Federal Court Denies Kim TRO and Injunction Against FINRA Enforcement Action

October 10, 2023

As alleged in the preamble of the Complaint drafted by Martin H. Kaplan, Esq. and Kari Parks, Esq. of Gusrae Kaplan Nusbaum PLLC Eugene H. Kim, Plaintiff, v. Financial Industry Regulatory Authority, Inc., Defendant (Complaint, United States District Court for the District of Columbia, 23-CV-2420 / August 18, 2023)

Through undersigned counsel, Plaintiff Eugene H. Kim files this “Complaint” against Defendant Financial Industry Regulatory Authority, Inc. (“FINRA”).

    1. This is a constitutional challenge to FINRA’s enforcement structure and the pending “Enforcement Action” against Mr. Kim
    2. While FINRA claims to be a private corporation with no constitutional responsibilities, it acts as a Congressionally-authorized bounty hunter with statutory authority to enforce federal securities laws against hundreds of thousands of Americans.
    3. Incorporated as a not-for-profit, FINRA is the nation’s only remaining securities “self-regulatory organization,” empowered by Congress to regulate, discipline,and enforce federal securities law against the American securities industry and its professionals.
    4. In practice, FINRA is nothing more than the federal government’s private, outsourced mall cop that metes and doles arbitrary “discipline” unto securities professionals while escaping actual supervision and control by the Executive (let alone the Legislative or Judicial) branch.
    5. FINRA is violating the Constitution’s separation-of-powers provisions by empowering its salaried personnel to unlawfully wield Executive power that the Constitution has granted solely to the President and officers under his supervision.
    6. Moreover, FINRA’s disciplinary process and the Enforcement Action’s evidentiary rules (or lack thereof) violate the Fifth Amendment.
    7. FINRA’s disciplinary process and the Enforcement Action further violate the Constitution by stripping respondents of their Seventh Amendment right to an impartial jury of their peers.
    8. Moreover, FINRA invokes its supposed “private not-for-profit” status to strip witnesses of their Fifth Amendment rights, presenting a Hobson’s choice of either testifying against themselves or accepting the automatic industry death sentence of a lifetime bar from the securities industry.
    9. At the same time, FINRA continually (and successfully) argues that sovereign immunity protects it from money damages suits alleging that FINRA broke federal law.
    10. Finally, FINRA’s monopolization of all securities SRO power violates the First Amendment and the Sherman Act, 15 U.S.C. § 2. 
    11. In this case, FINRA has filed an Enforcement Action alleging that Mr. Kim made material misstatements and omissions in connection with the sale of securities.
    12. In other words, FINRA is trying to enforce federal securities laws against Mr. Kim—despite the fact that FINRA’s own Complaint recognizes that all of the allegedly-defrauded customers actually profited handsomely from the investments that Mr. Kim sourced for them.
    13. Instead of referring Mr. Kim’s case to the SEC or federal prosecutors, FINRA is acting as the investigator, prosecutor, judge, and jury in the Enforcement Action.
    14. FINRA also is the executioner: it seeks to bar Mr. Kim from working in the American securities industry. 
    15. In demanding to have it both ways, FINRA—with the blind-eye approval of the Executive and Legislative branches—is violating the “long term, structural protections against abuse of power [that are] critical to preserving liberty.” Cf. Free Enterprise Fund v. PCAOB, 561 U.S. 477, 501 (2010) (quoting Bowsher v. Synar, 478 U.S. 714, 730 (1986)).
    16. But convenience never trumps the Constitution. 
    17. Therefore, Mr. Kim seeks declaratory judgment that FINRA is violating the Constitution and the Sherman Act, and preliminary and permanent injunctions prohibiting the unlawful Enforcement Action and prohibiting FINRA from pursuing further action against him unless and until FINRA complies with the law.

The District Court denied Plaintiff's Motion for a TRO and Preliminary Injunction. Eugene H. Kim, Plaintiff, v. Financial Industry Regulatory Authority, Inc., Defendant (Memorandum Opinion, United States District Court for the District of Columbia, 23-CV-2420 / October 6, 2023)
https://brokeandbroker.com/PDF/KimDDCCompl230818.pdf. As set forth in the preamble of the Court's Memorandum Opinion [Ed: footnote omitted]:

In 1790, Philadelphia merchants meeting at a coffee house formed the nation’s first stock  exchange, giving rise to the Philadelphia Stock Exchange. Two years later, New York brokers  meeting under a buttonwood tree negotiated an agreement to regulate traders, giving rise to the  New York Stock Exchange. Since the Republic’s early days, private organizations now known  as self-regulatory organizations or SROs have governed exchanges and regulated brokers. And  since the 1930s, they have done so with statutory recognition and regulatory oversight by the  Securities and Exchange Commission. This case concerns one SRO regulated by the SEC, the  Defendant Financial Industry Regulatory Authority, Inc. (FINRA). Though opportunities have  abounded, no court has ever held that FINRA or its relationship with the SEC is unconstitutional.  

Plaintiff Eugene H. Kim, a securities broker registered with FINRA, contends that the  courts have it all wrong. Facing an enforcement action for allegedly unethical conduct, he contends that FINRA either is a state actor bound by Article II’s appointment and removal requirements, see U.S. Const. art. II, § 1, cl. 1; id. art. II, § 2, cl. 2, or is structured in a way that  violates the private nondelegation doctrine. Either way, he alleges, the enforcement action  violates these and other constitutional provisions and, for added measure, the Sherman Antitrust  Act of 1890, 15 U.S.C. §§ 1–7. He seeks a temporary restraining order and preliminary  injunction enjoining FINRA from proceeding with the enforcement action. See Dkt. 4.

He is not alone. A D.C. Circuit motions panel recently enjoined a different, expedited  FINRA enforcement action based on similar claims. Alpine Sec. Corp. v. Fin. Indus. Regul.  Auth., No. 23-5129, 2023 WL 4703307, at *1 (D.C. Cir. July 5, 2023) (mem.) (per curiam). The  court’s short order held that the appellant had “satisfied the stringent requirements for an  injunction pending appeal.” Id. In a concurring statement, Judge Walker wrote that FINRA  might prevail on the appellant’s Appointments Clause and removal power claims, “but on the  briefing before [him], that seem[ed] unlikely.” Id. at *3 (Walker, J., concurring). Judge Garcia would not have granted the injunction. The appeal remains pending, with briefing scheduled to  finish on November 17, 2023. Plaintiff argues that the Alpine order, although not binding,  should guide the Court’s decision. Agreed. But the order does not suggest that courts must  enjoin every challenged FINRA enforcement action pending the Alpine merits decision.  

The Court must instead apply longstanding precedent and the record before it to assess this plaintiff’s claims. On precedent, the Court has benefitted from extensive briefing, amicus  briefs, and a multi-hour hearing that all addressed Judge Walker’s well-founded concerns. On  the record, Plaintiff faces a less severe and less imminent harm than the Alpine plaintiff. Alpine  involved an expedited enforcement proceeding “to expel Alpine [Securities Corporation] from  FINRA membership”—a sanction known as “the corporate death penalty”—after FINRA found that Alpine violated a cease-and-desist order more than 35,000 times. Scottsdale Cap. Advisors  Corp. v. Fin. Indus. Regul. Auth., Inc., — F. Supp. 3d —, 2023 WL 3864557, at *4 (D.D.C. June  7, 2023). For good reason, Judge Walker repeatedly referenced that FINRA sought, on an  expedited basis, the “corporate death penalty” or to “put [Alpine] out of business.” Alpine, 2023  WL 4703307, at *1–2, *4 (Walker, J., concurring). But here, FINRA is not insisting on the “corporate death penalty.” Dkt. 25 at 32:1–4. It currently seeks a $30,000 fine and  disgorgement of about $16,000 in profits. Id. at 92:10–11, 92:20–22. And in Alpine, FINRA  had scheduled the enforcement hearing for four days after the district court’s hearing on the preliminary injunction motion. Scottsdale, 2023 WL 3864557, at *4. The parties here agree that  an enforcement hearing and sanction, if any, are many months—and potentially up to a year—  away. Dkt. 25 at 37:13–17; see Dkt. 11-2 ¶¶ 12, 17.

The Court finds that Plaintiff has not met the high burden for the “extraordinary” relief of  a TRO or preliminary injunction, relief which is “never awarded as of right.” Winter v. NRDC,  Inc., 555 U.S. 7, 24 (2008). First, Plaintiff cannot establish he is likely to succeed on the merits.  Plaintiff’s Article II Appointments Clause and removal power claims require establishing that  FINRA is a state actor, which “clearly requires permanent government control.” Herron v.  Fannie Mae, 861 F.3d 160, 168 (D.C. Cir. 2017) (citing Lebron v. Nat’l R.R. Passenger Corp.,  513 U.S. 374, 398–99 (1995)). But Plaintiff concedes, and the record reflects, that the government does not control FINRA. On Plaintiff’s private nondelegation claim, the Court finds  that FINRA likely “function[s] subordinately to” the SEC, which has “authority and surveillance over [its] activities.” Sunshine Anthracite Coal Co. v. Adkins, 310 U.S. 381, 399 (1940). Nor  are Plaintiff’s other claims likely to succeed. Second, Plaintiff does not face irreparable harm.  He faces instead an enforcement hearing, months away, and most likely, monetary fines. Third and fourth, the balance of equities and public interest weigh against granting preliminary  injunctive relief because enjoining this enforcement proceeding would interfere with FINRA’s  regulatory mission and threaten the integrity of U.S. securities markets.  

Though a closer call, the equities and public harm factors would lead the Court to deny  Plaintiff’s motion even if it assumed that Plaintiff established a likelihood of success on the merits and irreparable harm. See Benisek v. Lamone, 138 S. Ct. 1942, 1944 (2018) (per curiam)  (explaining that balance of equities and public interest factors may overcome other two factors  even in cases involving constitutional claims).  Reading the Alpine order as effectively halting  all FINRA enforcement actions for now would upend FINRA’s work—a result that would put  investors and U.S. securities markets at risk.

Bill Singer's Comment

Regardless of whether you agree or not with the Court's Opinion in Kim, it is an impressive bit of jurisprudence. Clearly, this Opinion remains somewhat at odds with Alpine, and that tension suggests that we have not heard the last of the challenges to FINRA's constitutionality. 

Federal Court Denies Kim TRO and Injunction Against FINRA Enforcement Action (BrokeAndBroker.com Blog)


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