FINRA Sued in the Wrong Place At the Wrong Time

April 5, 2022

In that old Dr. John tune, he sings that "I been in the right place, but it must have been the wrong time." You're right, they just don't write 'em like that anymore! In a recent federal lawsuit against Wall Street's self-regulatory-organization FINRA, we have a Plaintiff who seems to have sued in the wrong court at the wrong time -- not exactly parroting the lines of the song but sort of capturing the spirit. 

2012 FINRA Bars

On Page 45 of FINRA's Disciplinary and Other FINRA Actions for June 2012
https://www.finra.org/sites/default/files/DisciplinaryAction/p127040.pdf, we find under the heading "Individuals Barred for Failure to Provide Information or Keep Information Current Pursuant to FINRA Rule 9552(h)" several names, among which are John Millar Fife and Pauline Neil Fife, who were purportedly barred on April 2, 2012. 

2022 SDNY Order

Moving ahead ten years after the 2012 Bars of the Fifes by FINRA, we come upon this: John M. Fife, Plaintiff, v. Financial Industry Regulatory Authority, Inc., Defendant (Order, United States District Court for the Southern District of New York ("SDNY"), 20-CV-10716 / March 29, 2022) https://brokeandbroker.com/PDF/FifeOrderSDNY220329.pdf In the March 2022 SDNY Order we learn that in 2011, John Fife opened an account with FINRA member firm Gordon & Co., and eventually he not only held multiple accounts at the firm but was one of its two primary customers. Notably, a family trust held 12.5% of Gordon's non-voting Class B shares. 

She Who Must Not Be Named?

SDNY informs us that on October 18, 2011, FINRA sent Fife and his wife a request to give testimony in an ongoing investigation of Gordon. The SDNY Order declines to name Gordon's wife by name because although she is referenced in the Complaint, apparently, she was not named by name. Could that wife be the Pauline Neil Fife who was barred by FINRA in 2011? Maybe. Maybe not. Regardless, Fife's lawyer apparently told his client that FINRA lacked jurisdiction to compel his testimony or to discipline him. 

Ummm, how's that?

As far as we're told in the SDNY Order, Fife was a customer of Gordon and that's about it. I know that there was a FINRA disciplinary action against him in June 2012, but just because FINRA appears to have barred John Fife and Pauline Fife doesn't mean that the self-regulatory-organization had jurisdiction over them. FINRA may have. May not have. For all we know, FINRA may have demanded the Fifes testimony, they told FINRA to drop dead, and, in response, FINRA barred them. As noted in the June 2012 online FINRA document, the Fifes were barred for failing to provide information. Notably, the SDNY Order states in part that:

[O]n April 6, 2012, Fife and his wife were notified that they were barred pursuant to FINRA Rule 9552(h). Id.  ¶ 98. Again, they did not challenge the bar because "it simply was not worth the time, energy, and expense." Id. ¶ 18.

at Page 2 of the SDNY Order

It Don't Matter To Me . . . until it did

Of course, funny thing, some matters that weren't worth the time, energy, and expense to contest in one decade suddenly become a royal pain in the ass the following decade. As explained by the Court:

For years, the bar did not impact Fife or his businesses. See id. ¶¶ 21-22, 26, 100. In September 2013, the Securities and Exchange Commission ("SEC") changed its regulations to create "new consequences for those barred by FINRA." Id. ¶¶ 20, 100. Fife continued to believe that he had not suffered adverse consequences from the FINRA bar. Id. ¶¶ 22, 100. Then, in September 2020, the SEC filed a civil action against Fife, alleging that he had violated Exchange Act § 15(a)(1) and that he is a "recidivist violator of the federal securities laws," invoking the FINRA bar as an example. Id. ¶¶ 23-25, 103, 106-08. In this action, Fife seeks a "judgment nullifying the FINRA [s]uspension and [b]ar." Id. ¶ 110.

at Page 2 of the SDNY Order

SIDE BAR: 
  "SEC Charges Unregistered Penny Stock Dealer" (SEC Release / September 3, 2020)
https://www.sec.gov/litigation/litreleases/2020/lr24886.htm
https://www.sec.gov/litigation/complaints/2020/comp24886.pdf, the SEC charged John M. Fife, and his companies Chicago Venture Partners, L.P., Iliad Research and Trading, L.P., St. George Investments LLC, Tonaquint, Inc., and Typenex Co-Investment, LLC, with violating the dealer registration provisions of Section 15(a)(1) of the Securities Exchange Act. As alleged in part in the SEC Release, the Defendants:

regularly engaged in the business of purchasing convertible notes from penny stock issuers, converting those notes into shares of stock at a large discount from the market price, and selling the newly issued shares into the market at a significant profit. The SEC alleges that Fife and his companies engaged in more than 250 convertible transactions with approximately 135 issuers, sold more than 21 billion newly-issued penny stock shares into the market, and obtained more than $61 million in profits. The complaint also alleges that, at the time of the conduct, the Defendants were not registered with the SEC as dealers, in violation of the mandatory registration provisions of the federal securities laws. It further alleges that by failing to register, the Defendants avoided certain regulatory obligations for dealers that govern their conduct in the marketplace, including regulatory inspections and oversight, financial reporting requirements, and maintaining books and records.

  As to what invoked John Fife's 2022 ire as manifested in his SDNY lawsuit against FINRA, we have this allegation in the 2020 SEC Complaint:

2. In doing so, Fife who is a recidivist violator of the federal securities laws and the Entity Defendants (together with Fife, Defendants) have violated, and continue to violate, the mandatory dealer registration requirements of the federal securities laws. 
. . .
11. John M. Fife, age 59, resides in Chicago, Illinois. In 2007, the SEC charged Fife with violations of 10(b) of the Exchange Act and Rule 10b-5 thereunder for his participation in an annuity market timing scheme. SEC v. Fife, No. 07-C-0347 (N.D. Ill. Jan. 18, 2007). That case settled after Fife consented to an injunction, monetary relief, and a bar from associating with an investment adviser, with the right to reapply after 18 months. In 2012, in an unrelated action, the Financial Industry Regulatory Authority (FINRA) barred Fife from association with any FINRA member for failing to respond to FINRA requests for information. FINRA Case No. 2011029203701 (March 2012). 



Not So Exhausting and/or Wrong Court 

Now, we return back to 2022 and find that in response to Fife's federal Complaint, FINRA has moved to dismiss pursuant to Federal Rules of Civil Procedure 12(b)(1) for lack of subject matter jurisdiction because Fife had failed to exhaust his administrative remedies. Now things really get complicated:

The statute at issue in this case permits judicial review, and provides that an adversely-affected person, after exhausting administrative remedies, including an appeal to the SEC, 15 U.S.C. § 78s(d)(2), "may obtain review" of a FINRA disciplinary order "in the United States Court of Case Appeals for the circuit in which he resides or has his principal place of business, or for the District of Columbia." 15 U.S.C. § 78y(a)(1); see also North v. Smarsh, 160 F. Supp. 3d 63, 83 (D.D.C. 2015). The appeal must be taken within sixty days of the final order. 15 U.S.C. § 78y(a)(1). Although the use of "may" might seem to imply that district courts also have jurisdiction, it is the law of this Circuit that clauses containing "a specific statutory grant of jurisdiction to the court of appeals . . . should be construed in favor of review by the court of appeals." Nat. Res. Def. Council v. Abraham, 355 F.3d 179, 193 (2d Cir. 2004) (collecting cases); see also Altman v. SEC, 768 F. Supp. 2d 554, 558 (S.D.N.Y. 2011), aff'd, 687 F.3d 44 (2d Cir. 2012). Under § 78y of the Exchange Act, "district courts lack jurisdiction to hear post-enforcement challenges seeking declaratory and injunctive relief related to disciplinary proceedings-such challenges must proceed[] in accordance with the statutory scheme." Altman, 768 F. Supp. 2d at 558. Free Enterprise Fund does not command a different result. See id. at 559-62. Therefore, even assuming, arguendo, that Fife is excused from exhausting the administrative remedies, this Court lacks subject matter jurisdiction over this action. 3
= = =
Footnote 3: The Court need not reach the timing of the filing of this action, which is years past the sixty-day appeal window. See 15 U.S.C. § 78y(a)(1). It also need not address that even if filing this action in a district court was permissible, which it is not, this would be an improper forum as Fife does not reside in this district, Compl. ¶ 28, nor does he allege that his principal place of business is in this district, see generally id., and this is not the district court for the District of Columbia. See 15 U.S.C. § 78y(a)(1). 

at Pages 3 - 4 of the SDNY Order

Based upon the above rationale, SDNY granted FINRA's Motion to Dismiss and dismissed the case without prejudice. District Court ain't Circuit Court. 60 days to appeal is 60 days not 10 years. Apparently, Fife had filed in the wrong place and at the wrong time. Like I said, it's almost that old Dr. John tune.