Company" in which F&C listed corrective measures it had taken to cure its penny stock deficiencies, including that "the firm has replaced the General Counsel . . . from the relevant period. The current Feltl employees occupying these positions will further enhance a culture of compliance at the firm."  

4. On September 4, 2014, the Wall Street Journal reported on F&C's penny stock settlement with FINRA:  

In a so-called corrective action statement attached to the enforcement action, the firm said it stopped recommending penny stocks after February 2012 and it no longer makes a market in any penny stock, but allows customers to trade in penny stocks if they initiate the transactions. The firm also said it replaced its general counsel, chief compliance officer, head trader, and a branch manager to beef up compliance. (Emphasis added.)  

5. In the Corrective Action Statement, F&C misrepresented the circumstances surrounding Taylor's voluntary resignation. Seeking to bolster its compliance image with FINRA and with the public, F&C claimed it had replaced Taylor as its general counsel as a remedial measure in response to the penny stock deficiencies. However, that statement was (and is) completely false.  

6. On September 25, 2014, the Minneapolis Star Tribune published an article on F&C's penny stock settlement, titled "Feltl execs out after penalty," reporting that:

Feltl & Co. replaced several executives, including its top lawyer, and paid a $1 million fine to settle a regulatory agency's finding that it failed to oversee a low-priced "penny stock" business. . . .The firm . . . replaced its general counsel . . . as a result of the [FINRA penny stock] investigation. (Emphasis added.)

7. Taylor's reputation in the legal and investment communities has been seriously damaged as a result of the false statements in F&C's Corrective Action Statement.

Taylor asserted in the Complaint that:

27. Taylor's decision to resign his employment at F&C was 100% voluntary, and had
nothing whatsoever to do with any perceived deficiencies in his job performance. F&C
management never even hinted that there were any concerns about Taylor's job performance. That F&C continued to send Taylor most of its arbitration work establishes that F&C was satisfied with Taylor's performance when he served as its general counsel. 
. . . 

34. In the corrective action statement, F&C misrepresented the circumstances surrounding Taylor's voluntary resignation from F&C. Seeking to bolster its compliance image with FINRA and with the public at large, F&C claimed it had replaced Taylor as its general counsel as a remedial measure in response to the penny stock deficiencies. However, that statement was (and is) completely false. 
. . .

44. Although F&C's corrective action statement does not identify Taylor by name as F&C's former general counsel, a substantial number of people who work in either the investment industry or the Twin Cities legal community know that Taylor is the individual whom F&C supposedly replaced as its general counsel.

Post-Trial Settlement

As reported in "Lawyer securies $850K defamation settlement from ex-client" (Minnesota Lawyer, by Mike Mosedale, February 4, 2016), 8 jurors found that Plaintiff Taylor had been defamed and awarded him $600,000 in compensatory damages. Prior to the jury's finishing their deliberations as to the issue of awarding punitive damages, the parties settled all claims for $850,000. As more fully explained in the Minnesota Lawyer article, considerations as to the vagaries of appeal prompted both parties to enter into the somewhat unusual resolution of a post-trial settlement. I urge you to read the Minnesota Lawyer article for an excellent presentation of the trial and appellate issues.

Bill Singer's Comment

If you conclude that the costs and/or risks of contesting the charges aren't worth it, then just sign the damn AWC and get over it. There's no need whatsoever to engage in a post-game, public analysis. Some think that this after-the-fact statement gives you a parting shot at unfair regulation or an opportunity to put your own spin on the matter. I would suggest that you simply avoid the temptation. Keep in mind that a Corrective Action Statement may actually set you and your firm up for heavier sanctions down the road if you acknowledge wrongdoing and propose a set of remedial actions.  If during subsequent examinations, a regulator finds that you engaged in similar misconduct to that discussed in the statement, or, it is alleged that you failed to  implement the promised revised policies and procedures, your own words may prove blunt instruments used to beat you into submission. Notwithstanding my opinion, Feltl and Company apparently determined that it was advisable to submit a Corrective Action StatementHow'd that work out for you?

READ the "Corrective Action Statement" Archive