Settle Or Litigate? That Is The Question


The Washington law firm, Sutherland Asbill & Brennan, said that securities firms and representatives that litigate against the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) are successful nearly half the time.

Those are pretty compelling odds, and ones that advisors who find themselves in hot water with the SEC or FINRA might want to consider.

The finding is based on Sutherland’s annual survey of enforcement actions brought against broker/dealers (B/Ds), investment advisors and their representatives. The survey looks at outcomes for firms and reps that chose to litigate rather than to settle on regulatory actions brought against them. The newest survey covers cases from April 2012 through September 2013.

Of 90 such cases litigated before a SEC administrative law judge or a FINRA hearing panel, 46.7 percent had “success,” Sutherland found. Success means the charges either were dismissed or the sanctions ordered were lower than the regulators had requested. The study produced some other data revealing a similar trend.

The number of cases may seem small, but it helps to remember the cases only involved B/Ds, advisors and reps that decided to litigate.

Litigating against the SEC and FINRA is not everyone’s idea of nirvana. In fact, Sutherland Partner Brian Rubin pointed out that many firms, advisors and reps actually fear taking that step.

The regulators have often spent “months or even years” investigating the conduct that triggered the enforcement action, Rubin explained in a statement. In addition, both the SEC and FINRA are “well-funded” and often bring cases in “friendly forums.” Rubin should know; he is a former deputy chief counsel of enforcement for the National Association of Securities Dealers (now FINRA) and a former senior enforcement counsel at the SEC.

Still, the study shows that “it often pays for firms and representatives to litigate, rather than to settle,” he said. This might ring bells for advisors who have been on the fence over what to do about an enforcement action they are facing.

If tempted to litigate, they might first want to consider the chest-thumping the SEC has been doing on the matter. In a recent speech, Andrew Ceresney, co-director of the SEC’s division of enforcement, said, “We have incredibly talented lawyers at the SEC who I would put up against any defense counsel… (and they are) preparing relentlessly for any argument that might be raised at trial.”

Likewise, in a November speech, SEC Chair Mary Jo White just happened to mention that, “over the past three years, our team has achieved an 80 percent success rate” in trials. That “may explain why most lawyers counsel their clients against going to trial against the SEC and why we achieve strong settlements in most of our cases,” she said.

In other words, if you intend to litigate with the SEC, look out. (FINRA doesn’t appear to have put out similar statements recently, so we can only wonder about that.)

The two sides of the coin are right here: Based on Sutherland’s study, litigation might be a valid option for some firms and advisors. Based on the SEC’s chest-thumping, litigation might be a very risky affair.

Complicating matters is that, earlier this year, the SEC started pressing for an admission of wrongdoing as part of settlement agreements. That may trigger more litigation, because some firms and advisors would rather have their day in court than make admissions that may trigger more claims.

This is one of those decision areas where firms and advisors will need to make their choice with eyes wide open. Settle or litigate? There’s a lot to consider.


Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Connect with Linda →

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