The Financial Industry Regulatory Authority responded this week in its legal conflict with Alpine Securities, a case that threatens the constitutionality of its enforcement powers (and by extension, the organization as a whole).
But while the self-regulatory organization made the case it worked within the bounds of the law, another registered rep facing FINRA disciplinary charges is trying to use Alpine’s success to halt his own enforcement proceedings.
In May, FINRA accused Sidney Lebental, a former rep with tenures at Deutsche Bank, Merrill and Bank of America Securities, of 523 instances of “spoofing” client trades (in which a trader would purchase stock orders to give the appearance of higher demand, while canceling the original order before execution).
But in a complaint filed in D.C. Circuit Court on Oct. 18, Lebental claimed he was “caught in the crosshairs” of the unconstitutional authority of FINRA’s Department of Enforcement, by mandating he appear before disciplinary proceedings he described as an “in-house tribunal.”
“While in every respect, the DOE functions as an agent of the executive branch in connection with its enforcement authority—mandated by Congress to enforce the nation’s securities laws with the authority to impart draconian and industry-barring sanctions against individuals—it nevertheless purports to act as a private entity unrestrained by the restrictions of the Constitution,” the Lebental complaint reads.
In the complaint, Lebental repeatedly cites Alpine Securities vs. FINRA, which is currently unspooling in the D.C. circuit. Alpine is a Utah-based brokerage firm with a long disciplinary history, but is challenging FINRA’s decision to expedite expelling the firm from the industry, claiming Alpine defied a cease-and-desist order.
However, FINRA ran into a roadblock when a three-judge panel in D.C.’s appeals court agreed to temporarily stay the ban in August, with Judge Justin Walker writing that Alpine may indeed be able to prove that FINRA “impermissibly exercises significant executive power.”
It’s this concurrence that Lebental often returns to in his effort to halt his disciplinary proceedings, quoting Walker that while FINRA is private, its “enforcement activities are controlled by the government.”
The D.C. Court’s stay on Alpine’s expulsion came in July, and one month later, Lebental requested FINRA’s DOE stay its own proceedings against him “pending the outcome” in the Alpine case. The department (and later, a FINRA hearing officer) denied Lebental’s request.
Lebental’s arguments against FINRA largely mirror Alpine Securities,’ with the broker accusing the agency of being a “front-line agent of the SEC” without the proper oversight a government agency typically entails.
But in a response to the Lebental complaint, a FINRA spokesperson said the agency has “strong defenses” to the claims, and that its constitutionality “has been affirmed by courts time and again in similar challenges.”
This week, FINRA submitted a brief in its defense in the Alpine case, arguing Alpine’s attempt to scuttle the agency poses “an existential threat not only to FINRA, but also to Congress’s time-tested approach of using private entities to assist in fulfilling important regulatory responsibilities and public functions—an approach that dates to the Founding.”
In the brief, FINRA also warned of the impact its dissolution would have on investors.
“Because the SEC lacks the resources to assume frontline regulatory responsibility over the securities industry—which is one of the primary reasons why Congress has preserved the self-regulatory model— investors would be left exposed to deception, overreaching and outright theft by unscrupulous industry members,” FINRA’s brief states.
Lebental is not the only broker seeking to overturn their own disciplinary tussle with FINRA. In July, Eugene Kim sought to halt FINRA proceedings against him in a D.C. Circuit Court filing, writing that although FINRA claimed to be a private corporation, in reality it operated as a “congressionally-authorized bounty hunter” with no oversight.
Like Lebental, Kim cited the Alpine order in his defense, but he was unsuccessful; the Court ruled against him, with District Judge Ana Reyes writing that the Alpine case “does not suggest that courts must enjoin every challenged FINRA enforcement action.”
Though Kim was unsuccessful, the broader dispute was likely to be a “live issue” for years to come, according to Professor Ben Edwards, a professor at the William S. Boyd School of Law at the University of Nevada, Las Vegas, in a previous WealthManagement.com interview.
“This argument will be tried and tried again until the Supreme Court puts it to rest one way or another,” Edwards said.