Judge tosses Schwab suit against Finra

A federal judge today dismissed a legal action the Charles Schwab Corp. brought against the Financial Industry Regulatory Authority Inc. to stop an enforcement case over an allegedly illegal arbitration agreement.

A federal judge today dismissed a legal action the Charles Schwab Corp. brought against the Financial Industry Regulatory Authority Inc. to stop an enforcement case over an allegedly illegal arbitration agreement.

The case erupted Feb. 1 when Finra filed a disciplinary action against Schwab, claiming its agreement wrongly precluded customers from bringing class-action claims against the firm in court.

Schwab immediately sought a court injunction to halt the action, arguing that recent U.S. Supreme Court decisions supported its effort to preclude class actions.

But Schwab must make its legal arguments in Finra’s disciplinary process, said U.S. magistrate judge Elizabeth LaPorte of the U.S. District Court for the Northern District of California.

The issues are “squarely within the expertise of Finra and the SEC,” judge LaPorte said. “Moreover, the court of appeals has the final word and can correct any error.”

Industry defendants can appeal adverse decisions by Finra hearing officers to a Finra appeal board, then to the Securities and Exchange Commission, and finally to a federal appeals court.
“The ruling today addressed the procedural issue of which forum, Finra or the federal court, will first hear the dispute,” said Schwab spokesman Greg Gable in an email.

“The decision means that it will now proceed through Finra hearings before a review by a federal circuit court,” he said.

Finra spokeswoman Nancy Condon declined comment.