FINRA Sued in the Wrong Place At the Wrong Time Affirms Federal Circuit Court

December 21, 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

Over a decade ago, John Millar Fife and Pauline Neil Fife were purportedly barred by FINRA on April 2, 2012. "Individuals Barred for Failure to Provide Information or Keep Information Current Pursuant to FINRA Rule 9552(h)" on Page 45 of FINRA's Disciplinary and Other FINRA Actions for June 2012

2022 SDNY Order

Time flies when you're having fun. It also flies when you're not having fun. In 2022, John Fife marched into a federal court and sued FINRA in an effort to have his Bar nullified. 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)(the "March 2022 SDNY Order") 

In the March 2022 SDNY Order we learn that in 2011, John Fife had 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 & Co.'s non-voting Class B shares. 

She Who Must Not Be Named?

In reading through the March 2022 SDNY Order, we find ourselves taking a trip down memory lane. The SDNY Order informs us that on October 18, 2011, FINRA sent Fife and his wife a request to give testimony in an ongoing investigation of Gordon & Co.. The Order declines to name John Fife's wife by name -- she is referenced in the Complaint, but, apparently, she was not named by name. Could that referenced-but-not-named wife of John Fife be the same Pauline Neil Fife, who was barred by FINRA in 2011? Maybe. Maybe not. Regardless, John Fife's lawyer apparently told his client that FINRA lacked jurisdiction to compel his testimony or to discipline him. 

As far as we're told in the March 2022 SDNY Order, John Fife was a customer of Gordon & Co. You can read the Order yourself. It won't tell you much more than that. Indeed, in June 2012, FINRA filed a disciplinary action against John Fife and then barred John Fife and Pauline Fife, but that doesn't mean that the self-regulatory-organization had jurisdiction over them. FINRA may have had jurisdiction. 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 FINRA Disciplinary Action, the Fifes were barred for failing to provide information. Notably, the March 2022 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 March 2022 SDNY Order

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

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:

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 March 2022 SDNY Order

September 2020: SEC Charges John Fife et. al in 2020 

As to what invoked John Fife's ire in 2020 and sent him to the federal courthouse with a Complaint against FINRA, my guess is that a September 2020 SEC investigation/Complaint may have planted the seed. "SEC Charges Unregistered Penny Stock Dealer" (SEC Release / September 3, 2020) In a Complaint filed in the United States District Court for the Northern District of Illinois
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 may have enraged Fife against FINRA, we have this 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 

In response to Fife's federal Complaint, FINRA 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 March 2022 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.

UPDATE: December 20, 2022, 2Cir

Arguing that SDNY had lacked jurisdiction, John Fife appealed from the March 2022 SDNY Order.
John M. Fife, Plaintiff-Appellant, v. Financial Industry Regulatory Authority, Inc., Defendant-Appellee (Summary Order, United States Court of Appeals for the Second Circuit ("2Cir"), 22-CV-750 / December 20, 2022)
In affirming SDNY, 2Cir offers in part this rationale:

Notwithstanding Fife's arguments to the contrary, 15 U.S.C. §§ 78s(d)(2) and 78y apply to him. First, Fife asserts that § 78s(d)(2) does not apply because it incorporates § 78s(d)(1), which references "final disciplinary sanction[s] [imposed] on any person associated with a member," 15 U.S.C. § 78s(d)(1) (emphasis added), but he was never a FINRA "associated person" nor otherwise under FINRA's jurisdiction. But an agency always has "the primary authority . . . to determine its own jurisdiction."1 Fed. Power Comm'n v. La. Power & Light Co., 406 U.S. 621, 647 (1972) (internal quotation marks, alteration, and citation omitted). 

Second, Fife asserts that § 78y does not apply because it provides appeal procedures for "[a] person aggrieved by a final order of the Commission," 15 U.S.C. § 78y(a)(1), but here there was no SEC "final order." Under the doctrine of exhaustion of administrative remedies, "a party may not seek federal judicial review of an adverse administrative determination until the party has first sought all possible relief within the agency itself." Beharry v. Ashcroft, 329 F.3d 51, 56 (2d Cir. 2003) (internal quotation marks and citation omitted). We have held the exhaustion requirement to apply to review of disciplinary actions by self-regulatory organizations, such as FINRA. See Barbara v. N.Y. Stock Exch., Inc., 99 F.3d 49, 57 (2d Cir. 1996), abrogated on other grounds by Merrill Lynch, Pierce, Fenner & Smith Inc. v. Manning, 578 U.S. 374 (2016); MFS Sec. Corp. v. S.E.C., 380 F.3d 611, 621-22 (2d Cir. 2004). Here, the reason there is no SEC final order is because Fife chose not to appeal the FINRA disciplinary action and thus failed to exhaust. He cannot now use that decision to skirt the statute's prescribed review process. 2 Accordingly, Fife is subject to the Exchange Act's administrative-and judicial-review scheme, and we affirm the district court's conclusion that it lacked subject-matter jurisdiction to hear his claim.

= = =

Footnote 1: Moreover, Fife's challenge to his classification as an "associated person" is not the sort of "constitutional claim[] . . . outside the [SEC's] competence and expertise" that the Supreme Court has permitted to bypass the Exchange Act's exclusive review scheme. See Free Enter. Fund v. Pub. Co. Acct. Oversight Bd., 561 U.S. 477, 489-91 (2010). Whether Fife is an "associated person" under the Exchange Act is a fact-bound issue well within the competence and expertise of FINRA and the SEC to resolve in the first instance.

Footnote 2: Although the district court declined to reach the issue of exhaustion, Fife's failure to exhaust after the FINRA bar and suspension is relevant to the jurisdictional question of whether there is a "final order of the Commission" subject to the exclusive review procedures of the Exchange Act, 15 U.S.C. § 78y.

Bill Singer's Comment

Compliments to Fife's lawyers from Gusrae Kaplan Nusbaum PLLC:
  • Martin H. Kaplan and 
  • Kari Parks
Kaplan and Parks seemed to have been asked to sit down in the middle of a chess game and play out an endgame that seemed likely to end in checkmate no matter their move. Fife's losing position was played as ably as possible. As best I can tell, he sure as hell got his money's worth!

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