Broker-Dealer Litigation - Greenberg Traurig LLP

FINRA Rule 2010 by submitting an annual report with financial statements audited by an
accounting firm that was not registered with the Public Company Accounting Oversight Board
(“PCAOB”). Previously, non-public broker-dealers such as Gremo were exempted from the
requirement that their annual financial statements be audited by a PCAOB-registered accounting
firm. However, in December 2008, FINRA published two Information Notices notifying nonpublic
broker-dealers that their fiscal year 2009 and subsequent audits were required to be
conducted by a PCAOB-registered accounting firm.
On appeal, Gremo argued in relevant part that the requirement that it use a PCAOBregistered
accounting firm was a violation of antitrust laws. The Commission rejected this
argument on the basis that the antitrust laws are impliedly repealed to the extent necessary for the
Exchange Act to function in the manner Congress intended. The Commission sustained
FINRA’s findings and sanction, noting that they would serve to impress upon Gremo and others
the importance of filing annual reports that are audited by PCAOB-registered firms.
In re Friedman, Release No. 64486, 2011 SEC LEXIS 1699 (May 13, 2011).
The Commission reviewed an appeal by Friedman, a general securities representative and
general securities principal formerly registered with a FINRA member firm (the “Firm”), from a
FINRA disciplinary action. A FINRA hearing panel had found that Friedman engaged in private
securities transactions without prior written notice to the Firm, in violation of NASD Conduct
Rules 3040 and 2110. The hearing panel suspended Friedman in all capacities for forty-five days
and imposed a $77,500 fine. FINRA appealed to the National Adjudicatory Council, seeking a
longer suspension. The National Adjudicatory Council affirmed the hearing panel’s decision in all
respects except for the suspension, which it increased to nine months based on the seriousness of
the violations. Friedman appealed, arguing in relevant part that another employee of the Firm,
Schnaier, was responsible for disclosing the transactions to the Firm because all relevant
conversations with the private company had occurred through him.
The Commission rejected this argument on the basis that Rule 3040 requires each person
who participates in a private securities transaction to provide prior written notice to his member
firm. The Commission found that Friedman’s conduct constituted a “very serious violation,” as
private securities transactions deprive investors of a firm’s oversight, due diligence, and
supervision. The Commission noted that the nine-month suspension was shorter than the
minimum suspension recommended in the Sanction Guidelines (which support a suspension of
twelve months to a bar), and that FINRA aligned the fine with the “financial benefit” Friedman
received as a result of the violations. The Commission sustained the National Adjudicatory
Council’s findings and sanctions.
Q.2.l
Q.2.l
In re FCS Sec., Release No. 64852, 2011 SEC LEXIS 2366 (July 11, 2011); In re FCS Sec.,
Release No. 65267, 2011 SEC LEXIS 3330 (Sept. 6, 2011).
The Commission rejected a request for reconsideration by FCS Securities, a registered
broker-dealer (the “Firm”), and Kleinser, its sole proprietor. Applicants sought review of the
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