Friday, March 24, 2023

Cert petition challenges review process for FINRA discipline

By Anne Sherry, J.D.

The Chicago-based manager of a family office is asking the Supreme Court to limit FINRA overreach. According to the petition for certiorari, the petitioner had no obligation to respond to a FINRA request for information, but the SEC leveraged the resulting FINRA ban to deem him a recidivist. Given a district court dismissed his case against FINRA for lack of jurisdiction, the petitioner is asking the Supreme Court whether he really needs to exhaust all FINRA and SEC remedies first (Fife v. FINRA, March 20, 2023).

Background. John Fife runs a family office that manages his family’s millions, chiefly by use of private investments in public equity, or PIPEs. In 2007, the SEC charged Fife with violating the antifraud provisions of the Exchange Act by participating in an annuity market timing scheme; Fife settled the action.

In 2011, Fife became one of the two primary customers of broker-dealer Gordon & Co.; a family trust associated with Fife became a 12.5 percent holder of Gordon’s nonvoting shares. Later that year, FINRA requested that Fife and his wife give testimony in an ongoing investigation of Gordon. Given that they were not securities professionals, the couple declined, reasoning that they were not required to cooperate and that any resulting sanction would not affect their lives. FINRA barred the couple from association.

In 2020, the SEC brought new charges alleging that Fife and his companies acted as unregistered dealers in connection with the acquisition and sale of more than 21 billion shares of penny stock. The SEC’s complaint cites the agency’s own early enforcement action and the FINRA ban and calls Fife “a recidivist violator of the federal securities laws.” This spurred Fife to file against FINRA in federal district court, seeking a judgment nullifying his suspension. But the district court dismissed the action for lack of subject matter jurisdiction because the applicable statute grants jurisdiction to the court of appeals. The appeals court affirmed by summary order.

Petition. Fife is now taking the fight to the top. In the petition for certiorari, he presents the question “Whether Congress impliedly stripped federal district courts of their “exclusive jurisdiction” to determine whether FINRA violates the Exchange Act when it purports to exercise its disciplinary jurisdiction beyond the bounds set by Congress.”

Fife argues that both the district and appeals courts relied on a too-narrow reading of Free Enterprise Fund v. PCAOB (U.S. 2010), in which the Supreme Court recognized federal district court jurisdiction for a constitutional challenge. But the Court wrote there that it was unlikely Congress meant to limit district court jurisdiction, where doing so would foreclose all meaningful judicial review, the suit is collateral to a statute’s review provisions, and the claims lie outside the agency’s expertise.

By conflating the Exchange Act’s procedures with the doctrine of administrative remedies, the lower courts made the same mistakes as in two other cases pending before the Court: Axon Enterprise, Inc. v. FTC and SEC v. Cochran. “FINRA’s ‘quasi-governmental’ status as the SEC’s mall cop exacerbates the dangers posed in Axon and Cochran,” the petition writes. The result is that a district court cannot review whether FINRA, a “private not-for-profit,” correctly determined the bounds of its own jurisdiction. All of FINRA’s cited cases challenged the merits of the disciplinary proceedings; none involved a party alleging FINRA lacked jurisdiction over them in the first place.

Fife argues that nothing in the Exchange Act allows FINRA to discipline securities customers like himself; rather, its authority is limited to its members and associated persons. While Cochran and Axon involve one or two levels of administrative review, FINRA’s internal system requires litigants to exhaust ten layers of internal discipline, then a further 11th review by the SEC, before they can seek recourse in the courts. A lack of judicial oversight as to whether FINRA exceeded its powers means anyone can be subjected to this exhaustive review process, regardless of whether they have ever been FINRA associated persons, worked in the securities industry, or otherwise consented to jurisdiction.

The petition argues that the case is important because the resolution of the questions it involves will either facilitate or foreclose meaningful judicial review by citizens claiming that a private actor has harmed them in violation of the federal securities laws. Furthermore, Fife’s case “would allow the Court to work on the cleanest slate” because Fife essentially defaulted, so there are no findings as to whether he was an associated person. This makes the case a pure legal question with no contested facts.

The case is No. 22-924.