Self-Reporting and Other Extraordinary Assistance Can Reap Benefits

FINRA and other regulators have long purported that substantial cooperation and self-reporting are given favorable consideration during the disciplinary phase after an investigation.

For over 15 years, FINRA (and its predecessor agencies) have encouraged member firms and associated persons to cooperate with them during exams and investigations in a candid manner, promising at least some level of leniency for those who do so. In July of this year, FINRA provided yet another public notice on this topic, Regulatory Notice 19-23 (“RN 19-23”).

RN 19-23 reiterates that pursuant to FINRA Rules 4530(b), 8210, and FINRA's Sanction Guidelines, a certain level of cooperation is expected any time FINRA is performing an examination, inquiry, or investigation. FINRA recognizes “extraordinary cooperation” as cooperation that is beyond “required cooperation” and does one or more of the following:

1. Shows an acceptance of responsibility and an acknowledgment of the misconduct at issue prior to detection and intervention by a firm or regulator,
2. Voluntarily employees initiatives to correct the issues prior to detection and intervention by a firm or regulator,
3. Voluntarily attempts to remedy the misconduct by restitution or another appropriate remedies prior to detection and intervention by a firm or regulator,
4. Voluntarily provides substantial assistance to FINRA during its examination and/or investigation of the misconduct at issue.

Per FINRA's Sanction Guidelines, “Sanctions in disciplinary proceedings are intended to be remedial and to prevent the recurrence of misconduct.” To the extent that member firms and associated persons show initiative in meeting this goal, FINRA states it will consider that fact when determining what, if any, disciplinary action they issue for misconduct. RN 19-23 provides three examples of FINRA adjusting its disciplinary decision based on what it deemed to be “extraordinary cooperation.”

FINRA also announces certain initiatives from time to time to further its goals of “investor protection and market integrity.” Once example of such an initiative is their “529 Plan Share Class Initiative” where FINRA encouraged member firms to review their 529 plan sales for common supervisory issues. To encourage firms to do this and to report their findings, FINRA stated they would issue settlement agreements for misconduct with no fines to remedy any identified and reported misconduct.

While there is always a risk when self-reporting, there is also a substantial risk in not doing so. Reviewing FINRA's RN 19-23 with counsel versed in securities regulations would be a wise first step in determining if and how you may wish to self-report or self-audit specific activity. Both member firms and associated persons can find themselves in a position where self-reporting should be considered. Taking that step can be daunting. Cosgrove Law Group, LLC has the experience to offer guidance and representation in such matters. Please give us a call!

SHOULD YOUR CIVIL DEFENSE ATTORNEY KNOW A THING OR TWO ABOUT CRIMINAL LAW?

The anticipated escalation of securities and investment fraud cases prompting criminal charges got off to an unexpected start with the acquittal of two Bear Stearns hedge fund managers last week. Regardless, financial industry members and their attorneys should continue to defend civil investigations and suits and administrative actions with an eye on the possibility of an indictment. Administrative enforcement personnel are in constant referral contact with criminal enforcement agencies such as the US Postal Service and the FBI. It is still all too common for either pro se defendants or targets, or defendants with counsel lacking financial or white-collar defense experience, to "T-up" a criminal prosecution by blindly participating in, or refusing to participate in, a civil or administrative action. Of course, in some cases, such as the Rothstein case coming out of Ft Lauderdale this month, the civil defendant and FBI target would have to be utterly clueless not to contemplate the advent of an indictment. But as the line between civil and criminal cases becomes less clear, and the public and political pressure to bring criminal cases persists, the brazen attorney or arrogant defendant may be in for a rude surprise.

Litigating a civil matter with an eye towards a potential criminal case is not an easy task. For example, asserting the privilege against self-incrimination in a civil or administrative matter is not without significant consequence, but the cost-benefit analysis of such an invocation should be evaluated and given serious and learned consideration. On the other hand, certain conduct in a civil matter--such as a lack of cooperation, witness tampering, or continuing on with the very conduct the regulator considers illegal--may frustrate the regulator or civil litigant to the point of seeking the involvement of a criminal enforcement agency. There are dozens of such points of decision or strategy during the course of any civil investigation or litigation. As such, there are seldom clear answers or boilerplate strategies. But the odds of making it through the treachery without blowing up yourself (or your client)are pretty slim if you don't even realize you are walking through a legal minefield. Remember, even an acquittal is only partial solace and seldom redemtive. The months of stress and distraction, public disgrace and incredible financial burden are not cured by the rare acquittal garnered by the Bear Stearns defendants. The line between civil and criminal investment or securities fraud is in the eyes of the beholder, and the beholder is the government until the case is submitted to the jury.