Three-Handed Dilemma Grabs NYAG, NYPPEX, Laurence Allen, and FINRA

March 1, 2022

Every so often, we are confronted with what I call the "three-handed dilemma" -- you know, when you start with "on the one hand," and then go to "on the other hand," and then find yourself compelled to note another "on the other hand." In an unfolding drama involving a private equity fund manager, the New York State Attorney General, a FINRA registered person, and FINRA, we are quickly running out of hands. On the one hand, we started with the NYAG's victory in a private-equity-fund fraud case. On the other hand, the defendants have appealed the court Order in the NYAG's case. On the other hand, FINRA stepped into the fray with some apparent justification but not without some questionable conduct of its own. Which then prompted a series of on the other hands when FINRA found itself in state court and then federal court and then back in state court. 

February 2021: NYAG Wins "Major Victory" Against Allen, ACP, and NYPPEX

NEW YORK - New York Attorney General Letitia James yesterday scored a major victory for investors defrauded by a private equity fund manager who misappropriated millions of dollars in investor assets. Yesterday afternoon, New York County State Supreme Court Justice Barry R. Ostrager found the defendants - fund manager Laurence Allen; ACP Investment Group, LLC; NYPPEX Holdings, LLC; ACP Partners X, LLC; and private equity fund ACP X, LP - liable for defrauding investors in ACP X, ordering Allen and the various corporate entities he controls to pay nearly $7 million in relief, in addition to appointing a receiver (a neutral third-party) tasked with winding down the fund so that investors can no longer be defrauded.

"This decision shows that corporate greed never pays," said Attorney General James. "For years, Laurence Allen bilked investors out of millions of dollars and used this investment fund like his private piggy bank. With this decision, we are delivering nearly $7 million in relief to those who were defrauded and winding down this fund to finally end this fraudulent scheme. My office will continue to use every tool at its disposal to stop this type of illegal activity, as we seek to protect investors from the self-dealing of financial fraudsters."

In the decision, Justice Ostrager found that Allen and the "maze of entities" he owned and controlled defrauded ACP X's investors by making "hopelessly conflicted" investments of fund assets in NYPPEX Holdings, the holding company for Allen's own struggling broker-dealer. This deception was contrary to Allen's promises and repeated representations to investors.

Further, the court found that NYPPEX Holdings "utilized these funds to pay Allen exorbitant NYPPEX annual salaries, totaling approximately $6 million, as well as to pay the salaries of his staff" rather than paying those returns to investors. Allen and the defendants under his control also fraudulently profited by taking millions of dollars in carried interest to which they were not entitled, and by wrongfully causing ACP X to cover NYPPEX Holdings' operating expenses.

Justice Ostrager found that the evidence "revealed a shocking level of self-dealing, breaches of fiduciary duty, misappropriation of enormous sums of ACP capital, and outright fraud."

In light of these facts, the court ordered Allen and the other defendants to disgorge approximately $7 million of ill-gotten gains, appointed a receiver to wind down the fund and protect investors' remaining assets, and ordered additional injunctive relief to prevent future fraud.

The decision marks the first time that a court has addressed the question of whether the six-year statute of limitations for New York's Martin Act - passed by the state legislature in 2019 - applies retroactively, finding that it does. . . .

October 2021: NYS Appellate Division Dismisses Defendants' Appeal

The People of the State of New York, by Letitia James, Attorney General of the State of New York, Plaintiff-Respondent, v. Laurence G. Allen et al., Defendants-Appellants, NYPPEX, LLC, et al., Relief Defendants-Appellants (Opinion, NYS Appellate Division/First Department / October 21, 2021)
Following Defendants appeal of the NYS Supreme Court's Order to the NYS Appellate Division, the appellate court found in part that:

Judgment, Supreme Court, New York County (Barry R. Ostrager, J., after a nonjury trial), entered May 4, 2021, against defendants and relief defendants in plaintiff's favor, unanimously affirmed, without costs. Appeals from orders, same court and Justice, entered on or about February 4 and June 30, 2020, and February 4 and 26 and March 18, 2021, unanimously dismissed, without costs, as subsumed in the appeal from the judgment.

Plaintiff Attorney General of the State of New York commenced this action after a multiyear investigation into allegations that defendant Lawrence G. Allen misappropriated millions of dollars of investor funds for his own personal enrichment and that he and the corporate defendants acting under his control made various misrepresentations to investors. After a nonjury trial the court found in favor of plaintiff on claims alleging securities fraud under the Martin Act, repeated and persistent fraud and illegality in violation of Executive Law § 63(12), and common-law breach of fiduciary duty to investors.

Defendants' argument that plaintiff's claims are usurped by federal law is unavailing. Neither the Securities Litigation Uniform Standards Act (15 USC §§ 77p & 78bbb) nor the National Securities Markets Improvement Act (15 USC § 77r[a][1][A]) preempts plaintiff's claim under the Martin Act (General Business Law art 23-A, § 352 et seq.)(see People v Greenberg, 95 AD3d 474, 480-482 [1st Dept 2012], affd 21 NY3d 439 [2013]). Further, the Martin Act applies, even though this action involves only about 75 investors (see People v Landes, 84 NY2d 655, 659, 663-664 [1994] [Martin Act applied when 12 individuals invested an aggregate of $100,000 in defendant's venture]).

Defendants also contend that a three-year statute of limitations governs the Martin Act claim, that the offending conduct falls outside that three-year period, and that therefore the Martin Act claim is time-barred. This argument is similarly unavailing. Since August 26, 2019, CPLR 213(9) has stated that a six-year statute of limitations governs "an action by the Attorney General pursuant to" the Martin Act or Executive Law § 63(12). Plaintiff commenced the instant action on December 4, 2019, well within the six-year limitations period.

Defendants' contention that CPLR 213(9) should not be applied retroactively ignores the fact that this court applied a six-year statute of limitations to Martin Act claims during the period of defendants' offending conduct. In 1992, this Court held that a six-year statute of limitations applied to Martin Act claims (see State of New York v Bronxville Glen I Assoc., 181 AD2d 516 [1st Dept 1992]). However, on June 12, 2018, the Court of Appeals held that Martin Act claims are governed by a three-year statute of limitations (id. at 626, 632-633). The legislature swiftly reacted by passing CPLR 213(9) (see e.g. Matter of Gleason [Michael Vee, Ltd.], 96 NY2d 117, 122-123 [2001]) and instructed that the statute take effect immediately[*2].

. . .

In any event, the complaint is not limited to the Martin Act claim; it also includes claims for breach of fiduciary duty and violation of Executive Law § 63(12). The latter concerns "persistent fraud or illegality in the carrying on, conducting or transaction of business." Allen's statement in July 2015 about the investments that the Partnership would make during the wind-down period was made in the conducting of business.

. . .

The trial court's evidentiary rulings were provident exercises of discretion. Thus, the court properly refused to allow one of defendants' experts to testify on redirect as to matters that were outside the scope of his direct testimony (see e.g. People v Lee, 96 NY2d 157, 162 [2001]). The court also properly refused to allow defendants to use a document that they had not previously disclosed (see Calabrese Bakeries, Inc. v Rockland Bakery, Inc., 139 AD3d 1192, 1194 [3d Dept 2016]). We note that, although the court did not allow defendants to use the spreadsheet, it did allow Mr. Allen to testify at length about the returns to the limited partners. Thus, defendants were not prejudiced by the absence of a spreadsheet detailing the returns for each limited partner. Additionally, the letter from the Financial Industry Regulatory Authority was properly used to attack the credibility of a statement that Allen had made in his direct testimony affidavit (see generally People v Post, 235 AD2d 299 [1st Dept 1997], lv denied 90 NY2d 862 [1997]).

Defendants contend that the preliminary injunction hearing testimony was inadmissible hearsay at trial. However, they agreed in a so-ordered stipulation that "all testimony and exhibits introduced at the . . . hearing . . . shall become part of the trial record" (see People v Bowen, 185 AD3d 1219, 1220 [3d Dept 2020]).

The court providently exercised its discretion by refusing to adjourn the trial (see generally Matter of Anthony M., 63 NY2d 270, 283 [1984]). Similarly, it was not an improvident exercise of discretion (see generally Brooks v Brooks, 37 AD2d 835 [2d Dept 1971]) for the court to deny defendants' demand for a jury trial. Plaintiff filed its note of issue - which did not request a jury trial - on October 30, 2020, but defendants did not request a jury trial until December 14, 2020, well [*4]beyond the 15-day deadline set forth in CPLR 4102(a). In addition, as the court pointed out, jury trials were being held in abeyance at that time due to the Covid pandemic. . . .

October 2021: ACP Appeals to NYS Court of Appeals
In pertinent part the ACP Release states:

NEW YORK, Oct. 27, 2021 /PRNewswire/ -- ACP Investment Group, LLC (ACP), a wholly-owned subsidiary of NYPPEX Holdings, one of the world's leading providers of secondary private equity liquidity, today announced its intent to appeal to the New York State Court of Appeals in its dispute with the Office of the New York Attorney General regarding a recent decision by the New York Supreme Court, Appellate Division, First Department. 

"We disagree with the decision on multiple grounds and will therefore be moving immediately to appeal", stated Jeremy Kim, General Counsel with NYPPEX. "ACP X, LP (the Fund), a private equity fund advised by ACP Investment Group, takes its regulatory responsibilities extremely seriously. ACP continues to focus on the best interests of its clients, and in particular, on maximizing the return on their investments. Our appeal submission will point to the many material omissions and errors that render the decision flawed, unreliable and misleading."

"The false allegations that the corporate defendants, including Laurence Allen, Managing Principal with ACP, misappropriated any funds, made any misrepresentations to investors, or used a device, scheme or artifice to defraud are completely unfounded. ACP is a top performing fund, and Laurence Allen has a 36 year track record of exemplary regulatory compliance."

The ongoing dispute will now move into the appeals process with the New York State Court of Appeals, to reach a final resolution. It is believed the case began due to a single corporate limited partner, with a stated and documented liquidity problem, harassing the general partner of ACP over several years, to force the Fund to buy out their entire original commitment at approximately 1.8x their original investment - the then current market value. When the general partner refused to meet this unusual demand, as it would not be in the best interests of the Fund and would put the capital of the other 75 limited partners at risk, this limited partner made several baseless allegations and a direct appeal to the current New York Attorney General, Letitia James. . . .

From State To Federal And Back To State 

On February 23, 2022, FINRA filed a Notice of Removal against an action filed against the self-regulatory-organization in the Supreme Court of the State of New York/Westchester County; and, accordingly, the case found its way before the United States District Court for the Southern District of New York ("SDNY"). In rapid-fire response to FINRA Notice of Removal, the Plaintiffs sought a temporary restraining order and a preliminary injunction, which FINRA opposed. NYPPEX, LLC, Laurence Allen, and Michael Schunk, Plaintiffs, Financial Industry Regulatory Authority, Inc., Defendant (Order, 22-CV-01528, SDNY / February 25, 2022) (the "SDNY February 2022 Order").

After oral argument, in part, SDNY issued an Order stating:

Based upon the foregoing, the Court concludes that it has no subject matter jurisdiction to hear Plaintiffs' claim. Accordingly, this action is REMANDED to the Supreme Court of the State of New York, County of Westchester. The Clerk of the Court is respectfully directed to send a copy of this Order forthwith to the Supreme Court of the State of New York, County of Westchester, and to close this action. All pending motions are hereby terminated.

at Page 3 of the SDNY February 2022 Order

Past as Prologue

As to the nature of the lawsuit not remanded to the NYS courts, in NYPPEX, LLC, Laurence Allen, and Michael Schunk, Plaintiffs, Financial Industry Regulatory Authority, Inc., Defendant (Plaintiffs' PI/TRO Motion, 22-CV-01528, SDNY / February 24, 2022) (the "TRO Memo")., we are presented with an extensive list of grievances:

[A]s described therein, Plaintiff NYPPEX is a broker-dealer with a business focused on the secondary market for private equity funds. NYPPEX has been a FINRA member since 1999 and is wholly owned by NYPPEX Holdings, of which ALLEN is a majority owner. ALLEN has worked in the securities industry for more than three decades and has no FINRA disciplinary history and no record of customer complaints. Nor does he interact at all with retail investors; rather, through NYPPEX, he is a provider of valuable liquidity in alternative funds to qualified investors on the secondary market.

As a broker-dealer, NYPPEX is required to be registered as a member with Defendant
FINRA, as are ALLEN and SCHUNK as associated persons with a broker-dealer. As such, NYPPEX, ALLEN, and SCHUNK are subject to FINRA's by-laws. Similarly, FINRA is subject to its own by-laws. Corporate by-laws are the set of rules that govern a corporation's operations, and therefore are legally enforceable as a contract among the members of the corporation. 

FINRA's Statutory Disqualification Process

In 2018 ALLEN became a defendant in a New York state court action initiated by the
Office of the Attorney General of the State of New York. The action largely concerned ACP X, LP, a private equity fund of which ALLEN is the managing member of the general partner of that fund, and NYPPEX is an affiliate of the fund. That action resulted in three orders from the Supreme Court, New York County. The first was an ex parte order, dated December 28, 2018, which ordered the production of documents, directed witnesses to appear for testimony and entered a temporary restraining order to preserve the status quo ("Ex Parte Order"). The second was a preliminary injunction order dated February 4, 2020 ("Preliminary Injunction Order"), and the third was a Decision and Order After Trial, dated February 4, 2021 and amended as of February 26, 2021, which converted the preliminary injunction to permanent injunctive relief ("Trial Decision"). The Trial Decision is currently on appeal, as the defendants are seeking leave to appeal to the Court of Appeals.

Neither NYPPEX nor ALLEN received any communication from FINRA in connection with the December 2018 Ex Parte Order. FINRA rules provide that "[i]f FINRA staff has reason to believe that a disqualification exists or that a member or person associated with a member otherwise fails to meet the eligibility requirements of FINRA, FINRA staff shall issue a written notice to the member or applicant for membership" and "[t]he notice shall specify the grounds for such disqualification or ineligibility." (Emphasis added.) Despite this mandatory language, no department of FINRA communicated to NYPPEX or ALLEN that FINRA believed that the December 2018 Ex Parte Order was a disqualifying event. Relying on the advice of counsel, ALLEN continued to conduct business.

More than a year later, the Preliminary Injunction Order was entered. At that time, FINRA's Department of Registration and Disclosure ("RAD") sent a letter to NYPPEX, dated  February 13, 2020, stating that it had determined that ALLEN was subject to statutory disqualification as a result of that order. Notably, the RAD letter refers to the Preliminary Injunction Order but makes no mention whatsoever of the earlier Ex Parte Order or any disqualification based on the Ex Parte Order. NYPPEX promptly submitted an MC-400 application the very next day, on February 14, 2020 ("MC-400 Application"), invoking the membership continuation process under FINRA's by-laws. ALLEN continued to conduct business.

The Trial Decision was entered a year later, in February 2021. Subsequent to that order, ALLEN requested a meeting with Membership Supervision to discuss his registration status. A Zoom meeting was held on March 31, 2021 and was attended by Patricia Delk-Mercer and Deon McNeil-Lambkin of FINRA's Statutory Disqualification and Membership Supervision departments, as well as ALLEN and several of his legal and regulatory advisors. During that call, one of ALLEN'S attorneys asked if he could continue to engage in his business, notwithstanding the permanent injunction imposed by the Trial Decision. Ms. McNeil-Lambkin responded in the affirmative, stating that he could continue to conduct business pending the membership continuation process. In accordance with this express representation by Membership Supervision, ALLEN continued to conduct business. 

NYPPEX's MC-400 Application on behalf of ALLEN was scheduled for a hearing before the National Adjudicatory Council ("NAC") on April 25, 2022. The purpose of the NAC hearing is to approve or disapprove the application, which will determine whether ALLEN may continue to engage in his business notwithstanding a disqualifying event. Membership Supervision typically makes a recommendation to the NAC to approve or disapprove an MC-400 application, and over the past ten years in approximately 225 cases it has recommended approval at a ratio of approximately 8-to-1.

FINRA Enforcement Complaint 

In May 2021, FINRA's Department of Enforcement filed a complaint against Plaintiffs. The complaint stemmed from the orders entered in the New York state court action, and charged Plaintiffs with nine causes of action based on a series of purported FINRA rule violations, although it was not based on the allegations or findings of the state court action. Rather it alleged violations of FINRA rules based on actions that the Plaintiffs allegedly took in relation to that state court action. 

The principal allegation in Enforcement's complaint (Count I) is that ALLEN was statutorily disqualified on December 28, 2018, as a result of the Ex Parte Order, and that ALLEN  continued to associate with NYPPEX, and NYPPEX permitted him to do so, without filing an MC-400 application, in violation of FINRA By-Laws and rules. As noted above, however, neither NYPPEX nor ALLEN received any communication from FINRA in connection with the Ex Parte Order. Nor did FINRA's first communication regarding disqualification - the February 13, 2020 letter from RAD - refer to the Ex Parte Order. Nor did Membership Supervision mention the Ex Parte Order during the March 31, 2021 Zoom meeting to discuss ALLEN'S status. Rather, the allegation that ALLEN was disqualified in December 2018 was first raised by Enforcement in 2021, not RAD or Statutory Disqualification or Membership Supervision or any other department of FINRA at any time prior to that. 

A hearing in the Enforcement action before FINRA's Office of Hearing Officers ("OHO") is scheduled to begin on February 28, 2022. One of the lead Enforcement attorneys in the case is a FINRA employee named Karen Daly. Ms. Daly signed the Enforcement complaint against Plaintiffs. 

In 2020, subsequent to the preliminary injunction order in the New York state court action, the FINRA Department of Enforcement sent Rule 8210 requests to NYPPEX, seeking documents, information and testimony, all in connection with matters relating to the New York action and NYPPEX's reaction to it. ALLEN reached out to an attorney, Stephanie Nicolas of WilmerHale, in April 2020, and they had privileged communications relating to a number of topics. On April 29, 2020, Enforcement took ALLEN'S on-the-record ("OTR") testimony (similar to a deposition in a civil action). ALLEN was represented by Jack Hewitt of Pastore & Dailey. Karen Daly, David Steinberg and David Newman were the Enforcement attorneys present at the OTR. 

Ms. Nicolas's name arose during the OTR, as ALLEN identified her as an attorney at WilmerHale who had provided legal advice and had assisted in drafting an April 23, 2020 letter that was introduced as an exhibit during the OTR. Specifically, Ms. Daly asked ALLEN if he had drafted the letter; he responded no, and when Ms. Daly asked who drafted it, he testified "a few attorneys but primarily WilmerHale," and then identified Ms. Nicolas as the WilmerHale attorney. During the OTRs, Mr. Hewitt reminded the FINRA attorneys on several occasions to stop asking for attorney-client privileged information. 

On or about May 5, 2020, Ms. Daly contacted Stephanie Nicolas at WilmerHale and asked about advice she had provided to ALLEN and NYPPEX. Ms. Daly is a former WilmerHale lawyer. 

This has direct relevance to the upcoming FINRA Enforcement hearing. ALLEN was asked during his OTR about a letter dated April 23, 2020. That letter is referenced throughout Enforcement's complaint and is the subject of at least one cause of action in the upcoming hearing. ALLEN testified at his OTR that Ms. Nicolas drafted that letter and provided legal advice to him in connection with it. Notwithstanding that testimony (or perhaps because of it), Ms. Daly reached out to Ms. Nicolas to ask questions about legal advice Ms. Nicolas had provided to ALLEN, a clear violation of attorney-client privilege, specifically after FINRA was warned about encroaching upon the privilege. 

Ms. Nicolas has since declined to testify for Plaintiffs in the hearing, and Plaintiffs have no means of compelling her testimony. Accordingly, one of FINRA Enforcement's lead attorneys sought improperly to obtain privileged information about an allegation in an action that she will be prosecuting against him in the next few weeks. 

It is possible that Ms. Daly, or other Enforcement attorneys, reached out to others of Plaintiffs' former attorneys, all of whom with the exception of one have declined to offer testimony in the hearing. Plaintiffs do not have subpoena power or any other method of compelling their testimony. Nor do Plaintiffs have the ability to obtain discovery on these matters through the FINRA Enforcement hearing process. 

There is grave concern that FINRA Enforcement's attorneys have either improperly obtained privileged attorney-client communications, or that by their actions in reaching out to Plaintiffs' former attorneys, have scared them from participating in the OHO hearing. As one of Plaintiffs' main defenses in the FINRA Enforcement case is their reliance on counsel, this has substantially prejudiced Plaintiffs' ability to put on their defense. 

FINRA's Recent Actions Demonstrate That Something is Afoul 

On January 10, 2022, NYPPEX received a letter from Ms. Delk-Mercer, stating that "FINRA has determined that Mr. Allen can no longer continue his association with NYPPEX until final decision from FINRA's National Adjudicatory Council approves such association." Ms. Delk-Mercer notified NYPPEX that it had to terminate Mr. Allen's registration by January 21, 2022. This was highly unusual, as the decision as to whether a registered person can continue to associate with a member ultimately rests with the NAC, not Membership Supervision. Moreover, there was a hearing coming up at which the NAC would make that very decision. 

While Membership Supervision has the ability to recommend approval or disapproval of an application, it is unheard of for it to unilaterally mandate the termination of registration before a NAC hearing has occurred, as it is the NAC, and not Membership Supervision, that ultimately decides whether a registered person may continue in membership notwithstanding a disqualifying event. By requiring NYPPEX to terminate ALLEN before the hearing, Membership Supervision was effectively usurping the role of the NAC in the membership continuation process, ensuring that ALLEN would effectively be permanently barred from the industry notwithstanding any finding the NAC might make. 

Plaintiffs have been unable to find any precedent for Membership Supervision's actions, and in fact the precedent shows just the opposite, that FINRA's interpretation of Article III, Section 3(c) of FINRA's By-Laws permits individuals who become statutorily disqualified while they are employed to continue working pending the outcome of the statutory disqualification process. Further, the timing of Ms. Delk-Mercer's letter came as a complete surprise, as Membership Supervision had permitted ALLEN to engage in his business for nearly two years without issue. Moreover, no material facts had changed around this time that would justify such an about-face - the NAC had not conducted a hearing on the MC-400 Application, the Decision remained subject to ongoing appeals, and ALLEN (who has no prior disciplinary history) remains on heightened supervision, with no adverse or reportable events. 

The most disturbing aspect of Ms. Delk-Mercer's letter was footnote 1, at which she wrote that "Mr. Allen initially became statutorily disqualified upon the entry of an ex parte temporary injunctive order issued by the New York Court on December 28, 2018 ('December 2018 Order')" and "Mr. Allen continued to be statutorily disqualified upon the entry of a subsequent preliminary injunction issued by the New York Court on February 4, 2020 after an evidentiary hearing." As noted previously, no FINRA department advised NYPPEX or ALLEN that ALLEN was disqualified as a result of the Ex Parte Order (a requirement under FINRA's rules), nor did any department ever express that position until Enforcement filed its complaint in May 2021.

Plaintiffs, through counsel, requested a meeting to discuss the January 10, 2022 letter, and on January 20, 2022, Plaintiffs' representatives participated in a telephone conference with Ms. Delk-Mercer, Ms. McNeil-Lambkin and others, including two members of the Department of Enforcement. On that call, Ms. Delk-Mercer stated that it was Membership Supervision that made the decision to withdraw the exercise of discretion and require the termination of ALLEN'S registration, but in response to questioning, she did not provide any good reason for doing so. Moreover, she indicated that Membership Supervision had also determined that it would recommend to the NAC that the MC-400 Application be denied - which is entirely inconsistent with its forbearance over the past two years and no adverse incidents involving ALLEN. Clearly, Membership Supervision had changed its position and altered the status quo that has been in effect for nearly two years, but without any explanation of why or why now when the NAC hearing was just a few months away. 

Plaintiffs (through counsel) attempted to address that question during the conference on January 20, but did not receive a good answer. Several of Plaintiffs' advisors asked iterations of the question why now? and what prompted this?, to which Ms. Delk-Mercer did not provide any real answer other than that Membership Supervision decided to do so. As noted, however, there was no basis for doing so, as decisions as to membership continuance are reserved to the NAC, and a hearing before the NAC on ALLEN'S application had been scheduled. 

Membership Supervision's actions in January 2022 served no real purpose for that department, but were quite beneficial to the Department of Enforcement, which had the OHO hearing fast approaching. For example, footnote 1 in Ms. Delk-Mercer's January 10, 2022 letter articulates a position that mirrors Enforcement's complaint, but which had never been expressed previously by Statutory Disqualification, Membership Supervision, RAD, or any other FINRA department. Although that footnote was not necessary as a basis for the termination of Mr. Allen's registration (which, per the letter, was based on the February 2021 Decision), it did create a record for Enforcement to use at the upcoming hearing. 

Likewise, the timing of the January 10, 2022 letter raised obvious concerns. For nearly two years, Membership Supervision did nothing, and, in fact, members of that department specifically told Mr. Allen in March 2021 that he could continue to conduct business pending resolution of the membership continuation process. That process had not yet been resolved. Nevertheless, some ten months later but just six weeks before the start of the Enforcement hearing, Membership Supervision suddenly changed course and reversed its position on Mr. Allen's registration status, for no apparent reason and based on no objective factors or events. 

This does not reflect a fair process, or the fair administration of FINRA processes. This is particularly so given that the subject is Plaintiffs' registration, which affects their ability to conduct business and to earn a living. Likewise, NYPPEX's and ALLEN's registration status affects employees and shareholders as well. 

FINRA's recent actions are clearly arbitrary, capricious and unfair, but even worse appear to be initiated, influenced by and/or coordinated with Enforcement. Any such influence would be improper, unfair and highly prejudicial to Mr. Allen, both with regard to his registration status and in the upcoming enforcement hearing. 

In fact, upon threat of litigation regarding the January 10, 2022 letter, FINRA once again changed its position, and decided to allow ALLEN to continue to associate with NYPPEX until the NAC hearing. However, it is clear that there are one or more individuals at FINRA who do not want to give Plaintiffs a fair process, and so the outcome at this point of the OHO and NAC hearings is inevitable, and the "process" a means for FINRA to dot its I's and cross its T's before permanently barring Plaintiffs, as it is clear FINRA is utilizing every means available to it to accomplish.  

In fact, FINRA's Department of Enforcement has taken the position that it will not even begin to discuss any potential negotiation with NYPPEX or SCHUNK unless ALLEN agrees to a permanent bar, despite the fact that the vast majority of Enforcement actions are resolved through mediation or direct settlement, further demonstrating that FINRA has no interest in treating Plaintiffs fairly or in accordance with Plaintiffs' reasonable expectations under the parties' contract. 

Accordingly, there are serious questions that must be addressed, including but not limited to:
  • When did Membership Supervision make the decision to withdraw the discretion previously afforded Mr. Allen, and to require the immediate termination of his registration? 
  • Why did Membership Supervision make that decision now, after two years of inactivity? 
  • Why make that decision at all, given that a NAC hearing is upcoming?
  • Who were the participants in that decision? 
  • Are there notes reflecting any meetings to discuss that decision? 
  • Was Enforcement a party to those discussions? 
  • Were there any communications between Enforcement and Membership Supervision on the subject (which should be preserved if they do exist)? 
  • Who decided to add footnote 1 to Ms. Delk-Mercer's January 10, 2022 letter and why? 
  • Where did the information in the footnote come from?
  • Did Enforcement play any role in including the footnote, or reference to the Ex Parte Order? 
  • Why, after two years of permitting ALLEN to conduct business, did Membership Supervision suddenly decide to recommend that his membership continuation application be denied? 
  • Who participated in that decision? 
  • When was it made? 
  • On what basis was it made? 
  • Have the various departments at FINRA been colluding with each other to ensure that Plaintiffs are permanently barred no matter the outcome of the state court action, the OHO hearing, or the NAC hearing?  
In each of these instances, there is no rational explanation for FINRA's actions - they are out of the ordinary, inconsistent with its past handling of ALLEN's registration status, and inconsistent with department precedent. On the other hand, the one common theme is that these actions are all beneficial to the Department of Enforcement in connection with its upcoming action against Plaintiffs. 

Plaintiffs Reach out to FINRA's Office of the Ombudsman To No Avail

Having nowhere else to turn, and receiving no real answers, earlier this month Plaintiffs reached out to FINRA's Office of the Ombudsman. FINRA's Office of the Ombudsman is an impartial, confidential and independent resource that works informally to assist in finding solutions to issues, or concerns that members may have with FINRA. Members are encouraged to contact the Ombudsman's Office if they believe that they cannot resolve the concern through normal channels, cannot determine the proper avenue for handling the concern, or if they require anonymity. As a neutral party, the Ombudsman considers the interests and concerns of all parties in the situation, with the objective of achieving a fair outcome. The FINRA Ombudsman reports directly to the Audit Committee of the Board of Governors and functions independently from other departments and FINRA management. As a designated neutral, the Office of the Ombudsman does not represent or act as an advocate for any person or entity in a dispute with FINRA; instead, it is designed to promote fair processes and the fair administration of those processes. The Ombudsman's Office, however, does not actually have any authority. 

Although Plaintiffs have raised their concerns with potential prosecutorial misconduct in connection with the upcoming Enforcement hearing to the Ombudsman's Office, those concerns have not resulted in any change of circumstance, and the hearing is still scheduled to begin on February 28, 2022. Further, the Ombudsman's Office has stated that it is not able to confirm or deny any aspects of its review to the Plaintiffs, meaning that although Plaintiffs have raised legitimate concerns, they have no way of knowing whether, when or how those concerns are addressed. As the Ombudsman's Office does not actually have any authority to mandate any action, it suggested to Plaintiffs that they make a request to OHO that the hearing set to begin February 28, 2022, be postponed while the investigation and any resolution thereof continues. 

However, Enforcement has denied Plaintiffs' request to agree to a postponement, and OHO has denied an official request from counsel to postpone the hearing. Plaintiffs have exhausted all available remedies internally within FINRA. 

It is patently unfair and a deprovision of Plaintiffs' reasonable expectations under the parties' contract for Plaintiffs to have to go through a hearing that will undoubtedly result in severely negative consequences for them because of the "game is fixed" against them. Plaintiffs are entitled to a fair process and a fair administration of the process free from undue influence and collusion, and one that is not arbitrary and capricious. While there are avenues of appeal and further processes, the reality of the situation is that any such avenue of appeal is going to be limited by the record below and a reversal of any determination is statistically likely to fail. Further, Plaintiffs have no avenue for discovery regarding allegations of collusion and prosecutorial misconduct in the Enforcement process itself, and thus they cannot create an evidence-based record for appeal on those issues. What will happen is that Plaintiffs will raise their concerns for the record, they will be dismissed out of hand, and the dismissal of those concerns will be affirmed on appeal because Plaintiffs have no evidence to support their allegations, since discovery is not available to them in the FINRA hearing process. 

Moreover, in the interim, Plaintiffs would potentially (and based on the recent actions of FINRA described above, likely) be barred from the industry, and it could take years to reverse that status, even assuming Plaintiffs could ultimately receive a fair shot. It would be impossible to reverse that damage.

In summary, Plaintiffs face an upcoming hearing in which they have expressed multiple concerns about potential prosecutorial misconduct but have no avenue to address those concerns other than through the court system, as they have exhausted all possible options internally at FINRA. Simply put, no one at FINRA seems to care that a lead attorney in the upcoming hearing attempted to obtain attorney/client privileged information from one of Plaintiffs' attorneys or may have attempted to influence another FINRA department to take action against ALLEN in advance of the hearing. Plaintiffs' concerns have fallen on deaf ears, and they have no other recourse but to seek injunctive relief.  

As stated, Plaintiffs worked diligently attempting to address these serious concerns through every available avenue at FINRA in the few weeks following the January 10, 2022 letter. On February 23, 2022, Robert Colby, FINRA Chief Legal Officer, informed Plaintiffs that FINRA would not postpone the OHO hearing. Having exhausted all internal options, Plaintiffs had no choice but to immediately file the instant action and seek a preliminary injunction and temporary restraining order. 

Last night, at 11:39 pm, Defendant filed a Notice of Removal, thereby ensuring that the Westchester Supreme Court would not hear Plaintiffs' motion for a temporary restraining order. Accordingly, Plaintiffs are filing the instant motion.  

at Pages 2 - 15 of the TRO Memo

Finally, note this from Footnote 1 on Page 18 of the TRO Memo:

It would appear that there is substantial corruption taking place at FINRA, as a recent Georgia court found that Wells Fargo and FINRA had a secret deal that allowed Wells Fargo to fraudulently manipulate the arbitration selection system, thereby undermining the entire integrity of FINRA's supposedly neutral system. See (last visited February 24, 2022). A number of United States Senators are now seeking more information from FINRA related thereto. See %20Scandal%20(1).pdf (last visited February 24, 2022).

FINRA's Brief in Opposition

In opposing Plaintiffs' requested TRO/PI, FINRA filed a Brief in Opposition. 
NYPPEX, LLC, Laurence Allen, and Michael Schunk, Plaintiffs, Financial Industry Regulatory Authority, Inc., Defendant (Defendant's' PI/TRO Opposition, 22-CV-01528, SDNY / February 25, 2022) (the "FINRA Opposition Brief").
In pertinent parts, FINRA's Brief asserts in its "Introduction":

Plaintiffs' Complaint in this action and their request for injunctive relief are a transparent effort to further delay FINRA's enforcement proceeding against Plaintiffs relating to misrepresentations and omissions of material fact in connection with the offering of securities, misrepresentations and omissions to prospective investors in marketing materials administrative process and enforcement proceedings, and other violations. A hearing on FINRA's Department of Enforcement's Complaint asserting those allegations remains scheduled to proceed on February 28, 2022, pursuant to a scheduling order issued on July 15, 2021. Plaintiffs also seek to enjoin an April 25, 2022 proceeding before FINRA's National Adjudicatory Council ("NAC") on a MC-400 application submitted on behalf of Plaintiff Laurence Allen, which requests that he be permitted to continue to associate with NYPPEX (a firm controlled by Mr. Allen). 

Notably, Plaintiff Allen has remained able to continue conducting business despite the pendency of these two proceedings. Thus, any delay in the proceedings would delay potential sanctions that might include an industry bar to protect the investing public, while benefiting one person and one person alone-Mr. Allen. In furtherance of that effort, despite knowing the February 28, 2022 disciplinary hearing has been scheduled for more than seven months, and despite the disciplinary hearing officer having denied his request for an adjournment several weeks ago, Plaintiffs waited until less than a week before the disciplinary hearing to file this purported emergency application seeking extraordinary injunctive relief. Plaintiffs took their time in drafting a detailed, 25-page brief that is heavy on speculation-what they believe will occur at the upcoming hearings, and theories about purported FINRA misconduct. However, Plaintiffs ignore the fact that, putting aside the fact that none of the issues Plaintiffs raise warrant the relief sought, the injunctive relief must be denied because Plaintiffs have no likelihood of success in this action. Plaintiffs' only claim for breach of contract fails as a matter of law for a multitude of reasons. There is no underlying contract, so Plaintiffs cannot state a claim. Even if there were a contract, there is no private right of action against FINRA for alleged violations of its rules. And a preemptive challenge in this Court to what Plaintiffs describe as a "foregone conclusion"-adverse decisions in both administrative proceedings-ignores the fact that administrative remedies are available to Plaintiffs to address any alleged concerns with the process. Plaintiffs are free in the pending proceedings to raise all of the alleged issues that they believe warrant (a) dismissal of the Enforcement Complaint and (b) granting of the MC-400 application that would allow Plaintiff Allen to continue associating with NYPPEX. The outcome of those proceedings-assuming they are adverse to Plaintiffs-can then be appealed up through the Securities and Exchange Commission ("SEC") and then the Second Circuit. That review can address any purported irregularities, as mandated by Congress when it established a statutory scheme for review of FINRA action. FINRA is also otherwise absolutely immune from suit in connection with any action taken in connection with its regulatory, disciplinary or prosecutorial functions. 

The failure to exhaust administrative remedies and other legal deficiencies are fatal to Plaintiffs' claims. Plaintiffs cannot succeed on the merits. In addition, Plaintiffs' claim of irreparable harm cannot support their application-courts have repeatedly held that the threat to a securities industry professional's ability to continue doing business does not constitute a threat of irreparable harm and cannot form the basis for an injunction. Finally, FINRA on behalf of the investing public and as mandated by Congress has an interest in appropriately regulating the industry professionals who are subject to its rules. The equities do not favor allowing a professional to avoid scrutiny and the potential consequences of their actions. 

at Pages 1 - 2 of the FINRA Opposition Brief