Court ruling seen soon on suit charging Finra misled members

Key issue is payment allowed for broker-dealers

Feb 7, 2010 @ 12:01 am

By Dan Jamieson

The fate of a lawsuit brought by two brokerage firms against NASD over its 2007 merger with the New York Stock Exchange's regulatory unit could be decided this month.

Judge Jed Rakoff of the U.S. District Court for the Southern District of New York has told the parties that he hopes to decide by the end of this month whether the suit against NASD can continue.

NASD is now the Financial Industry Regulatory Authority Inc.

A key issue in the suit is whether Finra executives, including then-NASD chief Mary Schapiro, misled brokerage firm members by claiming that $35,000 was the most that could be paid to member firms. She is now chairman of the Securities and Exchange Commission

Finra insisted at the time that the Internal Revenue Service wouldn't allow a higher payment because of the regulator's tax-exempt status.

In March 2007, two months after member firms voted for bylaw changes that allowed the merger to go forward, Finra received an IRS opinion letter regarding the payout.

The letter, which was produced during the litigation, gave a range of permissible payments that Finra could make. The dollar amounts, however, have been redacted from court documents.

Finra is fighting attempts by several news organizations to obtain the full IRS letter.

Mr. Rakoff plans to rule on whether to release the IRS letter by next Monday.

In a December court hearing, Jonathan Cuneo, founding member of Cuneo Gilbert & LaDuca LLP, who represents the plaintiff firms, claimed that NASD member firms could have received something like an additional $35,000 to $76,000.

He cited the IRS letter as the source of those figures.

Mr. Cuneo declined to comment further.

“There is no way to know how those numbers were created, and they are inaccurate,” Finra spokesman Herb Perone said in a statement. He declined to comment further.

The original case against NASD was filed by Standard Investment Chartered Inc. in May 2007. In December 2008, Benchmark Financial Services Inc. filed a similar case.

The suits, which have been consolidated, also name a number of NASD executives, including Ms. Schapiro.

Meanwhile, some Finra critics wonder why the regulator removed records from its website related to the merger, including references to the $35,000 payment.

Some suspect that Finra might be trying to bury embarrassing documents.

The removal of merger-related information was “most likely about the lawsuits” that Finra faces, said John Busacca, owner of the Broker Dealer Exchange LLC, a longtime Finra critic and one of the founders of the Securities Industry Professional Association, which represents firms and registered representatives.

Mr. Perone said that the merger-related web pages were taken down in July 2007, when the two organizations were being consolidated and the new Finra website was being readied.

A search at archive.org, which catalogs historic websites, shows that the NASD web pages at the old nasd.com site were removed in August 2007.

The original documents and records are still available through archive.org by searching for nasd.com on the “waybackmachine” function.

E-mail Dan Jamieson at djamieson@investmentnews.com.

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