From Ulmer’s Broker-Dealer Law Corner Blog
By Alan M. Wolper
A couple of years ago, I complained here about FINRA’s Office of Disciplinary Affairs, or ODA. I am here to report that…nothing has changed.
Let me explain. I am defending a FINRA Enforcement case that is scheduled to go to hearing in a few months. As is often the case, before the complaint was filed, FINRA offered my client the opportunity to settle through an AWC. Predictably, what FINRA wanted for a sanction was…a permanent bar. Period. No discussion, no room for compromise. I don’t blame the lawyers for this intransigence, however. In that setting, they are just the mouthpiece for ODA, that faceless, nameless, secretive entity that is empowered to authorize the issuance of complaints and to accept (or reject) settlements. So here, it was ODA that decreed that only a bar would be sufficiently remedial to address the alleged rule violations at issue, and the Enforcement lawyers were stuck conveying that message to me, regardless of whether they agreed with it or not. (And I can tell you, at least based on my own experience, that Enforcement lawyers often do not agree with ODA’s assessment, and would be more than happy to settle cases for sanctions more benign than ODA insists upon, but are not permitted to do so.)
Anyway, to the point of this post: as happens in every Enforcement action, soon after the complaint is filed, the parties are reminded of their ability to mediate the dispute. Mediation does not impact the timeline of the Enforcement action; that is, the various deadlines that appear in the typical Case Management Order, including the actual hearing dates, are not adjusted at all if the parties agree to mediate, so you have to find the time to squeeze it in. On occasion, it’s worth it, as the mediation is successful, and the case settles before it lurches to a hearing. Here, despite its repeated insistence that the only sanction it could support was a permanent bar, Enforcement agreed to mediation.
I took that to be a positive sign. I mean, why would Enforcement mediate if it was still unwilling to compromise from the bar, right? There would be no point, and it would be a waste of everyone’s time and money.
So we did the mediation. It is done telephonically, with a Hearing Officer, but a different one than the one who was appointed to hear the case serving as the mediator. She was more than competent and very experienced, and very willing to help, and things started out promising enough.
What happens in a mediation is confidential, which is why this post is short on details, so I can only give you a broad outline of what transpired. But, what happened was this: very quickly into the mediation, it became clear that Enforcement was still insistent that the only possible remedy it would even consider was a bar. As was the case from the outset of this exam, no room for discussion, no room for compromise. In other words, Enforcement was at the same place it was before it filed the complaint in the first place. With the mediator’s blessing and understanding, the mediation ended almost as soon as it began.
Which raises the question, why did Enforcement agree to mediate? Why put my client through the time, trouble and expense of preparing for and attending the mediation only to hear the very same inflexible message that had been delivered already? Frankly, I don’t know the answer here. As defense counsel, I will not agree to mediate unless my client commits to a willingness to compromise, which usually means a willingness to write a check for some amount. If my client denies liability and refuses to pay a dime, I will decline to participate in mediation (even though, admittedly, there can be a real strategic benefit of participating in a failed mediation, namely, getting a “sneak peek” of the arguments and important facts the other side will be focusing on at the final hearing, and perhaps an opportunity to gauge how the principal opposing party will perform as a testifying witness).
Regardless of the reason for FINRA’s rigidity here, it left a bad taste in my mouth, and my client’s, as well. Look, the entire Enforcement process feels stacked against the respondent from the very beginning and throughout the case. FINRA statistics reveal that Enforcement wins the vast majority of the cases it brings. Respondents’ procedural motions are rarely granted. Sanctions seem overly harsh and punitive. Parties who lose are rarely successful on appeal; indeed, the NAC is famous for increasing sanctions. And anyone that is counting on the SEC to fix on appeal what FINRA failed to get right is more than a bit overly optimistic.
But, these are known facts, facts that I can bake into my advice to clients who have to decide whether to settle or fight. What I cannot necessarily account for, however, is what appears to be a lack of good faith by ODA when it comes to settlement, which impacts both Enforcement and me. ODA was created way back when to serve as a check on Enforcement’s powers, once the Code of Procedure was changed to give Enforcement, rather than the District Business Conduct Committees, the power to file complaints and accept settlements. But, no equivalent check exists relative to ODA. It acts with impunity, and answers to no one. That needs to change.
 To combat my adversary from employing that strategy against me, I am increasingly hesitant to participate in a joint opening session at the mediation, one in which both sides appear before the arbitrator and lay out their respective cases. Instead, when possible, I waive the opening joint session, so the opposing party only learns what I permit the mediator to share from our private caucus, which is very little if it becomes evident that the chance of settlement is remote.