Federal Court Dismisses Challenge to Six Year Old FINRA AWC

November 11, 2020

Today's blog features a 2012 FINRA AWC. No, that's not a typo. Like I said, the regulatory settlement was executed in 2012. The sanctions imposed were a fine and one-month suspension. For whatever reasons, the Respondent had buyer's remorse. His anger with the AWC stewed and simmered in him until 2018, when he sued to have the settlement undone. The case raised a number of interesting and fascinating issues. See what you think.

The 2012 FINRA AWC

For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Jeffrey Arthur Cashmore submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Jeffrey Arthur Cashmore, Respondent (FINRA AWC 2010023393501 / October 2, 2012) 

The AWC alleges that Cashmore was first registered in 1989 and by 1994, he was registered with FINRA member firm LPL Financial, LLC. The AWC asserts that Cashmore "has no FINRA disciplinary history." As asserted in the "Overview" section of the AWC:

Cashmore prepared and distributed misleading sales literature to his customers and prospective customers. He also failed to retain copies of that sales literature. This conduct violated NASD Conduct Rules 2210(b)(2)(A), 2210(d)(1)(A), 2210(d)(1)(B) and 2110 and FINRA Rule 2010. 

In accordance with the terms of the AWC, FINRA imposed upon Cashmore a $5,000 fine and a one-month suspension from association with any FINRA member firm in any capacity. Consistent with FINRA's AWC protocol extant in 2012 and consistent with current practice, the Cashmore AWC contained the following:


I specifically and voluntarily waive the following rights granted under FINRA's Code of Procedure: 

A. To have a Complaint issued specifying the allegations against me; 

B. To be notified of the Complaint and have the opportunity to answer the allegations in writing; 

C. To defend against the allegations in a disciplinary hearing before a hearing panel, to have a written record of the hearing made and to have a written decision issued; and 

D. To appeal any such decision to the National Adjudicatory Council ("NAC") and then to the U.S. Securities and Exchange Commission and a U.S. Court of Appeals.

Further, I specifically and voluntarily waive any right to claim bias or prejudgment of the General Counsel, the NAC, or any member of the NAC, in connection with such person's or body's participation in discussions regarding the terms and conditions of this AWC, or other consideration of this AWC, including acceptance or rejection of this AWC. 

I further specifically and voluntarily waive any right to claim that a person violated the ex parte prohibitions of FINRA Rule 9143 or the separation of functions prohibitions of FINRA Rule 9144, in connection with such person's or body's participation in discussions regarding the terms and conditions of this AWC, or other consideration of this AWC, including its acceptance or rejection

Consistent with 2012 protocols and as largely extant today, the AWC contains this further language:

C. If accepted: 

1. this AWC will become part of my permanent disciplinary record and may be considered in any future actions brought by FINRA or any other regulator against me; 

2. this AWC will be made available through FINRA's public disclosure program in response to public inquiries about my disciplinary record; 

3. FINRA may make a public announcement concerning this agreement and the subject matter thereof in accordance with FINRA Rule 8313;

4. I may not take any action or make or permit to be made any public statement, including in regulatory filings or otherwise, denying, directly or indirectly, any finding in this AWC or create the impression that the AWC is without factual basis. I may not take any position in any proceeding brought by or on behalf of FINRA, or to which FINRA is a party, that is inconsistent with any part of this AWC. Nothing in this provision affects my right to take legal or factual positions in litigation or other legal proceedings in which FINRA is not a party; and . . .

I certify that I have read and understand all of the provisions of this AWC and have been given a full opportunity to ask questions about it; that I have agreed to its provisions voluntarily; and that no offer, threat, inducement, or promise of any kind, other than the terms set forth herein and the prospect of avoiding the issuance of a Complaint, has been made to induce me to submit it.. 

The 2012 Cashmore AWC was signed off by both Respondent Cashmore and his legal counsel. Frankly, as the song goes: sign, sealed, delivered, I'm yours. Except, with the passage of time, maybe not so much.. 

2018: New York State Supreme Court Petition

On October 1, 2018, Cashmore filed a Petition in the New York State Supreme Court seeking a Declaratory Judgment that his entry into the 2012 AWC was unconscionable, and, additionally, that the Court should issue a permanent injunction against the continued publication of the AWC on FINRA's online BrokerCheck. 

Removal to WDNY

In response to that NYS Petition, FINRA filed a Notice of Removal to the United States District Court for the Western District of New York ("WDNY") citing federal question jurisdiction based upon the invocation of federal district court jurisdiction as set forth in the Securities Exchange Act. Further, FINRA filed a Motion to Dismiss arguing that WDNY lacked subject matter jurisdiction because the Securities Exchange Act exclusively provides for whatever judicial relief is available.  Jeffrey A. Cashmore, Plaintiff, v. Financial Industry Regulatory Authority, Defendant (Decision and Order, 18-CV-1198S / November 9, 2020)

A Matter of Jurisdiction

In framing the respective positions before it, WDNY characterizes Cashmore's positions, in part, as asserting that the Court:

has jurisdiction over this contract dispute because Congress did not provide administrative relief for a contract dispute such as this (Docket No. 13, Pl. Memo. at 8). He denies that exhaustion of administrative remedies is applicable (id. at 9-11, 12-13 (exception for exhaustion requirement from undue prejudice or doubts that agency is empowered to grant relief)). Plaintiff denies that he is seeking review of a final disciplinary sanction; this action seeks contract relief (id. at 10-11). Plaintiff alternatively claims that the AWC is defamatory and, under FINRA's own rules, it should not be released "potentially defamatory language" in the BrokerCheck (id. at 13), FINRA Rule 8312(d). Plaintiff denies that absolute immunity extends to a declaratory judgment (which he seeks) but only applies to preclude monetary damages (id. at 14-15).

at Pages 7 - 8 of the WDNY Decision [Ed: "it should not be released" [sic] in the Decision]

Absolute Immunity

In response to Cashmore's arguments, FINRA essentially asserted that it has:

absolute immunity as a securities regulator, D'Alessio v. New York Stock Exchange, 258 F.3d 93, 105 (2d Cir. 2001) (Docket No. 4, Def. Memo. at 10-11). Defendant raises other defenses, such as the lack of subject matter jurisdiction because Plaintiff has not exhausted his administrative remedies and Plaintiff had no legal right to expungement or vacatur of the six-year-old securities disciplinary record (id. at 9-10, 13- 15).

. . .

[P]laintiff seeks to vacate a FINRA disciplinary action (Docket No. 14, Def. Reply Memo. at 1). Congress did intend an exclusive review scheme (by appeal to the SEC then judicial review of the Commission's decision) for challenged FINRA discipline (id.). Plaintiff's execution of the AWC here waived Plaintiff's right to review to the SEC. Plaintiff's choice to settle in 2012 does not create a cause of action in this Court in 2018. (Id. at 3.) 

FINRA also invokes its absolute immunity for injunctive and declaratory relief as well as against damages (id. at 4), see Buscetto, supra, 2012 WL 1623874, at *4. Finally, FINRA Rule 8312 exists to provide information to the investing public about past and present securities representatives by disclosing their records (id. at 7; see also Docket No. 4, Def. Memo. at 5).

at Pages 7 and 8 of the WDNY Decision

WDNY Grants FINRA's Motion to Dismiss

In granting FINRA's Motion to Dismiss, WDNY solely bases its ruling on a finding that FINRA is absolutely immune in the matters presented, and the Court declines to address the defenses of exhaustion of administrative remedies, lack of a private right of action, lack of right to expungement of the BrokerCheck, and the effect of the release provisions of the AWC). Pointedly, WDNY finds that:

FINRA as a self-represented organization enjoys absolute immunity "because they perform a variety of vital governmental functions, but lack the sovereign immunity that governmental agencies enjoy . . . [FINRA is] protected by absolute immunity when they perform their statutorily delegated adjudicatory, regulatory, and prosecutorial functions," Empire Financial Group, Inc. v. Financial Indus. Regulatory Auth., Inc., No. 08-80534- CIV, 2009 WL 10644856, at *6 (S.D. Fla. June 15, 2009) (quoting Weissman v. Nat'l Ass'n of Secs. Dealers, Inc., 500 F.3d 1293, 1296 (11th Cir. 2007)); D'Alessio, supra, 258 F.3d at 104; Buscetto, supra, 2012 WL 1623874, at *4 n.4 (Docket No. 14, Def. Reply Memo. at 4). FINRA "stands in the shoes of the SEC in interpreting securities laws for its members and in monitoring compliance with those laws," D'Alessio, supra, 258 F.3d at 105. The Second Circuit in D'Alessio notes " 'absolute immunity is particularly appropriate in the unique context of the self-regulation of the national securities exchanges,' " 258 F.3d at 105 (quoting Barbara v. New York Stock Exchange, 99 F.3d 49, 59 (2d Cir. 1996), abrogated on other grounds, Merrill Lynch Pierce, Fenner & Smith Inc. v. Manning, 578 U.S. ___, 136 S.Ct. 1562, 1567 & n.1, 194 L.Ed2d 671 (2016)

Here, FINRA is performing the regulatory functions of disciplining its members, representatives, and associates, and maintaining and publishing reports of final disciplinary action of a former and present representative. All of this is pursuant to its statutory mandate to inform the investing public about a representative whom they intend to transact business with, 15 U.S.C.§ 78o-3(i); see also North v. Smarsh, Inc., 160 F. Supp. 3d 63, 87-88 (D.D.C. 2015) (FINRA enjoys absolute immunity when it pursues disciplinary cases against registered representative in securities industry, "that is precisely what Congress intended FINRA to do").

at Pages 9 - 10 of the WDNY Decision

Having established that FINRA's cited conduct was within its regulatory role and, as such, fell under the doctrine of absolute immunity, WDNY further considers the ramifications of Cashmore's entry into the AWC at issue:

FINRA's absolute immunity is not restricted by the type of claims asserted against it by Plaintiff herein. Absolute immunity also is not limited to damages claims as argued by Plaintiff (but cf. Docket No. 13, Pl. Memo. at 14-15). This immunity also covers declaratory or injunctive relief. 

Plaintiff Cashmore here waived SEC and judicial review of his discipline by signing the AWC. Without this agreement, Plaintiff faced administrative proceedings before FINRA where, if Plaintiff lost, he had appeal rights to the SEC and judicial review of the Commission's decision to the United States Court of Appeals. Plaintiff's execution of the AWC waived both sources of review. 

Plaintiff's objection is that this 2012 discipline remained on FINRA's database in 2018, as required by securities law and FINRA's rules. Plaintiff does not seek to register with FINRA. Instead, he is registered with the SEC (Docket No. 1, Pet. at 5). 

Even if this Court were to have jurisdiction over FINRA and this matter, Plaintiff puts forth his challenge to a securities regulation under state contract law. State contract law does not apply to Plaintiff's obligations under securities law, see United States v. Williams, 864 F. Supp. 305, 311-12 (E.D.N.Y. 1994) (case not governed by contract law because conditions imposed arise from statutory directive for the National Health Service Corps Scholarship Program); Rendleman v. Bowen, 860 F.2d 1537, 1541-42 (9th Cir. 1988) (Docket No. 4, Def. Memo. at 14). As noted by the Ninth Circuit in Rendleman in discussing the National Health Service Scholarship, "in passing the statute, Congress intended to implement certain public policy goals by conditioning receipt of scholarship aid upon compliance by the recipient with federal statutory and administrative directives," 860 F.2d at 1541, these conditions "do not arise from a negotiated agreement between the parties; rather, they are provided for in the statute. Statutory intent, therefore, is more relevant to the interpretation of these conditions than are common law contract principles," id. at 1541-42. Similarly, the Securities Exchange Act and securities regulations set forth directives that are more relevant than contract law. 

This Court is not the proper forum, and six years after entering the AWC is not the proper time, to undo the effects of Plaintiff's decision to sign the AWC. Defendant's Motion to Dismiss (Docket No. 4) is granted.

at Pages 11 - 12 of the WDNY Decision

Bill Singer's Comment

Despite a number of long-standing disagreements with the appropriateness and extent of the doctrine of absolute immunity as it is often applied to FINRA, which is not a government regulator but, at best (or worst) a self-regulatory-organization, I appreciate a well-crafted and well-drafted Opinion, which is what WDNY produced.  Respectfully, I disagree with a number of the Court's assumptions and findings but accept the sincerity of same.

Unfortunately, the old law school maxim has held sway in Cashmore; namely, that: Bad facts make bad law. Although I empathize with Cashmore and understand the nature and source of his grievances about the AWC and FINRA's regulatory-settlement process, the inescapable fact is that WDNY has fairly highlighted one of the key problems with his appeal: "six years after entering the AWC is not the proper time, to undo the effects of Plaintiff's decision to sign the AWC." Ultimately, better late than never doesn't always carry the day with courts. 

Also READ: 

Ballad of a FINRA Man (BrokeAndBroker.com Blog / October 15, 2020)

Federal Court Transmogrifies FINRA Into State Criminal Prosecutor (BrokeAndBroker.com Blog / December 13, 2019)

FINRA Schrodinger Cat Is Dead, Alive, And A Zombie (BrokeAndBroker.com Blog /  November 7, 2017)

Federal Appeals Court Deems FINRA Deputy Of The Federal Government (BrokeAndBroker.com Blog / November 6, 2017)

Fired Bankers' Job Prospects Fade With Firms Under Pressure to Cut Costs (Bloomberg by Elaine Chen)

Federal Court Dismisses Challenge to Six Year Old FINRA AWC (BrokeAndBroker.com Blog)

San Antonio Businessman Brian Alfaro Sentenced to Ten Years in Federal Prison on Mail Fraud Charges (DOJ Release)

CoConspirator Sentenced to 10 Years' Imprisonment in Multi-Million Dollar Investment Fraud Scheme that Victimized Professional Hockey Players and Long Island Investors (DOJ Release)

Former Financial Advisor Sentenced to 6 Years in Federal Prison for His Role in Scheme to Defraud Investors Out of $3.5 Million (DOJ Release)

In the Matter of Alexandre S. Clug, Aurum Mining, LLC, PanAm Terra, Inc., and the Corsair Group, Inc. (SEC Opinion and Order)

In the Matter of William J. Sears (SEC ALJ Initial Decision)

FINRA Imposes Censure and Fine on Member Firm for Failed Research Report Disclosures
In the Matter of Citigroup Global Markets, Inc., Respondent (FINRA AWC)