Federal Appeals Court Deems FINRA Deputy of the Federal Government
November 6, 2017
Starting in 2009, the Financial Industry Regulatory Authority went toe-to-toe with Antony Lee Turbeville, the former Chairman and CEO of the former FINRA member firm Brookstone Securities, which went down for the count in 2012. Turbeville held on to FINRA for as many rounds as possible but, in the end, he lost by a KO at the self-regulatory-organization and, thereafter, by TKOs during both the Securities and Exchange Commission's appellate review and in a separate civil lawsuit he filed against FINRA. Today's BrokeAndBroker.com Blog offers a blow-by-blow post-fight analysis.
Case In Point
Some eight years ago, the Financial Industry Regulatory Authority ("FINRA") filed FINRA Department of Enforcement, Complainant, v. Brookstone Securities, Inc., Antony Lee Turbeville, Christopher Dean Kline, and David William Locy, Respondents (Complaint, 2007011413501, January 6, 2009). As set forth, in pertinent part, under the heading "RESPONDENTS AND JURISDICTION":
10. Brookstone Securities, Inc. is currently, and was during all times relevant hereto, a member of FINRA and registered as a broker-dealer with the U.S. Securities and Exchange Commission. Brookstone purchased predecessor broker-dealer RISE, Inc. on July 14, 2005. RISE, Inc. had been a member of FINRA since April 8, 1983, Brookstone is a private 3 corporation that is over 75% directly owned by Antony Lee Turbeville, The firm currently employs 157 registered personnel and operates 44 branch offices.
11. Antony Lee Turbeville entered the securities industry in July 1987, when he associated with a FINRA member firm. He subsequently registered with 11 different member firms, including Brookstone in April 2005. Turbeville serves as a General Securities Principal and a Registered Representative with Brookstone. He is also the firm's Chairman of the Board, Chief Executive Officer, and a 75% owner. Additionally, Turbeville is a Registered Investment Advisor with, and a direct owner of, Brookstone Investment Advisory Services. During his career in the securities industry, Turbeville obtained Series 6, 7, 24 and 63 securities licenses.
The FINRA Complaint asserted six Causes of Action:
I. Fraud -- Misrepresentations and Omissions by Respondents Brookstone, Turbeville and Kline
II. (Alternative to First Cause of Action) Negligent Misrepresentations and Omissions by Respondents Brookstone, Turbeville and Kline
III. Unsuitable Recommendations by Respondents Brookstone, Turbeville and Kline
IV. Respondents Brookstone and Turbeville's Violations of NASD Advertising Provisions
V. Respondents Brookstone and [NAME REDACTED IN COMPLAINT] Failed to Review Customer Discretionary Accounts
VI. Supervisory Violations by Respondents Brookstone, Turbeville and [NAME REDACTED IN COMPLAINT]
As set forth, in part, under the heading "SUMMARY," FINRA alleged that:
1. During the period from July 2005 through July 2007, Brookstone Securities, Inc., acting through registered representatives Antony Lee Turbeville and Christopher Dean Kline (collectively, "Respondents"), fraudulently induced certain retail customers to invest in complex, high-risk collateralized mortgage obligations ("CMOs"), mortgage-backed securities that are collateralized by pools of private home mortgages. Respondents utilized discretionary trading authority to execute transactions in Inverse Floater bonds, hedged to a very small degree by purchases of Interest Only and/or Tiered-Index Bond CMOs in both cash and margin accounts, for eight mostly senior and/or retired customers for whom the risk and complexity was unsuitable.
2. Through material misrepresentations and omissions, Respondents led the customers to believe that by investing in the recommended CMOs, they could safely achieve high annual returns of 10% or more, with the government backing the investments. In reality, the CMOs that Respondents purchased for the customers were not government guaranteed, and were subject to price volatility and to uncertain cash flows and maturities, based on changes in interest rates. . .
OHO Decision 2012
Following 16 days of hearing from June 13, 2011, to February 17, 2012, a FINRA Office of Hearing Officers ("OHO") Extended Hearing Panel ("OHO Panel") issued FINRA Department of Enforcement, Complainant, v. Brookstone Securities, Inc., Antony Lee Turbeville, Christopher Dean Kline, and David William Locy, Respondents (OHO Extended Hearing Panel Decision, 2007011413501, May 31, 2012). As set forth in the "Syllabus" to the OHO Decision:
For violating Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, as well as Rules 2120 and 2110, by making fraudulent misrepresentations and omissions of material fact in selling complex, esoteric, and risky tranches of collateralized mortgage obligations ("CMOs") to unsophisticated, elderly, and retired investors, Brookstone was censured and fined $500,000, and Turbeville and Kline were barred from associating in any capacity with any FTNRA-regulated firm. The Second Cause of Action, which alleged, in the alternative, that Brookstone, Turbeville, and Kline acted negligently, was subsumed by the fraud charge. For violating Rules 2310(a) and 2110 by making unsuitable recommendations of CMOs, Brookstone was fined $300,000, and Turbeville and Kline were barred from associating in any capacity with any FINRA-regulated firm. For violating Rules 2210(d)(1)(A) and 2210(d)(1)(B) by making misrepresentations, omitting material facts, and using misleading statements in letters to customers, Brookstone was fined $50,000. For violating Rules 2510(b) and 2110 by failing to review customer discretionary accounts, Brookstone was fined $50,000, and Locy was barred from acting in any supervisory or principal capacity with any FINRA-regulated firm. For violating Rules 3010(b) and 2110 by failing to adequately supervise customers' CMO accounts and transactions, and by failing to safeguard customer information, Brookstone was fined $100,000, and Locy was barred from acting in any supervisory or principal capacity with any FINRA-regulated firm, suspended from associating with any FINRA-regulated firm in any capacity for two years, and fined $25,000. Brookstone also was ordered to pay restitution in the amount of $1,620,100 with $440,600 of that amount imposed jointly and severally with Turbeville, and the remaining $1,179,500 imposed jointly and severally with Kline. The Respondents were also ordered to pay the hearing costs, which were assessed jointly and severally.
The Hearing Panel listened to and observed Turbeville testify for a full day. While he displayed an understanding of CMOs, the Hearing Panel did not believe his claims that he fully explained the strategy to his clients so that they understood all of the risks involved in trading CMOs, or the risks of trading on margin. His testimony that his customers' account forms accurately reflected their investment objectives was contradicted by each of his customer's testimony and sworn declarations. He showed no remorse for his customers' losses, and insisted that they understood the CMO strategy, despite their claims that they did not.The Hearing Panel did not find Turbeville's testimony credible. The Hearing Panel found that his customers, who did not know one another, testified truthfully when they said they did not understand how CMOs worked, and that they had never understood how they worked. The Hearing Panel believed the customers when they testified that they had invested in the CMO strategy because they trusted Turbeville when he told them that their assets would be safe and would grow, whether interest rates went up or down. The marketing materials and the Financial Profile that Turbeville gave to one of his customers (Mr. MR) corroborated MR's and the other customers' testimony. In addition, the testimony of the three experts, two of whom were Respondents' experts, supported the Hearing Panel's conclusion that the CMOs at issue and the trading strategy proposed by Brookstone and Turbeville, were too complex for Turbeville's unsophisticated customers to understand.
Turbeville intentionally made multiple misrepresentations and withheld material facts from his customers regarding the characteristics and risks associated with CMOs, the implementation of Brookstone's CMO strategy, and the use of margin to invest in CMOs. He made these fraudulent misrepresentations and omissions to enrich himself -- initially to lure his customers to purchase CMOs, and later to induce them to allow him to continue trading their accounts. He preyed on their greatest fears -- losing their assets to nursing homes and becoming destitute during their retirement and old age. All of the factors that aggravate Brookstone's conduct also apply to Turbeville. The Hearing Panel found that Turbeville's violation is egregious and found no mitigating factors. He is therefore barred from associating with any FINRA-regulated firm in any capacity.
Firm and registered representatives made unsuitable recommendations and committed fraud; firm and a registered representative violated the content standards applicable to member communications with the public; firm and registered representative failed to review customer discretionary accounts; and firm and registered representatives failed to supervise reasonably the firm's activities. Held, findings and sanctions affirmed
Page 2 of the MDFL OrderA close reading of the complaint demonstrates that the claims are premised on FINRA's failure to follow its own regulations. Federal law is clear that these types of artfully pled "state law" claims are preempted. Federal law is also clear that FINRA is immune from these types of claims.
While the FINRA Case was on appeal to the NAC, FINRA learned that Turbeville had filed a lawsuit in Florida state court against the elderly clients who had testified against him in the FINRA disciplinary hearing. FINRA opened an investigation to determine whether Turbeville's lawsuit constituted an additional violation of FINRA rules. Specifically, on July 3, 2013, FINRA issued a Wells Notice to Turbeville, advising him that FINRA had determined it had sufficient cause to file a disciplinary proceeding against him and inviting Turbeville to submit a response to persuade FINRA not to file a case. At that time, Turbeville was no longer registered with a broker-dealer. Ultimately, FINRA publicly released through BrokerCheck that a Wells Notice had been issued to Turbeville. Specifically, in a section captioned "Details," the Disclosure Event entry stated as follows:WELLS EXAMINATION #20130375047: ON JULY 3, 2013, FINRA MADE A PRELIMINARY DETERMINATION TO RECOMMEND THAT DISCIPLINARY ACTION BE BROUGHT AGAINST ANTONY TURBEVILLE ALLEGING HE FILED A FALSE COMPLAINT AGAINST AND ATTEMPTED TO INTIMIDATE WITNESSES IN A FINRA DISCIPLINARY ACTION, IN VIOLATION OF FINRA RULE 2010.(Dkt. 2 at p.39). Turbeville, through counsel, disputed the Wells Notice and FINRA later withdrew and removed it from the BrokerCheck report.
Pages 3 - 5 of the MDFL OrderUltimately, Turbeville dismissed his lawsuit against his former clients after the Florida state court ordered him to arbitrate his claims. Turbeville then filed the instant action in state court. Turbeville's complaint alleges that FINRA, in violation of its own regulations, publicly disclosed the Wells Notice. Turbeville alleges that the Wells Notice was first published in or around July, 2013, and was continuously published until 2014, or 2015. According to Turbeville, FINRA published the Wells Notice maliciously to prevent Turbeville from clearing his name and reputation. During the entire time that the Wells Notice was published, Turbeville was neither a member of FINRA, nor was he associated with a member of FINRA. And he contends that the allegations contained in the Wells Notice were false. Turbeville's claims of defamation, abuse of process, intentional interference with a prospective advantage, and conspiracy are premised on FINRA's publication of the Wells Notice. Turbeville avers that he lost potential clients as a result of the publication of the Wells Notice.
The law is clear that "[b]ecause they perform a variety of vital governmental functions, but lack the sovereign immunity that governmental agencies enjoy, SROs are protected by absolute immunity when they perform their statutorily delegated adjudicatory, regulatory, and prosecutorial functions." Weissman v. Nat'l Ass'n of Secs. Dealers, Inc., 500 F.3d 1293, 1296 (11th Cir. 2007); Empire Fin. Grp., 2009 U.S. Dist. LEXIS at *19 (holding that FINRA has absolute immunity from tort claims concerning its regulatory duties).
Turbeville's claims relate to FINRA's actions of conducting a disciplinary investigation against him and subsequently making that investigation public on BrokerCheck; these actions fall squarely within FINRA's regulatory duties. As such, the claims against FINRA are barred by FINRA's absolute regulatory immunity. See Santos Buch v. Fin. Indus. Regulatory Auth., Inc., 591 Fed.Appx. 32, 34 (2d Cir. 2015) ("Because all of the relevant conduct by FINRA (and by NASD and NASDR before it) was undertaken in furtherance of its regulatory responsibilities as an SRO, it is immune from [the plaintiff's] claims for damages"). The immunity applies "regardless of FINRA's alleged motives" and despite any disagreement Turbeville has with respect to the manner in which FINRA carried out its regulatory function. See Empire Fin. Grp., 2009 U.S. Dist. LEXIS at *19.
Turbeville alleges that FINRA's disclosure of the Wells Notice on his BrokerCheck records violated FINRA rules requiring non-public FINRA investigations. Taking this allegation as true, Turbeville is barred from suing FINRA for violating its rules or those of the Exchange Act. "In the absence of an express private right of action, courts have consistently refused to find an implied private right of action against SROs for actions or omissions under the Exchange Act. Rather, courts have held that the Exchange Act bars private rights of action against SROs, be they asserted under the Exchange Act, or be they state law claims when those claims relate to defendants' SRO activities." Id. at 21-22 (citing MM&S Fin., Inc. v. Nat'l Ass'n of Secs. Dealers, Inc., 364 F.3d 908, 910-11 (8th Cir. 2004) (holding that the Exchange Act does not create a private right of action against an SRO for violations of the Exchange Act or for breach of contract); Sparta Surgical Corp. v. Nat'l Ass'n of Sec. Dealers, Inc.,159 F.3d 1209, 1213 (9th Cir. 1998) ("It is undisputed, even by [the plaintiff], that a party has no private right of action against an exchange for violating its own rules or for actions taken to perform its self-regulatory duties under the Act.").
Here, FINRA was performing a regulatory function when it opened an investigation of a previously registered broker to determine whether a disciplinary proceeding should be filed against him for violating FINRA rules.
Not surprisingly, the feisty Turbeville appealed the MDFL Order to the United States Court of Appeals for the Eleventh Circuit ("11Cir"), which affirmed the lower court.
We begin our analysis by examining Turbeville's complaint to ascertain the nature of his challenge. Although it invokes state tort law as the basis for relief, the complaint is on its face a challenge to FINRA's application of its internal rules in exercising its regulatory authority under the Exchange Act. Three of Turbeville's four causes of action -- defamation, abuse of process, and intentional interference with a prospective advantage -- rest expressly on allegations that FINRA violated its own rules and exceeded its jurisdictional grant. For example, regarding defamation, Paragraph 48 of the complaint says, "FINRA's rules and regulations precluded publication of a formal charge . . . when FINRA had only a Wells notice and a response to that Wells notice." Later in the same paragraph, Turbeville says "FINRA . . . published [the Wells notice] far earlier than would normally have been the case had customary protocols been followed." The same paragraph concludes, "FINRA had no jurisdiction to issue a Wells notice, investigate, or conduct any disciplinary action for the conduct."
Pages 11 - 12 of the 11Cir Opinion
Federal Government Deputy FINRA
In considering whether a private right of action exists, the 11Cir noted that self-regulatory-organizations were created under the Exchange Act, which vests the SROs with enforcing federal securities laws. Further, the Exchange Act was found to have mandated the creation of the SROs' internal rules in order to govern their disciplinary and disclosure actions. As such, the 11Cir Opinion finds that:
When exercising these functions, SROs act under color of federal law as deputies of the federal government. To sue these actors, a litigant must obtain permission from the federal sovereign; otherwise, any state-law claims asserted against them for carrying out their federally mandated duties crash headlong into the shoals of preemption. McCulloch v. Maryland, 4 Wheat. 316, 317 (1819) ("The states have no power . . . to retard, impede, burden, or in any manner control the operations of the constitutional laws enacted by congress to carry into effect the powers vested in the national government."). Thus, because Turbeville's complaint depends on a right of action supplied by federal law, the District Court concluded correctly that removal was proper. See Manning, 136 S. Ct. at 1569 ("Most directly, and most often, federal jurisdiction attaches when federal law creates the cause of action asserted.").
Page 15 of the 11Cir Opinion
In fact, the internal appeals and administrative-review processes created by the Exchange Act confirm that no private right exists. Those avenues of relief satisfy the Exchange Act's requirement that SROs "provide a fair procedure for the disciplining of members and persons associated with members," and that they "adopt rules establishing an administrative process for disputing the accuracy of information provided in response to inquiries" about affiliated persons. See 15 U.S.C. § 78o-3(b)(8), (i)(3).
To survive, Turbeville's collateral attack on FINRA's regulatory conduct requires picking up far more than the Exchange Act's expressly provided remedies put down. It implies necessarily the existence of a private right of action against FINRA that operates parallel to the administrative-review processes the Act prescribes. And it implies a second set of remedies -- the remedies supplied by state tort law. FINRA's appeals process carries its own set of remedies -- to wit, reversal of the FINRA hearing board's disciplinary actions. In similar fashion, FINRA's administrative-review process for disputing information disclosed in a BrokerCheck report carries with it the remedy of removing information shown to be inaccurate. Yet despite the existence of these Exchange-Act-mandated remedies, Turbeville seeks a separate, distinct set of rights and remedies: the right to sue FINRA in state court under state tort law and recover damages as allowed therein. At the same time, he argues that no federal question exists, meaning the federal courts lack jurisdiction to adjudicate these claims. Thus, Turbeville would have us hold that a private right of action to challenge SROs -- which are authorized and closely directed by federal law and federal agencies -- exists under federal law, while also holding that only state courts have authority to enforce that right of action.
We are not persuaded that Congress contemplated such a result when it granted SROs regulatory authority under the Exchange Act. Recognizing the second set of rights and remedies under state law Turbeville seeks would undercut the distinctly federal nature of the Exchange Act. If actions like Turbeville's are permitted, fifty state courts would be authorized to supervise FINRA's regulatory conduct and its application of its internal, SEC-approved rules through the vehicle of state tort law. And given SROs' front-line role in enforcing federal securities laws, such review would in turn lead to state-court supervision of the Exchange Act's securities-regulation regime writ large. We find nothing in the Exchange Act that suggests Congress intended to create a private right of action overlaying the relief avenue it set forth in the Act's text and thereby disrupt the uniform federal character of the securities-regulation scheme Congress created.
That these remedies leave something to be desired does not change the analysis. The Supreme Court long ago observed, "[T]he fact that a federal statute has been violated and some person harmed does not automatically give rise to a private cause of action in favor of that person." Touche Ross, 442 U.S. at 568, 99 S. Ct. at 2485 (internal quotation marks omitted) (quoting Cannon v. Univ. of Chi., 441 U.S. 677, 688, 99 S. Ct. 1946, 1953 (1979)). Although a person regulated by an SRO might find the prescribed remedies incapable of fully assuaging the reputational harm he suffered as a result of the SRO's regulatory and disciplinary conduct, he chose to accept those limitations on recovery by affiliating himself with an SRO-governed firm.
Pages 16 - 19 of the 11Cir Opinion
Bill Singer's Comment
Unless Turbeville appeals to the United States Supreme Court and unless that court grants certiorari, this lawsuit is now done and FINRA emerges victorious both in terms of the sanctions it imposed on Turbeville and in terms of defending against his civil lawsuit.
I am troubled and perplexed by the 11Cir's Opinion and its underlying rationale. Pointedly, I take issue with the following language:
When exercising these functions, SROs act under color of federal law as deputies of the federal government.
In fact, the internal appeals and administrative-review processes created by the Exchange Act confirm that no private right exists. Those avenues of relief satisfy the Exchange Act's requirement that SROs "provide a fair procedure for the disciplining of members and persons associated with members," and that they "adopt rules establishing an administrative process for disputing the accuracy of information provided in response to inquiries" about affiliated persons. See 15 U.S.C. § 78o-3(b)(8), (i)(3).
If actions like Turbeville's are permitted, fifty state courts would be authorized to supervise FINRA's regulatory conduct and its application of its internal, SEC-approved rules through the vehicle of state tort law. And given SROs' front-line role in enforcing federal securities laws, such review would in turn lead to state-court supervision of the Exchange Act's securities-regulation regime writ large.
That these remedies leave something to be desired does not change the analysis. The Supreme Court long ago observed, "[T]he fact that a federal statute has been violated and some person harmed does not automatically give rise to a private cause of action in favor of that person." Touche Ross, 442 U.S. at 568, 99 S. Ct. at 2485 (internal quotation marks omitted) (quoting Cannon v. Univ. of Chi., 441 U.S. 677, 688, 99 S. Ct. 1946, 1953 (1979)). Although a person regulated by an SRO might find the prescribed remedies incapable of fully assuaging the reputational harm he suffered as a result of the SRO's regulatory and disciplinary conduct, he chose to accept those limitations on recovery by affiliating himself with an SRO-governed firm.