I am on the record, many times, with my belief that, at least in theory, FINRA should never lose any Enforcement cases it files. This is for the simple reason that if FINRA has any genuine doubts about its ability to prevail in front of a hearing panel, due to the quality of the evidence that’s been gathered, it doesn’t have to file a complaint; rather, it can just settle the case cheaply and/or charge respondent with a more benign rule violation. Given this dynamic, it is easy to understand why FINRA generally does not lose Enforcement cases. Sometimes, however, it does. These occasional decisions typically provide some lesson to be learned in how to defend a FINRA complaint; and, if they don’t, at least they provide the opportunity to celebrate a respondent’s victory.

Last week, Stanley Clayton Niekras, a former registered rep, managed to beat FINRA in a one-count complaint that accused him of making material misrepresentations in violation of Rule 2010. Essentially, the case boiled down to an accusation that Mr. Niekras took advantage of a strong relationship he had with a wealthy, senior couple to induce them to pay him for financial planning services that he had rendered to them. The couple themselves, it seems, had no issues with Mr. Niekras. Their adult children, however, viewed things rather differently. One of the children eventually filed a written complaint with FINRA about Mr. Niekras, and that ultimately led to the issuance of the Enforcement action.

According to the decision, the adult children told FINRA that their parents were too old to provide any meaningful assistance, and affirmatively prevented the examiner assigned to investigate the complaint from contacting the parents. Thus, everything FINRA ever learned before filing the Enforcement complaint came from the adult children and Mr. Niekras, but not from the two people who were the “victims” of the alleged misrepresentations.

That carried through to the hearing itself. At the outset of the hearing, in the opening statement, the Enforcement lawyer announced that while the case was indeed about the two parents, they were “94 and 95 years old, and, unfortunately, they will not be appearing at this hearing.” Enforcement reassured the Hearing Panel, however, it would hear from the adult daughter, who would “testify about conversations she had with her father.” As the decision put it, this “suggest[ed] that, but for their advanced years, the [parents] would have testified and Enforcement would not have needed to offer evidence through a surrogate.”

Turns out that FINRA’s suggestion was way, way off. The decision contains a very detailed discussion of the parents’ mental and physical condition, too detailed to recount here, but, it came down to this finding by the hearing panel: “[T]he record does not reflect that they suffered from mental or physical health problems preventing them from having provided evidence, in some form, at least during the investigation.” Notably, FINRA didn’t even bother to get the parents to sign Declarations in lieu of providing testimony. I am not saying that I advocate the use of such – indeed, when confronted with Declarations instead of live witnesses, I routinely argue as to the unfairness, given the inability to cross-examine the declarant. But, from FINRA’s perspective, arguably a Declaration is better than nothing. The hearing panel observed, however, that while the adult daughter “testified that it would have been emotionally difficult and painful for her parents to have provided a written statement or declaration, she did not point to any physical or mental infirmity that would have prevented them from doing so.”

This led to my favorite part of the decision, which recounts what happened on the night before the last day of the hearing. Apparently, Mr. Niekras and his attorney “drove unannounced to the [parents’] home and met with [the huband] for about an hour.” According to Mr. Niekras, the husband was “very sharp . . . sharp as a tack.” The decision continues:

Mr. Niekras claimed that when he asked [the husband] to testify, [the husband] told him he was unaware of this proceeding, but “would do anything he could to help,” including testifying, because Niekras had been loyal to him and had never cheated him or presented him with a bill. [The husband] and Niekras arranged for Niekras to pick up [the husband] the next day to take him to the hearing. But when Niekras and his counsel arrived at the [parents’] home the next morning, [the adult daughter and one adult son] were there and [the adult daughter] told him not to get out of his vehicle, so he left.

At the hearing, Mr. Niekras brought these developments out, and Enforcement basically corroborated them. And, in doing so, Enforcement counsel uttered these soon-to-be-famous lines:

I have not said this on the record before, but we were specifically requested not to call [the husband] to testify because the perception by his children is that it would not be good for him, good for his health. And, we respected that because that’s part of what we do as FINRA Enforcement lawyers. We don’t wave around a heavy hand like we may have if we were federal or state prosecutors.

NOW you see why I HAD to blog about this decision.

As to the merits of the case, turns out that without the parents’ testimony backing its allegations, FINRA had nothing but the adult children. And the hearing panel, to its credit, wasn’t buying what they had to say. With regard to the adult daughter, in particular, the panel noted that she “impeded the investigation and Niekras’s defense by shielding the [parents] from contact with the parties,” and that “her objectivity was questionable” as “she was openly hostile toward Niekras.” Not quite sure what’s so special about that last observation, as FINRA routinely trots out customers who are “openly hostile” to my clients, yet hearing panels have no problem believing them, but I suppose that’s an issue for another blog post. The bigger problem was that the adult children were the only ones who testified for FINRA, but they were also the only reason that the parents themselves did not appear to testify. As a result, the hearing panel chose not to believe the only witnesses that FINRA produced in support of the allegations.

Here is what I take from this case: FINRA Enforcement lawyers have to remember that just because they are presented with an exam report from Member Reg with a recommendation to proceed with a complaint, the evidence supporting that recommendation may not be there. Enforcement owes it to prospective respondents everywhere actually to do its job, to conduct a real review of the exam report for sufficiency of evidence, not merely to rubber-stamp Member Reg’s opinion. Had Enforcement done that here, it would have realized that it could not prove a misrepresentation case without the ability to produce as witnesses the only two people who actually heard the alleged misrepresentations, and Mr. Niekras would not have had to go through with this silly charade of a case.