Let’s play pretend.  Can you imagine what FINRA would do to a respondent broker-dealer in an Enforcement action that announced on Day Five of the hearing – i.e., during the “final phase” of the hearing – that – whoops! – it had forgotten to produce certain documents that it should have produced eight months before the hearing even started? Documents that would potentially prove FINRA’s case?  And then, after being given a week to determine exactly how many documents it forgot to produce, the respondent announced that, in fact, it was, um, 30,000 emails?  That the failure was the result of an “apparent miscommunication?”  And that in addition to those emails there were another few hundred more that also hadn’t been produced because they were “inadvertently omitted” from an earlier production?

I am speculating, if course, but it’s not difficult to imagine that there would be a permanent bar involved.  Rule 8210, which gives FINRA the power to compel the production of documents and information, is powerful.  The failure to abide by the rule routinely results in permanent bars.  FINRA takes very seriously its right to require member firms and their associated persons to produce whatever documents it feels are necessary to conduct an exam.  Apparently, however, when the shoe is on the other foot, when it is FINRA that fails to produce required documents, a simple apology is good enough to resolve the problem.

How do I know?  Yesterday, FINRA issued an Order in an Enforcement case denying a motion to dismiss that Respondent Stephen Larson filed stemming from FINRA’s “massive” – to quote the Hearing Officer – failure to produce required documents.  These were documents that FINRA should have produced eight months before the hearing.  And there were, as my hypothetical suggests, 30,000 emails, including potentially exculpatory documents.  According to the Hearing Officer, however, this was no big deal.

He started his analysis of whether to sanction FINRA – which could, theoretically, have included a dismissal of the Complaint – by considering FINRA Rule 9251, which “requires Enforcement to make available to a respondent for inspection and copying all documents (subject to various exemptions) prepared or obtained by FINRA staff in connection with the investigation that led to the disciplinary proceeding.”  This sounds an awful lot like the flip-side of Rule 8210, which requires a respondent to produce the equivalent documents to FINRA.  It, too, is a serious, powerful rule.  As the Hearing Officer stated, “[i]t is essential that Enforcement exercise diligence in complying with this obligation, as rule-compliant document production by Enforcement is fundamental to a fair disciplinary proceeding.” He also observed that “under the Code of Procedure’s regulatory scheme, a respondent typically relies substantially on Enforcement’s good faith and diligence in producing documents; in most cases, a respondent will never know what documents Enforcement has withheld.”[1]


Given this, is not surprising that the Hearing Officer called FINRA’s document debacle “disconcerting,” explaining that

  • FINRA utterly blew its Rule 9251 obligations;
  • It violated the terms of the Case Management and Scheduling Order;
  • It missed the production deadline by a whopping eight months;
  • It didn’t acknowledge the production failure until the hearing was nearly over;
  • The volume of missing documents was “staggering”;
  • The production failure “did not result from a single cause, but from a combination of miscommunications, misunderstandings, and other errors”; and
  • The missing documents were potentially exculpatory, but, at a minimum, were relevant to Mr. Larson’s defense.

Despite all this, the Hearing Officer took no action against FINRA.  Nothing.  No dismissal.  No sanction.  Why?  Because he basically concluded that FINRA didn’t intend to screw up, and that it was all an innocent mistake:  “Enforcement [did not] engage in willful misconduct, bad faith, or . . . otherwise act contemptuously.”  Guess what?  When respondents make this same argument in the defense of an 8210 claim, they are laughed off by FINRA.

The Hearing Officer also noted that “Enforcement admitted it made a mistake in not producing the omitted documents,” and deemed this admission to be important to his ruling.  I can assure you, as a respondents’ counsel, FINRA could care less if my client is willing to admit that a “massive,” eight-month-late production was a “mistake.”  The sanction would undoubtedly be harsh; after all, intent is not an element that FINRA needs to prove in an 8210 case.  It would be unheard of to suggest that there would be no ramifications for a respondent who mistakenly failed to produce 30,000 emails, as was the case here for FINRA.

The Hearing Officer also put a lot of stock in the fact that he granted a four-month continuance in the hearing to allow Mr. Larson to review the late-produced documents, asserting that somehow this “eliminated, or at least substantially mitigated” any prejudice to Mr. Larson.  At best, this is an arguable point, not nearly the dispositive issue it is made out to be.  Prejudice is in the eyes of the beholder, and I doubt Mr. Larson would concur that he was not prejudiced by this delay in the hearing.

If anyone ever has any doubt that the deck is stacked against you in a FINRA Enforcement case, or that FINRA rules only work to the detriment of the members, just read this Order.  FINRA completely blew its deadlines by months, omitted tens of thousands of documents that should have been produced, and yet, because it was a mistake and not intentional, and because it admitted its mistake, the Hearing Officer essentially concluded “no harm, no foul.”  Respectfully, I humbly suggest that if the roles had been reversed, Mr. Larson would never have received the same treatment.  And there are dozens and dozens of former reps who have been barred for 8210 violations involving way fewer documents, way less delay, with an equal lack of intent, who will attest to this.

[1] I blogged – here – about the unfairness of Rule 9251 – that a respondent is essentially forced to rely on representations by FINRA that it has produced all the required documents – a couple of years ago.