A US litigation team comprised of US Head of Regulation, Investigations, Securities and Compliance Kevin Harnisch (Washington, DC) and senior associate Ryan Meltzer (Austin) represented Scottsdale Capital Advisors in a significant victory before the Securities and Exchange Commission (SEC).
On September 17, the SEC handed a rare victory to the targets of a FINRA enforcement action, vacating FINRA's findings of violations and its assessment of sanctions against a broker-dealer, its founder, and two of its officers. FINRA had accused the broker-dealer, Scottsdale Capital Advisors, and certain of its principals of violating Section 5 of the Securities Act of 1933 by executing sales of unregistered microcap securities for its foreign financial institution customers, and of maintaining inadequate supervisory systems and written procedures to ensure compliance with Section 5. After a 12-day hearing in 2016, a FINRA panel found in favor of FINRA's Department of Enforcement on all counts and assessed severe penalties on all respondents—a US$1.5 million fine on the firm, a lifetime industry bar on the founder, and two-year industry suspensions and US$50,000 fines on two officers. In 2018, FINRA's National Adjudicatory Council (NAC) affirmed the hearing panel's findings and sanctions in full.
The respondents filed an immediate appeal to the SEC and moved to stay the effectiveness of the bar against the firm's founder, principally on the grounds that the NAC's decision affirming the sanctions against the founder was premised on an uncharged theory of liability (i.e., engaging in conduct that FINRA deemed "unethical" and not a violation of Section 5). The other sanctions were automatically stayed pending the appeal to the SEC. The SEC agreed that the founder had raised a serious legal question as to the fairness of the proceedings and the merits of his appeal, and, in an extremely rare move, stayed the effectiveness of the bar pending appeal. More than three years later, the SEC forcefully vindicated the respondents' position, setting aside all of FINRA's findings and sanctions.
The SEC concluded that FINRA had improperly and unfairly changed its theory of liability against the founder after the hearing, had misapplied the legal standards governing Section 5, and had made findings regarding the quality of the firm's supervisory procedures and the officers' responsibility that were unsupported by the record. Remarkably, the SEC declined to remand the case to FINRA to clarify its findings "given the significant flaws we have identified in the application of legal standards and FINRA's changing theories of liability in the case." The decision marks a significant victory for the respondents and illustrates the importance of the SEC's oversight of self-regulatory organizations like FINRA.