Mary Schapiro, the current Chairman of the Securities and Exchange Commission, was discovered to have lied and made material misrepresentations in her role as head of FINRA, the private regulator overseeing broker-dealers. The discoveries were made in a lawsuit filed against FINRA and Schapiro by a brokerage firm that is a member of FINRA. The documents and court record in the suit show that FINRA executives lied to FINRA members both verbally and in a written proxy statement surrounding the payment of $35,000 to FINRA member firms. FINRA is a regulator of securities broker-dealers, which Schapiro ran until her appointment to the SEC in early 2009. Though FINRA is not part of the government, it is given government power by, and is subject to oversight by the SEC. The misrepresentations surrounding the $35,000 payment to FINRA members were made as part of the merger of regulators where the NASD and NYSE Regulation merged to form FINRA in 2007. To have FINRA members sign off on the merger, FINRA paid out $35,000 to each FINRA-member firm. FINRA stated in its proxy statement, and FINRA’s officers including Mary Schapiro stated verbally, that it could not pay more due to an IRS ruling.
The broker-dealer that sued FINRA discovered that the IRS had ruled that FINRA could actually pay much more. Schapiro and FINRA fought successfully to have the court keep the actual IRS document sealed. The U.S. Court of Appeals even separately considered the matter of unsealing the IRS records, with support in favor of unsealing from the New York Times and Bloomberg, but even the Court of Appeals ruled against forcing FINRA to be transparent. However, the district court judge asked the plaintiff’s lawyer what the IRS ruling stated in open court. The response in the court transcript shows statements that the IRS ruled that FINRA could have paid two to three times more than the amount Schapiro and FINRA claimed that the IRS would allow to the firms FINRA regulated. FINRA and its executives thus repeatedly lied while directly acting in their capacities as regulators. The judge dismissed the lawsuit, stating that FINRA had “absolute immunity” from civil suits arising from FINRA’s actions as a regulator. The judge did not see fit to discuss why a merger of two private entities and a related cash payment should be considered part of FINRA’s government-conferred regulatory responsibilities. The judge also did not address the merits of the argument that Schapiro and other FINRA executives lied. The judge’s decision in the case shows FINRA executives being given “absolute immunity” when they lie to the firms they regulate. FINRA executives are thus given more privilege than government officials or private companies. A government official would not be able to have regulatory records sealed when the records show the official lied. A private company would not be granted immunity from lying to its shareholders in a proxy statement. FINRA apparently enjoys the privileges of both government and private businesses, while not having to fulfill the responsibilities of either. FINRA is not subject to the same Congressional oversight as government agencies. FINRA is only overseen by the SEC, and can theoretically be sanctioned by the SEC. However, with Mary Schapiro now running the SEC, there is no chance that the SEC will investigate the instances of lying and other misconduct by Schapiro and other FINRA executives. There has been only one case where the SEC sought to sanction an official from a self-regulatory organization such as FINRA, and the charges were actually litigated. The case was that of Salvatore Sodano, a former vice chairman of FINRA, who was charged by the SEC for “exploiting” regulatory deficiencies for his personal gain. The SEC initiated proceedings against Sodano in 2007, and litigation ensued for two years. After Schapiro assumed control at the SEC, the SEC accepted a proposed settlement from Sodano in 2010. The terms of the settlement were not disclosed. However, the final order in the case did not specify that Sodano had committed the misconduct stated in the initial order. During 2008, while Sodano was defending SEC charges, FINRA, under the leadership of Schapiro, paid Sodano $3 million, according to FINRA’s public tax records. Given the stance of the courts, the American people are left to action by the Congress or the Department of Justice to investigate potential misconduct by Schapiro.  Std. Inv. Chartered, Inc. v. NASD, 2010 U.S. Dist. LEXIS 19174 (S.D.N.Y., Mar. 1, 2010)  Std. Inv. Chtd., Inc. v. Fin. Indus. Regulatory Auth., Inc., 347 Fed. Appx. 615, 2009 U.S. App. LEXIS 19808 (2d Cir. N.Y., 2009)