Can FINRA Lead to Criminal Charges??

FINRA stands for the Financial Industry Regulatory Authority. It is a private, nongovernmental securities self-regulatory organization. As a result, FINRA is not an arm of the U.S. government, and it lacks the authority to seek grand jury indictments, file criminal charges, or initiate civil litigation in federal court.

While FINRA cannot directly bring criminal charges against you, it will refer suspected crimes to U.S. attorneys’ offices, the DOJ, the SEC, and state authorities (including state attorneys general and District Attorneys). When it does so, FINRA generally shares the evidence it has gathered during its compelled investigation (i.e., documents, emails, transcripts, etc.). Additionally, while FINRA has no authority to arrest or imprison you (or anyone else), it does have the authority to seek monetary penalties, industry bars, and other forms of disciplinary action.

If FINRA believes that it should file a disciplinary complaint, it will generally offer you (or your securities firm) a “Wells call” before it formally files. A Wells call is an opportunity to persuade FINRA’s enforcement division not to pursue enforcement, to persuade it to pursue a different theory or approach, or to discuss settlement options. If you are not successful in your efforts to deter a complaint, FINRA will file the disciplinary complaint. Once filed, however, FINRA disciplinary complaints become public. FINRA’s disciplinary proceedings, including FINRA Arbitration Association proceedings, are conducted on an administrative basis and are governed by the Securities Exchange Act.

What can FINRA investigators force me to provide?

Under FINRA Rule 8210, FINRA may conduct investigations and compel members (and associated persons) to “provide testimony, information, and records subject to the jurisdiction of FINRA.” Rule 8210 is not limited to cases where FINRA has already decided to file a disciplinary complaint, nor is it limited to the period after it has begun to investigate you for a specific offense. Rather, Rule 8210 is broadly applicable to “all matters pertaining to FINRA’s jurisdiction,” and Rule 8210 demands are an incident of FINRA’s jurisdiction, not a product of its subpoena power. Rule 8210(c) provides that “[n]o member or person shall fail to provide information or testimony or to permit an inspection and copying of books, records, or accounts pursuant to this Rule,” which makes noncompliance with a Rule 8210 request an independent basis for disciplinary action (see, e.g.Moreover, Rule 8210 provides that FINRA may “compel the respondent to participate in an on-the-record, sworn interview;” and, upon the respondent’s failure to appear, FINRA’s remedy is disciplinary rather than judicial: it may bring an expedited proceeding under Rule 9552 that typically results in suspension and then a permanent bar from the industry. In short, FINRA has the power (as the administrator of Rule 8210) to require you to produce testimony, information, and records and to appear for an on-the-record, sworn interview, but that power rests on your status as a member or associated person, not on any subpoena authority, and FINRA enforces it through its own disciplinary process rather than through the courts.

Can you assert the Fifth Amendment when you face a Rule 8210 demand for information? In most circumstances, the answer is no. Because FINRA is not a “state actor” for Fifth Amendment purposes, it has no obligation to respect the Fifth Amendment’s protections against self-incrimination. It can compel you to produce a handwritten letter, or a transcript of a confidential discussion, and it can compel you to testify when you face criminal exposure.

The exception is when the government directs (or “co-opt” FINRA) to obtain the information it seeks. In these cases, the constitutional “state-action” doctrine may come into play. With respect to FINRA’s predecessor (the National Association of Securities Dealers, or NASD), the Second Circuit held that in D.L. Cromwell Investments, Inc. v. NASD Regulation, Inc., 279 F.3d 155 (2d Cir. 2002) :

“[The] coordination between the two agencies, and even joint enforcement efforts, as NASD may have been doing, did not deprive NASD of its separate and discrete identity as a private entity. The federal government may coordinate with FINRA, and FINRA may cooperate with the federal government, as FINRA continues to be, nonetheless, a private entity and does not necessarily become a state actor just because it has the opportunity to work with the government. . ..”

The federal securities laws may designate FINRA’s authority in several contexts, and the courts may have extended FINRA’s authority to compel voluntary production of information, documents, and testimony. The federal securities laws and court decisions have upheld the use of testimony (and, documents) obtained during a “compelled” investigation, conducted by the SEC (and similar private entities), in a later criminal prosecution. For instance, in United States v. Solomon :

“[The] government is not precluded from conducting an investigation into a matter in which it suspects that criminal conduct may have occurred, and even though the government is not to seek criminal charges, it is allowed to ask questions in the investigation. Moreover, even if the government is not entitled to compel information, it is entitled to ask questions. In the present case, the government of the United States compelled testimony by a private securities exchange. Even if the private securities exchange was not a government actor, it was nevertheless compelled testimony. There is nothing in the Constitution that prohibits the use of testimony compelled by a private securities exchange.”

Which Agencies Investigate and Prosecute Securities Crimes?

If you have the opportunity to make a lawful choice, and you would like to have the opportunity to make a lawful choice, you will want to have a knowledgeable attorney who can make a sound assessment. You want to have the experience to understand the scope and implications of the evidence your attorney has gained, and you want to know how much time is available before you must decide. As with all matters requiring you to make a sound assessment, you will want to have an attorney who has relevant experience and the ability to communicate with you and all others involved in the process effectively.

With this in mind, if you suspect (or have been told that you are suspected) of a violation of the federal securities laws, you will want to get an experienced defense attorney on your side. If you are under suspicion for a federal crime, you will want an experienced prosecutor on your side. With respect to criminal fraud, if you are not in trouble, then you will not have to worry. But if you are in trouble, you will want an experienced fraud defense attorney on your side.

Once again, with respect to criminal fraud, the first question is whether you are the target of a criminal investigation. The second question is who is conducting the investigation. The third question is what are the evidence that is available for prosecution. The fourth question is what are the means of providing effective defense counsel. These are four questions that you will want to ask your attorney.

At Spodek Law Group, we do all of these for you.

If you are facing this situation, Spodek Law Group handles federal criminal defense matters nationwide, from offices in New York and Los Angeles.

How Does a FINRA Case Become a Criminal Investigation?

FINRA investigations can occur simultaneously with investigations by the SEC, DOJ, FBI, and state prosecutors. There is no rule that says a FINRA disciplinary proceeding has to be completed before a referral to a state or federal authority can be made. In fact, a parallel proceeding is an incredibly common (and, often, deliberate) enforcement strategy.

When FINRA makes a referral to the government, it also shares (or makes available) any information it obtained during the course of its inquiry. Information obtained from private sources, documents, testimony, emails, and computer files, they all can be used in both parallel investigations.

As a result, one of the most important aspects of facing a FINRA inquiry is knowing whether it is a standalone case or whether you are under scrutiny for alleged criminal violations as well. However, because FINRA is not a state actor and does not owe you any constitutional protections, it has no obligation to tell you if it has made a referral to any state or federal authority. You can be under criminal investigation for a violation of the federal securities laws, and FINRA might not inform you of the investigation, until it is late enough for the FBI to come to your door.

What triggers FINRA inquiries? FINRA opens inquiries based on:

• Customer complaints filed through FINRA’s Investor Complaint Center;
• Whistleblower complaints filed by current and former employees of registered firms;
• Referals from regulators (such as the SEC and state securities commission);
• Public reports;
• Complaints from broker-dealers;
• Media reports;
• Registration filings made under the Securities Act; and
• Information from the FINRA Whistleblower Office.

In addition to taking these steps, FINRA conducts automated surveillance of securities transactions of all brokered securities that are publicly traded. As a result, FINRA may have evidence that may point to a violation of the law even before it is aware that you are involved in a potential insider trading case.

Does a criminal referral mean that you are guilty, or that you are going to get in trouble? Not necessarily. Many cases that result in criminal referrals will ultimately end up not having enough evidence for prosecution. And criminal referrals generally go either to federal prosecutors, most often the U.S. Attorney's Office for the relevant district, or DOJ's Fraud Section, or to state authorities.

Does a criminal investigation stop FINRA’s disciplinary proceeding? No, a criminal investigation does not necessarily stay a FINRA disciplinary proceeding. However, if the targets of parallel investigations request a stay for constitutional grounds (namely, protection against self-incrimination), and if the federal authority which received the referral from FINRA confirms the ongoing nature of its investigation, this may persuade FINRA to stay its disciplinary proceeding.

What Must Prosecutors Prove After a FINRA Referral?

If a FINRA referral is pursued, it can lead to a criminal prosecution. However, even if FINRA makes a referral to the government, federal prosecutors (or state prosecutors) must then bring criminal charges. This means proving each statutory element of a crime beyond a reasonable doubt.

Many regulated brokers, investment advisors, and their owners find themselves in hot water due to regulatory oversight and/or complaints. While regulatory misconduct can be investigated and proven, the fact is that, before a regulatory violation is charged as a criminal offense, the statutory definition of the alleged crime will be scrutinized. Then, every statutory element will need to be proven beyond a reasonable doubt.

To be clear, it’s not enough to prove that you deleted a document in response to a demand for documents. To prove criminal obstruction of justice, for example, prosecutors would have to prove all statutory elements.

The charges that federal prosecutors can seek to bring against brokers and brokers’ owners are broad in scope, and they can potentially lead to massive fines and decades of imprisonment. For example:

• Title 18, Section 1348 (introduced as part of the Sarbanes-Oxley Act in 2002), authorizes up to 25 years of federal imprisonment and/or a fine of up to $250,000 (for an individual, i.e., $1 million if a financial institution is involved) for anyone convicted of “executing, or attempting to execute, a scheme or artifice” that uses false or fraudulent means to obtain money or a “commodity, security, or any contract involving a commodity, security, or any other matter concerning a securities exchange.”
• Section 32 of the Securities Exchange Act authorizes up to 20 years of federal imprisonment and/or a fine of up to $5,000,000 for anyone found to have “willfully” violated the Exchange Act.
• Title 18, Section 1343 generally authorizes up to 20 years of federal imprisonment for anyone who is convicted of “wire fraud” (which includes transmitting or attempting to transmit “any signals, communication, and/or documents to further a ‘scheme or artifice to defraud or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises’”), though a conviction involving a federally insured financial institution can lead to up to 30 years of federal imprisonment.

If a FINRA referral leads to a criminal investigation (and, subsequently, charges), the federal government has several statutory mechanisms it can use to prosecute for a broad range of offenses. The most common statutory offenses charged include:

• Section 1343 (Wire Fraud)

A wire fraud charge under Section 1343 requires the federal government to prove that (i) the person acted with the intent to defraud; (ii) the person devised a “scheme or artifice to defraud or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises”; and (iii) the person transmitted (or caused to be transmitted) a writing, sign, signal, picture, or sound by means of wire, radio, or television communication in interstate or foreign commerce for the purpose of executing the scheme or artifice.

• Section 1348 (Securities Fraud)

A criminal securities fraud charge under Section 1348 requires the federal government to prove that (i) the person knowingly executed (or attempted to execute) a “scheme or artifice”; (ii) the person did so with the intent to defraud, to obtain any money or property by means of false or fraudulent pretenses, representations, or promises; or to obtain by means of false or fraudulent pretenses, representations, or promises any “commodity, security, or any other matter concerning a securities exchange, commodities exchange, or any commodity, security, or anything of value;” and (iii) the “scheme or artifice” must be executed “in connection with” a securities exchange.

• Section 1519 (Obstruction of Justice)

A criminal obstruction of justice charge under Section 1519 requires that (i) the person “knowingly”) “altered, destroyed, mutilated, concealed, covered up, or falsified” any record, document, or tangible object; and (ii) the person did so with “the intent to impede, obstruct, or influence” a “matter within the jurisdiction of any department or agency of the United States,” including a “criminal case.”

Can the SEC Enforce or Review FINRA’s Rules?

The Securities and Exchange Commission (SEC) is FINRA’s regulator. As a result, the SEC oversees FINRA’s rule-making authority, and it has jurisdiction to hear appeals from FINRA’s disciplinary proceedings. Under Section 202 of the Securities Exchange Act, FINRA’s disciplinary decisions generally may be appealed to the SEC within 30 days of issuance, and the SEC can affirm, modify, remand, or set aside FINRA’s orders.

Additionally, Section 19(h)(3) of the Exchange Act gives the SEC “the authority to impose sanctions and cease-and-desist proceedings” when “it determines that FINRA or any other registered self-regulatory organization has failed to enforce, or has failed to adequately enforce, the rules and regulations with respect to which that organization has disciplinary authority.” If FINRA is unable to, or declines to, enforce a rule against a regulated broker or brokerage firm, the SEC can step in if “it is determined that it is in the public interest” (id.).

The SEC’s review of FINRA’s disciplinary decisions in appeals is independent. While the SEC can remand a FINRA disciplinary proceeding to FINRA for further review, the SEC will review the administrative record in its decision-making process. Under FINRA Rule 9370, the filing of an appeal stays all sanctions and penalties, although it does not stay bars and expulsions.

Under Section 25(a) of the Exchange Act, the SEC’s orders are subject to appellate review. An appeal must be filed within 60 days of issuance.

FINRA serves as a regulator, but it is also a regulated entity. As the National Association of Securities Dealers Self-Regulatory Organization (NASD SRO), the Financial Industry Regulatory Authority (FINRA) is tasked with maintaining “market integrity” and “investor protection.” This regulatory function allows FINRA to issue demands for information, compel appearances in recorded interviews, and impose sanctions for violations of its rules.

However, FINRA is not only an industry self-regulatory organization; it is also a company. As a company, it must engage in contractual business with financial companies. When it does so, it requires a clear and mutual understanding of the relationship between FINRA and its business partner. As a result, FINRA includes a contractual provision in its business relationship with financial companies, stating that FINRA’s business partnership “does not impair FINRA’s ability, authority, or jurisdiction to investigate, prosecute, and sanction” brokers and financial companies. FINRA does this because, under the rules of self-regulatory organizations, FINRA must maintain its independence. This makes it a matter of contractual obligation, not a product of statutory authority.

Ultimately, while FINRA has the authority to regulate and enforce the rules in exchange market transactions, it also must abide by the same rules. As an industry self-regulatory organization, it is subject to the rules that it is asked to enforce. As a company, it must abide by federal and state contract and tort law.

Get Advice on Your Situation

If you want someone to look at the specifics of your case, Spodek Law Group handles federal criminal defense nationwide from New York and Los Angeles. The firm has been practicing since 1976 and its motto is simple: we owe loyalty to only you. Call 212-300-5196.