5 FAQs with FINRA Defense Attorney Nick Oberheiden
Securities professionals who find themselves under the watchful eye of the Financial Industry Regulatory Authority (FINRA) stand to lose a lot if they are not careful. Making a mistake during a FINRA investigation can expose brokers to significant civil liability, get them barred from the industry, and potentially even lead to criminal charges for securities fraud or a similar offense.
Here are answers to 5 frequently asked questions about the FINRA defense process by Dr. Nick Oberheiden, FINRA defense attorney .
1. I Received an 8210 Letter. Am I Under Investigation?
The 8210 Letter, also known as an OTR (on-the-record) Notice, is a formal request for information from FINRA. For securities professionals who are under investigation by the agency, it is generally the first indication that they will have that they are under scrutiny. However, 8210 Letters can also be sent to people who are not under investigation but who may have pertinent information for another inquiry.
Unfortunately, the express terms of the 8210 Letter rarely clarify this uncertainty. The Letter or Notice generally says that it is a “preliminary inquiry” into potential securities fraud or other wrongdoing.
However, the details of the information request in the Letter can provide clues about FINRA’s intentions. Based on what the agency is asking for and the circumstances surrounding the case, it is possible to read between the lines of the Letter and see what FINRA is getting at. However, it often takes an attorney who has seen numerous cases and FINRA investigations before to make an educated guess about what is going on.
While it may be imperfect, taking this step is essential. If the recipient of the Letter is the target of a FINRA investigation, the appropriate response is completely different than if the recipient is simply being asked to corroborate details that are likely being used in a separate investigation.
2. Why Should I Get My Own Lawyer When My Brokerage Will Provide One?
Many brokerage firms provide legal representation to their brokers if the individual is being investigated by FINRA. Nevertheless, brokers should strongly consider hiring their own defense lawyer from a reputable law firm because the brokerage firm’s lawyer has an inherent conflict of interest. If there comes a time during the investigation when the firm stands to benefit by throwing one of its brokers under the bus to escape liability, rest assured that they will do just that. In such a scenario, the legal representation by the firm’s lawyers becomes a liability: Brokers in this joint representation situation may be relying on the legal advice of the firm’s attorney until it is too late to protect their own interests and the damage has been done.
3. Can FINRA Send Me to Jail?
No, not quite. FINRA can only penalize securities professionals within the industry. However, if FINRA’s investigation uncovers evidence of fraud or a crime involving the sale of securities, it will pass that information on to federal law enforcement agencies like the Federal Bureau of Investigation (FBI) or Department of Justice (DOJ) for them to pursue federal investigations.
Basically, FINRA is limited to taking back only what it has given. For securities professionals, that includes the licenses and certifications that are required to work in the field, though FINRA can also impose civil penalties for securities violations. FINRA does not have the authority to send someone to jail or prison for violating securities law.
However, other government agencies have that authority, and FINRA has a longstanding practice of sending evidence of criminal activity to those agencies for a further federal investigation. If the FBI or DOJ receives word from FINRA about potential criminal activity, they will conduct their investigation or possible criminal prosecution. This can lead to criminal charges or civil and criminal cases that carry a significant amount of prison time. For example, a conviction for securities fraud under 18 U.S.C. § 1348 carries a fine, disgorgement of ill-gotten proceeds, and up to 25 years in prison.
So no, FINRA cannot send you to jail. But it can pass the information along to law enforcement agencies that can.
4. Should I Settle the Case to Avoid a Hearing?
This should always depend on numerous factors, including:
The strength of the case against the broker
The terms of the settlement offer
The broker’s personal interests
The strength of any defenses to the allegations FINRA is pursuing
The terms of the settlement offer are outlined in the Wells Notice, also called the settlement document. This Notice comes after the Wells call, which informs the individual that FINRA intends to take disciplinary action.
Unfortunately, the act of refusing to settle at this point has consequences for the broker: FINRA will send a notice of the charges it is going to pursue and the broker will be obligated to update his or her Form U4 to reflect the new investigation.
However, that should only be one factor in the decision to settle or not. If FINRA’s case is flimsy or if the broker has a strong defense to the allegations FINRA is levying, it can be in the broker’s best interests to deal with the blemish on their Form U4 for the time being and aim for an acquittal at the hearing, especially if the settlement terms are onerous.
Additionally, the terms of the settlement are not set in stone. They can be negotiated, and there are mediation services to facilitate a mutually-agreeable outcome to the case.
5. What is the Hearing Like?
If no settlement is reached, the case will go before a three-member panel at FINRA’s Office of Hearing Officers (OHO). These hearings are similar to a courtroom trial, but with some very important differences that throw off even the most skilled trial litigators if they are not familiar with FINRA’s process.
The general structure of the hearing is familiar: After opening statements from both sides, the FINRA enforcement team presents its case. The defense then presents its side of the story. FINRA enforcement then has an opportunity to rebut the defense. The defense may be allowed a counter rebuttal, but this is rarely offered by the hearing officers. Then there are closing statements.
The hearing usually lasts a couple of days, though complex cases can last weeks.
Outside of this general structure of the hearing, though, FINRA’s process is much more relaxed than the civil or criminal justice system. The normal rules of evidence do not apply, allowing a broader range of information into the hearing, including some that are arguably unreliable. The grounds to object to the introduction of evidence are much narrower, making it more difficult for the defense to keep damning but questionable evidence out of the hearing.
As Dr. Nick Oberheiden says, “The relatively relaxed environment for the FINRA hearing presents a steep learning curve for lawyers who have litigated in the courtroom but not before FINRA’s OHO. FINRA defense lawyers, however, know how to spin these evidentiary rules to our client's advantage and use them to present evidence that might not be allowed in a courtroom trial.”