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Mcginn, Smith & Co., Inc. et al v. Financial Industry Regulatory Authority

May 15, 2011


The opinion of the court was delivered by: Colleen Kollar-kotelly United States District Judge


This action was filed on May 2, 2011 by pro se Plaintiffs David L. Smith and Timothy M. McGinn for injunctive relief against Defendant Financial Industry Regulatory Authority ("FINRA").*fn1 Plaintiffs seek to compel FINRA to stay a disciplinary proceeding that is scheduled to begin on May 16, 2011 until the conclusion of a civil proceeding pending against Plaintiffs in the United States District Court for the Northern District of New York, SEC v. McGinn, Smith & Co., No. 10-cv-457 (GLS) (DRH) (N.D.N.Y. filed Apr. 20, 2010). Although the disciplinary proceeding was scheduled to occur just two weeks after the Complaint was filed, Plaintiffs did not initially file this action with a request for a temporary restraining order or a preliminary injunction. On May 10, 2011, counsel for FINRA contacted the Court by telephone and informed the Court that FINRA had received by mail a copy of a motion for temporary restraining order that Plaintiffs appeared to be filing with the Court. The Court informed counsel for FINRA that the Clerk of the Court had not yet received any motion for temporary restraining order ("TRO") filed by the Plaintiffs but requested that FINRA file an opposition to the motion by May 11, 2011, which they did. On May 12, 2011, the Clerk of the Court received and docketed Plaintiffs' motion. Plaintiffs filed a reply to FINRA's opposition on May 13, 2011. Accordingly, the parties have fully briefed Plaintiffs' motion for TRO and the issues presented are ripe for resolution.

For the reasons explained below, the Court finds that because Congress has vested judicial review of FINRA disciplinary proceedings exclusively with the Courts of Appeals, this Court lacks jurisdiction to hear Plaintiffs' request for a stay of the FINRA discplinary proceeding. Furthermore, the Court finds that transfer in lieu of dismissal is not in the interest of justice because Plaintiffs are not likely to succeed on the merits of their claim for injunctive relief and they have not demonstrated that they will suffer irreparable harm as a result of the FINRA disciplinary proceeding. Accordingly, the Court shall deny Plaintiffs' [8] Motion for Temporary Restraining Order and dismiss this action for lack of subject matter jurisdiction.


The following facts are drawn from the allegations in Plaintiffs' Complaint as well as the exhibits attached to FINRA's opposition to Plaintiffs' request for a TRO. Because of the expedited briefing schedule, the parties have presented the Court with a limited record, and the Court's ruling is necessarily based on the limited record provided by the parties.

A. Statutory and Regulatory Background Financial Industry Regulatory Authority, Inc. ("FINRA") is a private not-for-profit corporation and a self-regulatory organization that is registered with the Securities and Exchange Commission ("SEC") as a national securities association pursuant to § 15A of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 73o-3. Nat'l Ass'n of Sec. Dealers, Inc. v. SEC, 431 F.3d 803, 804 (D.C. Cir. 2005).*fn2 "By virtue of its statutory authority, [FINRA] wears two institutional hats: it serves as a professional association, promoting the interests of its members, and it servers as a quasi-governmental agency, with express statutory authority to adjudicate actions against members who are accused of illegal securities practices and to sanction members found to have violated the Exchange Act or . . . [SEC] regulations issued pursuant thereto." Id. (internal citations omitted); 15 U.S.C. § 78o-3(b)(7). Disciplinary actions brought by FINRA's Department of Enforcement may be adjudicated before a FINRA Hearing Panel and appealed to the FINRA National Adjudicatory Council. 431 F.3d at 804. FINRA must notify the SEC of any final disciplinary action taken against a member. 15 U.S.C. § 78s(d)(1). The SEC may review FINRA's decision de novo pursuant to a petition from the aggrieved member; the SEC may also review the action sua sponte. Id. § 78s(d)-(e); 431 F.3d at 804. A person aggrieved by a final order of the SEC may obtain judicial review by filing a petition with the United States Court of Appeals for the District of Columbia Circuit or for the circuit in which he resides or has his principal place of business. 15 U.S.C. § 78y(a)(1). This statutory system authorizing self-regulatory organizations to act as quasi-governmental agencies in disciplining members for federal securities law violations has existed for over 70 years. See Nat'l Ass'n of Sec. Dealers v. SEC, 431 F.3d at 804.

B. Factual Background

Plaintiffs David L. Smith and Timothy M. McGinn are part owners of McGinn, Smith & Co., Inc. (the "Firm"), which is based in Albany, New York and conducts a general securities business. See Compl., Ex. 1 (FINRA Dept. of Enforcement Complaint) ¶ 10. The Firm has been a member of FINRA since 1981, and Plaintiffs have each been registered with FINRA as general securities principals since November 25, 1980. Id. ¶¶ 10, 11 & 14. On April 5, 2010, FINRA's Department of Enforcement filed a complaint with the FINRA Office of Hearing Officers alleging that Plaintiffs and the Firm conducted four fraudulent unregistered securities offerings between September 2003 and November 2006. See generally id. Among other things, the complaint accused Plaintiff Smith of misusing funds for his own personal use, accused Smith and the Firm of making misrepresentations to investors, failing to establish and maintain a supervisory system to ensure compliance with applicable securities laws and regulations and FINRA rules, and accused Plaintiffs of providing FINRA with falsified documents. Id. The Department of Enforcement requested relief in the form of sanctions, including disgorgement of ill-gotten gains, and a finding that the Firm and Smith had willfully violated securities laws and regulations.

Because FINRA believed that Plaintiffs had violated securities laws and regulations, FINRA referred the matter to the SEC for further investigation. The SEC commenced its own formal investigation on January 5, 2010. See Def.'s Ex. 1 (Memorandum Decision and Order, SEC v. McGinn, Smith & Co. (N.D.N.Y. Jan. 5, 2011)) at 4. FINRA provided the SEC with evidence from its investigation, which included testimony from Plaintiffs. Id. On April 20, 2010, the SEC filed a civil action against Plaintiffs and the Firm in the U.S. District Court for the Northern District of New York alleging that Plaintiffs had violated the antifraud provisions of the Exchange Act and other securities laws and regulations. The federal court appointed a receiver to take possession of the Firm and its related assets and entities and enjoined any person from taking actions that would interfere with the taking control, possession, or management of these assets. See Def.'s Ex. 3 (Order to Show Cause, Temporary Restraining Order, and Order Freezing Assets and Granting Other Relief). On July 8, 2010, the hearing officer presiding over the FINRA enforcement action issued an order staying the proceeding against McGinn, Smith & Co. based on the federal court's order. See Def.'s Ex. 4 (Order Staying Proceeding Against McGinn, Smith & Co. and Directing Remaining Parties to File Proposed Hearing Schedule).

On July 28, 2010, the FINRA hearing officer issued a scheduling order setting the dates for the hearing as May 2-20, 2011. See Compl., Ex. 3 (Scheduling Order). On January 12, 2011, Plaintiffs' counsel withdrew from the FINRA proceeding. See id., Ex. 4 (Amended Scheduling Order). The hearing officer issued an amended scheduling order on February 15, 2011, which set the hearing for May 16-26, 2011 in Albany, New York. Id.

On March 21, 2011, the FINRA hearing officer conducted a telephonic pre-hearing conference. See Compl., Ex. 6 (Order Denying Respondents' Oral Motion for Stay). Plaintiffs represented themselves during the conference and requested that the disciplinary proceeding be stayed until after the SEC action is concluded. Id. Plaintiffs informed the hearing officer that the SEC action was in the initial discovery phase, that 50 depositions would be scheduled between May and December 2011, that some depositions may conflict with the dates set for the FINRA hearing, and that a trial date had been set in March 2012 for the SEC matter. Id. Plaintiffs argued to the hearing officer that they could not defend themselves in the disciplinary proceeding because they were unable to obtain the books and records of the Firm, which were now in the possession of the SEC and/or the appointed receiver. Id. Plaintiffs suggested that if a stay were granted, they would be willing to consent not to re-enter the securities industry for the duration of the stay. Id. The FINRA Department of Enforcement opposed the stay, noting that the hearing dates had initially been set in July 2010. Id. It also represented that it had provided Plaintiffs with discovery consisting of approximately 30,000 pages of documents several months earlier and that it was incapable of providing Plaintiffs with access to documents in the possession of third parties. Id. The FINRA hearing officer denied Plaintiffs' request for a stay. In reaching his decision, the hearing officer cited the age of the case, the fact that the Department of Enforcement had provided extensive discovery materials, the uncertainty as to when the SEC case would conclude, the fact that lengthy delays increase the difficulty of reaching a fair resolution of the issues presented, and the importance to the parties and the investing public of reaching a fair and expeditious resolution of the case. Id.

As part of their defense in the SEC action, Plaintiffs contend that the testimony they gave to FINRA was compelled in violation of their Fifth Amendment rights against self-incrimination because FINRA was allegedly acting on behalf of the SEC in compelling their testimony. See Def.'s Ex. 1 at 4-5. To discover evidence supporting this defense, Plaintiffs served interrogatories on the SEC and subpoenas on FINRA and its employees seeking information relating to their investigations. Id. at 5. FINRA moved to quash the subpoenas, and the court granted FINRA's motion. The court held that Plaintiffs had failed to establish that FINRA was acting on behalf of the SEC in conducting its own investigation and sharing evidence with the SEC. See id. at 15-17. FINRA had provided the court with declarations from officials who explicitly denied that FINRA took any action in its investigation at the request of the SEC. See id. at 15-16.

C. Plaintiffs' Complaint and Motion for TRO

In their Complaint in this action, Plaintiffs ask the Court to order that the FINRA disciplinary proceeding and hearing scheduled for May 16-26, 2011 in Albany, New York be stayed until the conclusion of the SEC action pending the Northern District of New York. Plaintiffs allege that "FINRA has repeatedly violated the Complainants [sic] civil rights as a result of an unconstitutional state action by FINRA acting as a proxy for the federal government (SEC)." Compl. at 1.*fn3 Plaintiffs generally allege that FINRA has been and continues to work in collusion with the SEC. Plaintiffs argue that the SEC did not conduct an independent investigation before filing its complaint and relied entirely on FINRA's investigation. Id. at 11. They claim that the only reason the FINRA hearing officer granted a stay with respect to the Firm and not with respect to Plaintiffs is because the SEC wants the disciplinary proceeding to go forward so that the SEC can gain advantage over Plaintiffs in the civil action. Id. at 1. Plaintiffs contend that the hearing should not go forward as scheduled because the hearing will disclose Plaintiffs' defenses, which Plaintiffs allege will then be used by the SEC to its advantage in the civil action. Id. at 2-3. Plaintiffs also contend that an adverse ruling would be used by the ...

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