(Law360) The U.S. Securities and Exchange Commission has vacated $1.6 million in fines and additional sanctions that the Financial Industry Regulatory Authority had levied against Scottsdale Capital Advisors Corp. and three of its officers, in a decision that the firm's defense counsel on Tuesday hailed as an "extremely rare" win for defendants.
Norton Rose Fulbright, which represented the Arizona-based broker-dealer in the case, called the SEC decision an "extremely rare move" after the agency vacated the fines against the firm and two of its officers, as well as what would have been a lifetime industry ban of its founder, John J. Hurry.
"The SEC agreed that the founder had raised a serious legal question as to the fairness of the proceedings and the merits of his appeal, and, in an extremely rare move, stayed the effectiveness of the bar pending appeal," Norton Rose said. "The decision marks a significant victory for the respondents and illustrates the importance of the SEC's oversight of self-regulatory organizations like FINRA."
In a May 2015 complaint, FINRA had accused Scottsdale of executing sales of unregistered microcap securities for its foreign financial institution customers and failing to maintain adequate supervisory systems and written procedures.
FINRA had claimed that Hurry was a "necessary participant and substantial factor in the foregoing sales of unregistered securities transactions."
In 2016, a FINRA panel assessed a $1.5 million fine on the firm, a lifetime industry bar for Hurry and two-year industry suspensions and fines of $50,000 each for two additional company officers: its president and chief legal officer, D. Michael Cruz, and the firm's chief compliance officer, Timothy B. DiBlasi. In 2018, FINRA's National Adjudicatory Council, or NAC, affirmed the panel's findings and sanctions.
But in Friday's opinion, the SEC, in a 5-0 vote by its commissioners, found that the NAC incorrectly applied legal standards, failed to "clearly explain the bases for its conclusions" and produced a "flawed articulation" of the regulations governing exemptions from registering securities.
The SEC noted that a disciplinary sanction "must be supported by a statement setting forth, among other things, the violative act or practice engaged in by the member or person and the sanction imposed and the reason therefore."
"If FINRA fails to do so, applicants are impaired in their ability to defend themselves before us," the SEC said.
FINRA declined to comment on the case Tuesday.
As the basis of its findings, the SEC said that the NAC had incorrectly conflated various regulations that govern exemptions for the resales of unregistered securities.
"Scottsdale could not be expected to defend itself before us against FINRA's finding ... in light of the NAC's flawed articulation of the standards governing" the exemptions, the SEC said. "Because of this, we are unable to discern whether FINRA has discharged its obligation of establishing a violation for which it can impose sanctions."
The NAC's decision affirming the sanctions against Hurry was premised on an "uncharged theory of liability," as the NAC claimed that his conduct was "unethical" and not a violation of securities laws, the defendants had noted in an appeal.
The SEC said it agreed with Hurry, noting that the theory of liability presented by the NAC was "fundamentally different" than the one FINRA had pursued in earlier proceedings, making it "unfair for the NAC to impose liability on him under the circumstances."
The SEC declined to remand the case back to FINRA based on the "significant flaws ... in the application of legal standards and FINRA's changing theories of liability in the case."
