(Reuters) - Wall Street brokers who dig in their heels when regulators ask for details about business dealings conducted outside of their brokerages play a risky and often career-ending game.
A battle waged by one former broker against the Financial Industry Regulatory Authority (FINRA) shows how quickly the tactic can go wrong.
FINRA wants the broker, Gregory Evan Goldstein, to hand over certain details about a consulting business he operates. But Goldstein, in a recent proceeding before the U.S. Securities and Exchange Commission, argued that details about the business, a third party that FINRA does not regulate, should be off-limits. Meanwhile, Goldstein was suspended from the industry as of February 15, and will eventually be barred and fined $50,000 if he continues to ignore FINRA’s requests.
The case is an example of FINRA’s authority to request a broad range of information from brokers, including businesses they may run on the side, in its effort to ensure they are complying with industry rules and to prevent potential wrongdoing. It also shows the steep challenges of trying to fight that authority, especially when signing on for a securities license means agreeing to comply with FINRA’s rules.
While FINRA, which oversees Wall Street’s brokerages, cannot randomly seek information directly from businesses it does not regulate, it can press Wall Street brokers and firms under its control for details they may have about those businesses if they are relevant to an investigation, according to industry rules.
Failing to respond to FINRA information requests is not a widespread practice among brokers, say lawyers. But it happens, as FINRA’s database of disciplinary cases reveals. Cases involving brokers who do not show up for interviews with regulators or ignore other record requests typically end with suspensions or bars.
Goldstein’s arguments, so far, failed to persuade the SEC to temporarily stop FINRA from imposing the sanctions while the SEC considers his broader appeal of those penalties, according to a February 11 opinion. The interim ruling does not surprise many lawyers. But they are perplexed by Goldstein’s insistence on waging a battle that typically ends badly for brokers - one they say will likely raise more suspicions among regulators.
While FINRA has long had broad authority to request information from its brokers, a recent rule change approved by the SEC makes those powers clearer than ever before, lawyers say. The new amendment, effective next week, spells out that FINRA can inspect documents in the “possession, custody or control” of its members when relevant to an investigation. That will make battles such as Goldstein’s even more difficult to wage, they say.
“I’d never tell FINRA, ‘You can’t have it,'” said Matthew Farley, a lawyer for Drinker Biddle & Reath LLP, who is not involved in Goldstein’s case. That is especially true when the activities are related to money or investments, where customers could be at risk, said Farley, who represents brokerages.
Goldstein, who is not accused of wrongdoing, told Reuters he refuses to provide FINRA information about the consultancy, which he testified does due diligence to see if companies are viable, because “they have no right to it.”
Goldstein’s troubles began in 2010 when FINRA began investigating Marquis Financial Services Inc, a two-person brokerage in Tarzana, California, where he was president. FINRA was concerned about suspicious trading in penny stocks.
That investigation revealed that Goldstein also operated an outside consulting business, Wall Street at Home.com Inc, since at least 2005 but did not report those activities to FINRA as industry rules require. Goldstein later testified that he conducted “due diligence” for the business to determine whether companies were “viable,” according to the SEC opinion. The nature of the business beyond that is not entirely clear.
FINRA notified Goldstein last year that it would suspend him for refusing to provide a range of details about the business, including customer names and his compensation. Goldstein asked the SEC to halt the suspension and other sanctions and accused FINRA of going on a “fishing expedition,” according to the SEC opinion.
FINRA, however, sees the case differently: it is looking for information about “potentially serious” securities violations, including whether Goldstein sold securities outside of the firm where he was registered, according to the SEC opinion. Moreover, his two companies are “closely tied.” Wall Street at Home owns a holding company that owns Marquis, according to the opinion.
Goldstein’s lawyer said the SEC, at least for now, has “glossed over” a larger concern: the confidentiality of FINRA’s investigative process.
Parties involved in private lawsuits, for example, could potentially subpoena investigatory records from FINRA, leading to sensitive client information, such as assets, being made public, said Martin Unger, the Garden City, New York-based lawyer who represents Goldstein. FINRA, a private organization, lacks the authority that a government agency has to shield its investigations from those requests, Unger told Reuters.
The SEC, however, rejected the claim as “speculative” and no excuse to violate FINRA’s rule. In fact, allowing such “abstract worries about privacy” to interfere with FINRA’s ability to enforce the rule would “eviscerate” the regulator.
Goldstein resigned from his brokerage last week, but says the once two-person shop is still in business. His future in the securities industry is far from secure.
Already, the SEC concluded that a key argument in his pending appeal of FINRA’s sanctions is “unlikely to succeed.”
Reporting by Suzanne Barlyn in New York; Editing by Jennifer Merritt and Matthew Lewis