Federal Court Transmogrifies FINRA Into State Criminal Prosecutor

December 13, 2019

Just for the hell of it, let's re-visit the issue of whether the Financial Industry Regulatory Authority ("FINRA") is a government agency -- even when it collaborates or cooperates with a government agency or in a government investigation. 

In the Matter of Michael Nicholas Romano (SEC)

In the Matter of the Application of Michael Nicholas Romano For Review of Disciplinary Action Taken by FINRA (Opinion, Securities and Exchange Commission, '34 Act Rel.No. 76011, Admin. Proc. File No. 3-15978  / September 29, 2015)
http://www.sec.gov/litigation/opinions/2015/34-76011.pdf, the SEC explained that [Ed: highlighting added]:

Romano argues that the similar subject matter and close timing of the criminal charges against him and the FINRA information request show that FINRA engaged in state action. But we have held that "general collaboration or cooperation between the SRO and a government agency" does not demonstrate state action in the absence of "evidence suggesting an 'interdependence' between the government investigations and the SRO's [information] requests." 25 Romano also suggests that our "close oversight of SROs" and what Romano describes as "quasi-governmental powers" that FINRA exercises support his claim of state action, but reviewing courts have rejected similar claims.26 Further, it is well established that close timing of FINRA and government investigations by themselves do not establish state action.27

= = =

Footnote 25: Michael Sassano, Exchange Act Release No. 58632, 2008 WL 4346410, at *9 (Sept. 24, 2008).

Footnote 26: Courts have generally found that self-regulatory organizations, including FINRA's predecessor, NASD, are not inherently state actors based on their regulatory function, even where evidence suggests some degree of governmental cooperation in its investigations. See, e.g., D.L. Cromwell, 279 F.3d at 162-63.

Footnote 27: See, e.g., id. (declining to find state action based on the fact that Rule 8210 requests "followed shortly after individual appellants contested grand jury subpoenas" and that NASD" refused to delay the Rule 8210 interviews until after completion of the . . . criminal investigation"); Sassano, 2008 WL 4346410, at *7 (finding that "the timing of the actions in the simultaneous regulatory investigations is insufficient to prove a 'causal connection between the requests for testimony' in the separate investigations").

As the Securities and Exchange Commission has opined, FINRA is not a government actor. Just going by the SEC's own words in Romano, FINRA is not engaged in "state action" and is "not inherently" a state actor notwithstanding "some degree of governmental cooperation in its investigations." 

In the Matter of Michael Earl McCune (SEC)

In 2016, the SEC tackled the other side of the coin by reiterating that FINRA is a private actorIn the Matter of the Application of Michael Earl McCune For Review of Disciplinary Action Taken by FINRA (Opinion, Securities and Exchange Commission, /34 Act Rel.No. 77375; Admin. Proc. File No. 3-16768  / March 15, 2016) 
https://www.sec.gov/litigation/opinions/2016/34-77375.pdf, we have this unequivocal finding as set forth in Footnote 57[Ed: highlighting added]:

McCune argues that the sanctions imposed by FINRA conflict with the Eighth and Fourteenth Amendments of the U.S. Constitution because they constitute an excessive fine and violate due process. FINRA is a private actor and not a state actor subject to constitutional requirements. See D.L. Cromwell Invests., Inc. v. NASD Regulation, Inc., 279 F.3d 155, 161-62 (2d Cir. 2002) (holding that NASD, FINRA's predecessor, was not a state actor and thus was not subject to the requirements of the Fifth Amendment); Desiderio v. Nat'l Ass'n of Sec. Dealers, Inc., 191 F.3d 198, 206-07 (2d Cir. 1999) (rejecting plaintiff's claim that NASD violated her rights under the Fifth and Seventh Amendments because NASD was a private actor, not a state actor.

In the Matter of Robert R. Tweed (FINRA NAC)

Literally the other day, FINRA's own National Adjudicatory Council penned these very words in In the Matter of Department of Enforcement, Complainant, v. Robert R. Tweed, Respondent(FINRA National Adjudicatory Council Decision, Complaint No. 2015046631101 / December 11, 2019)

Tweed argues that the Hearing Panel erred in finding that the statute of limitations does not apply because, according to Tweed, "FINRA disciplinary decisions are appealable to the Securities and Exchange Commission and the United States Courts of Appeal[s], which make them governmental or, at the very least, quasi-governmental actions subject to "the statute of limitations. The SEC previously has considered and rejected this argument, finding that FINRA is not a governmental entity and therefore not bound by any statutory limitations period. See, e.g., William J Murphy, Exchange Act Release No. 69923, 2013 SEC LEXIS 1933, at *92-93 (July 2, 2013) ("But [Section] 2462 does not apply to FINRA disciplinary proceedings because FINRA is not a government entity. Indeed, we have repeatedly held that 'the disciplinary authority of private self-regulatory organizations (`SROs') such as [FINRA] is not subject to any statute of limitation."), aff'd sub nom. Birkelbach v. SEC, 751 F.3d 472 (7th Cir. 2014). 

at Page 11 of the NAC Decision

As such, it would seem a fairly straight-forward and established proposition that FINRA is a private actor and not a federal/state government agency. For those who harbor ANY doubts, consider that in Tweed, FINRA repeats twice that FINRA is not a governmental or government entity.

Except . . . 

Dicken v. Brewer (EDMI)

Every so often life and the law throw you a curveball. A nasty one. One that starts at 12 o'clock and breaks to 6 o'clock. One that you see as here but by the time you swing, it's there. As set forth in the Syllabus in Shawn Kristi Dicken, Petitioner, v. Shawn Brewer, Respondent  (Opinion and Order, United States District Court for the Eastern District of Michigan, 19-CV-11676)

Shawn Kristi Dicken, ("Petitioner"), confined at the Huron Valley Women's Correctional Facility in Ypsilanti, Michigan, filed a petition for a writ of habeas corpus pursuant to 28 U.S.C. § 2254 through her attorney F. Randall Karfonta. Petitioner challenges her conviction for conducting a criminal enterprise, Mich. Comp. Laws § 750.159i(1); embezzlement from a vulnerable adult, $50,000 or more but less than $100,000, Mich. Comp. Laws § 750.174a(6)(a); and seven counts of obtaining money by false pretenses, $1,000 or more but less than $20,000, Mich. Comp. Laws § 750.218(4)(a). Petitioner was sentenced to concurrent prison terms of 140 months to 20 years for the criminal enterprise conviction, 23 months to 5 years for each false pretenses conviction, and 71 months to 15 years for the embezzlement conviction. For the reasons that follow, the petition for writ of habeas corpus is DENIED WITH PREJUDICE.

As set forth in part in the EDMI Opinion/Order [Ed; emphasis added]:

Petitioner seeks a writ of habeas corpus on the following grounds: 

I. In a fraud case where the issue was Defendant's disclosure to clients and unlawful and illegal intent, Defendant was denied fundamentally fair discovery of the investigation of the business entities in the case including a clearly intentionally and important Brady v Maryland violation. 

II. Improper expert opinion as to evidence that "is not a defense" and opinion as to the meaning of federal statu[t]es and regulations is plain error[.] 

III. Recordings of Shawn Dicken's testimony before the FINRA state investigative agency are required evidence showing her lack of intent to defraud. 

IV. Where the charge is embezzlement from a vulnerable adult, prosecutorial arguments and evidence that the power of attorney in the case was the equivalent of legal incapacity denied Defendant a fair trial and due process of law. 

The FINRA state investigative agency! 

The FINRA state investigative agency? 

Frankly, I'm not quite sure what to even make of that characterization, which is repeated in the EDMI Opinion as follows [Ed: emphasis added]:

Petitioner next contends that the trial judge violated her right to present a defense when he refused to allow defense counsel to play petitioner's entire seventy five minute tape recorded interview with state investigators with the Financial Industry Regulatory Authority [FINRA]. Petitioner claims that this tape recording would show that she cooperated with state investigators, so as to negate any criminal intent on her part. Petitioner also claims that the statements that she made during the interview showed that she did not have the intent to defraud her victims.

I'm hoping that someone -- either Petitioner Dicken and/or her lawyer and/or District Court Judge Denise Page Hood -- realizes that FINRA is not a state agency and that there are no "state investigators" employed at FINRA. It may be that FINRA worked with state investigators, but that is not the same as asserting that FINRA is a state investigative agency. Y'all remember that SEC language about how general collaboration or cooperation between the SRO and a government agency" does not demonstrate state action in the absence of "evidence suggesting an 'interdependence' between the government investigations and the SRO's [information] requests.

The difference between a "state" agency and a "self-regulatory" organization may not be all that material in EDMI's deliberation about Dicken's Point III basis for appeal because the dispute was over whether all 75 minutes of a tape-recorded FINRA interview should have been played in court. On the other hand, consider this commentary in the EDMI Opinion/Order about the Michigan state court's evidentiary ruling [Ed: emphasis added]:

[D]efendant sought to admit the 75-minute recording of her interview with state investigators during an investigator's testimony in order to show that she cooperated with investigators. She also asserted that the evidence could support a conclusion that she lacked the intent to commit a crime at the time the alleged offenses occurred. The trial court expressed concern about confusion of the issues, and on that basis, denied defendant's request to play the entire recording. Although the trial court added that defendant could play portions of the recording for impeachment purposes, defendant made no attempt to do so. . . .

at Pages 18 - 19 of the EDMI Opinion/Order

Her "interview with state investigators?" If the tape is of a FINRA on-the-record interview ("OTR"), how did that get transformed into an interview with state investigators? Were state investigators participating in the FINRA OTR? If so, was Dicken informed of that and did she object to the mixing of state and SRO investigations at the same time? 

As to the substantive evidentiary issue pertaining to Dicken's argument about the unreasonableness of the state trial court's exclusion of the entire FINRA tape, EDMI found, in part, that:

It was not unreasonable for the state trial court to exclude, as more prejudicial than probative, the playing of the entire 75-minute tape recording. The purpose of playing the entire tape recording was to show that petitioner was cooperative. Petitioner was not prevented from presenting evidence that she cooperated with the authorities and that she lacked the intent to defraud her victims. The investigator admitted at trial that petitioner had been cooperative during the interview and had provided a written statement. Petitioner testified on her own behalf at trial and denied intending to defraud the victims. The contents of petitioner's tape recorded interview would have been cumulative to other evidence presented at trial that petitioner did not intend to defraud the victims and that she had cooperated with authorities; the exclusion of this evidence did not violate petitioner's her right to present a defense. See Washington v. Renico, 455 F.3d 722, 728-29 (6th Cir. 2006). 

Finally, the trial judge did not prevent the defense from playing portions of the taped interview for impeachment purposes, but defense counsel chose not to do so. Petitioner cannot convert a tactical decision not to introduce evidence into a constitutional violation of the right to present evidence generally. See Rodriguez v. Zavaras, 42 F. Supp. 2d 1059, 1150 (D. Colo. 1999); See also State v. Flood, 219 S.W. 3d 307, 318 (Tenn. 2007)("Generally, the right to present a defense is not denied when a defendant does not pursue a line of questioning during cross-examination"). 

To the extent that petitioner claims that counsel was ineffective for failing to introduce petitioner's testimony from FINRA, she would not be entitled to relief. Petitioner's testimony at FINRA was identical to her trial testimony, in which she denied any intent to defraud her victims. Petitioner was not prejudiced by counsel's failure to introduce petitioner's testimony from FINRA because it was cumulative of other evidence in support of petitioner's claim that she did not intend to defraud the victims. . . .

at Pages 21 -22 of the EDMI Opinion/Order

Bill Singer's Comment: 

Puhlease . . . don't get me wrong here. I am NOT at all sympathetic to Dicken, and it seems from the allegations and findings that she was guilty of some horrific crimes. On the other hand, what the hell is this nonsense about FINRA being a state governmental agency? Is this a mere typo by the federal Court? Did something actually transpire by which FINRA was transmogrified from a mere SRO into a state agency? Did something actually transpire by which an important line was crossed, and FINRA, a non-governmental actor with no criminal enforcement powers, was deemed to be standing in the shoes of a state prosecutor? How's that impact so-called Grand Jury secrecy?

Whatever the explanation, what's written in the EDMI Opinion/Order doesn't make sense. And don't blame me: I didn't write any of that stuff. I've highlighted it for you to see. It's coming from the Court's own quill. I'm thinkin' that the Court threw us a spitter.