A study conducted by financial services law firm Sutherland Asbill & Brennan finds that it sometimes pays for broker-dealers and registered representatives to take on regulators. The study analyzes the outcomes of disciplinary and administrative proceedings between October 2008 and September 2010—the SEC’s 2009 and 2010 fiscal years.
Some key findings:
• 57% of the time, the SEC fails to prove fraud charges, but FINRA had a 100% success rate (4 of 4 fraud charges were proven).
• 33% of SEC respondents were successful in receiving reduced sanctions when cases were appealed from SEC Administrative Law Judge (ALJ) to the full Commission
• 33% of the time the ALJ or the Hearing Panel imposed lower monetary sanctions than the amount FINRA or SEC staff initially sought, but 33% of the time the ALJ or Hearing Panel imposed higher monetary sanctions.
• 28% of SEC respondents got charges dismissed compared with 8.6% of FINRA respondents (out of 237 litigated charges)
• FINRA respondents represented by counsel were significantly more successful than pro se respondents. Since 2006, only one pro se FINRA respondent successfully got charges dismissed.
Often firms and individuals think it is better to settle with the regulators. However, based on the findings of this study, in some circumstances—usually where fraud is charged, respondents will fare better if they come before a judge or hearing panel. Further, the study purports to establish that there might not actually be a “settlement discount,” which is a tactic used by the regulators to incentivize settlement before entering into litigation. However, the study admits that the sample used to determine this finding is not likely a representative sample.
The bottom line: seek legal counsel before making the decision to settle or litigate. Again, the study only finds that litigants are more successful some of the time over those who settle.
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