Did the Wall Street regulator FINRA have funds from its own internal investment portfolio invested directly or indirectly in Bernie Madoff’s Ponzi scheme? Did FINRA effectively front run the auction-rate securities market in 2007 when it liquidated a position of approximately $647 million ARS from that same internal portfolio?
Do you think investors and all Americans would like to know the answers and details to these questions and much more? Do you think we deserve to know these answers?
After developments this week, we are that much closer to learning answers to these questions and potentially much more about Wall Street’s regulator FINRA. How so? Let’s navigate.
The donnybrook legal battle continues between Amerivet Securities of Moreno Valley, California and the Wall Street self-regulatory organisation FINRA. For those keeping score, the latest round this week was a decided victory for Amerivet. Why do I believe this specific case and the allegations made by Amerivet are so important?
Why do I believe investors and all Americans will benefit from real transparency within our financial regulatory system? Trust and confidence.
Americans lack these highly prized virtues in our financial industry as a whole and financial regulators specifically. Why do they lack that trust and confidence? How much time do you have? Given the massive regulatory failures and rampant evidence of regulatory capture, Sense on Cents has been calling for the Wall Street self-regulatory organisation FINRA to open its books and records for review for the better part of the last two years. Regular readers are well aware of the voluminous details and ongoing calls for transparency put forth by yours truly on this topic.
This week, the Honorable John M. Mott, Associate Judge in the Superior Court of the District of Columbia Civil Division, issued a ruling which echoes my call for transparency. Judge Mott writes of the Amerivet case:
As a self-regulating organisation (SRO), FINRA enjoys absolute immunity from private suits seeking damages for actions within the scope of FINRA’s regulatory authority. See DL Capital Group, LLC v. Nasdaq Stock Market, Inc., 409 F.3d 93 (2d Cir. 2005) (absolute immunity applies as long as the SROs “engage in conduct consistent with the quasi-governmental powers delegated to them pursuant to the Securities Exchange Act of 1934”).
As this suit does not seek damages, but rather the ability to examine records, FINRA is not immune from this suit. Whether immunity applies will turn on whether an action against FINRA arises from conduct within the scope of FINRA’s regulatory authority and only in those cases seeking damages. Immunity of the exchanges, as is the case with FINRA, is limited to activities relating to the regulatory function and not to its proprietary or profit-making activities. See Weissman v. NASD, 468 F.3d 1306 (11th Cir. 2006), affirmed in relevant part and reversed in part on other grounds, 500 F.3d 1293 (11th Cir. 2007) (immunity applies only to regulatory activities but not to the other functions such as advertising to further the profit-making activities of an SRO).
Since FINRA enjoys an SRO’s immunity, the derivative action that is “contemplated” by Amerivet would only be valid if the suit were premised on actions by FINRA that are outside of its regulatory authority. However, a determination of whether the alleged misconduct did or did not fall within FINRA’s regulatory function depends on facts that Amerivet will only be able to determine if it is given the ability to inspect FINRA’s books. (LD’s emphasis) Amerivet makes 20-five allegations, 10 of which are alleged regulatory failures that FINRA would likely be immune to any actions arising from such failures, but the remaining fifteen deal with executive compensation and FINRA’s investment strategy.
At this stage, it is impossible to tell whether Amerivet would have standing for a derivative suit and therefore impossible to know whether FINRA’s immunity should prevent the records inspection request. Since a motion to dismiss requires all facts be viewed in the light most favourable to the non-moving party, this once again requires that the Motion to Dismiss Amerivet’s books and records request be denied.
The court finds that none of the defendant FINRA’s arguments support dismissal of the plaintiff Amerivet’s claims at this time. Therefore, it is this 1st day of March, 2011, hereby ORDERED that the defendant FINRA’s Motion to Dismiss is DENIED.
The Honorable John M. Mott
(Signed in Chambers)
I commend Judge Mott for standing his ground and issuing this ruling. I have publicly asked much the same of FINRA for a long time. For those with interest and an extra 18 minutes, you may appreciate the bombshells provided by myself and others (including Madoff investor Ronnie Sue Ambrosino and Amerivet attorney Richard Greenfield) on this topic during an interview on Fox’s America’s Nightly Scoreboard in early September 2009.
For the legal eagles in the crowd who would like to read the full 7-page ruling made by Judge Mott, I am happy to provide Amerivet Securities, Inc., Plaintiff v. Financial Industry Regulatory Authority Inc., Defendant (click on image for pdf document):
Why is FINRA fighting? What are they trying to hide? Open the books, FINRA!! America deserves answers.
Thoughts, comments, constructive criticisms always encouraged and appreciated. If you are intrigued by this case, you can access a wealth of details on it via Sense on Cents/Amerivet.
I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own and not those of Greenwich Investment Management. As President of Greenwich Investment Management, an SEC regulated privately held registered investment adviser, I am merely a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.