Here is a fascinating analysis by my partner, Michael Gross, of FINRA’s twisted logic when it comes to sanctions: your very decision not to admit liability and to put FINRA to its proof can, and will, be held against you when it comes time to determine the appropriate sanctions. Or will it? – Alan

The FINRA Sanction Guidelines, which are designed to ensure the imposition of fair and consistent sanctions, provide, among other things, that in determining what and how much sanctions to mete out, adjudicators should consider whether a respondent has acknowledged and accepted responsibility for his or her misconduct. On its face, this appears to be the ultimate Catch-22: How can I be exonerated if I admit that my actions are improper? Needless to say, this does not seem to be fair.

Held against Respondent

In the Anthony A. Grey case from 2015, FINRA charged Mr. Grey with, among other things, charging excessive mark-ups on municipal bonds. Mr. Grey fought the charges at the OHO, NAC, and SEC levels, arguing to each tribunal that his mark-ups were appropriate, and not excessive. He even presented expert testimony in support of his position. His arguments ultimately were rejected, and his mark-ups were found to be excessive by each tribunal. In the sanctions section of its Opinion, the SEC noted that Mr. Grey had not acknowledged that his misconduct violated the securities laws, and issued the following seemingly inconsistent statements:

We reject Grey’s argument that FINRA punished him for defending himself in a disciplinary action. The acceptance or acknowledgment of misconduct is a principal consideration in tailoring appropriate sanctions to deter future misconduct.

The SEC then cited another case where sanctions were adjusted upward for the same reason. By all appearances, Mr. Grey was punished for defending his mark-ups, and for not acknowledging that his mark-ups were improper. Of course, if Mr. Grey had admitted his mark-ups were excessive, he would not have mounted much, if any, of a defense. Hence, the Catch-22.

Not Held against Respondent

In the J.W. Korth & Company case, just decided a couple of weeks ago, FINRA similarly charged the respondent firm with charging excessive mark-ups on corporate bonds.[1] The firm, like Mr. Grey did in his case, argued its mark-ups were appropriate, and not excessive. As with Mr. Grey, the OHO Hearing Panel found the mark-ups to be excessive. The Panel, however, did not punish the firm for defending itself (despite FINRA’s argument that it should have done so), unlike Mr. Grey’s Hearing Panel:

While we agree that it is aggravating when a respondent refuses to accept responsibility for its misconduct, we do not find that J.W. Korth’s actions should be so characterized. J.W. Korth launched a vigorous defense and contested the allegations against it.

The Decision then explained how the firm presented evidence of the factors that it considered in making its pricing determinations and the supervision of its pricing practices.

Reconciliation?

While you try to wrap your head around the seemingly unfair notion that a respondent can be punished for defending himself, and the seemingly inconsistent results in these two cases, you should know that the J.W. Korth Decision contains a dozen citations to the Decisions and Opinion issued in Grey. This issue, however, may not be as unfair as it appears, and the two differing results may not be as inconsistent as they appear. Two factors may determine whether or not a tribunal will punish you for defending your actions: the nature of your misconduct and the manner in which you defend your actions.

Mr. Grey charged excessive mark-ups in connection with what was determined to be a fraudulent interpositioning scheme. J.W. Korth’s excessive mark-ups did not involve a fraudulent scheme. It is possible that the nature of the misconduct in the cases is what resulted in the differing interpretations of acceptance of responsibility. By way of a more extreme example in the context of a criminal case, it seems appropriate to punish more severely the thief caught red-handed stealing money who denies his obvious culpability than the same thief who acknowledges his guilt. In sum, there is a difference between defending actions that arguably may or may not be improper, and actions that clearly are improper.

It also is possible that the manner in which Mr. Grey and J.W. Korth defended their actions played a role in the decisions (although I cannot attest to that in either case). As the saying goes, you can catch more flies with honey than with vinegar. There is a difference between respectfully disagreeing with someone’s position, and impolitely doing so. The latter is rarely, if ever, successful in litigation – or life.