Financial Industry Regulatory v. Fiero
| Decision Date | 07 February 2008 |
| Docket Number | 2. |
| Citation | 882 N.E.2d 879,10 N.Y.3d 12,853 N.Y.S.2d 267 |
| Parties | FINANCIAL INDUSTRY REGULATORY AUTHORITY, INC., Formerly Known as National Association of Securities Dealers, Inc., Respondent, v. John J. FIERO et al., Appellants. |
| Court | New York Court of Appeals Court of Appeals |
In the early 1990s, John J. Fiero registered with the National Association of Securities Dealers, Inc. (NASD) (now called the Financial Industry Regulatory Authority, Inc. or FINRA), a self-regulatory organization (SRO), as a securities representative. Relatedly, Fiero Brothers — a broker-dealer firm owned by Fiero, the company's president and sole employee — became a member of NASD.* SROs are quasi-governmental entities with a duty under the Securities Exchange Act of 1934, as amended, "to promulgate and enforce rules governing the conduct of [their] members" (Barbara v. New York Stock Exch., Inc., 99 F.3d 49, 51 [2d Cir.1996]; see 15 USC § 78c [a][26]; § 78f[b]; § 78s [g]). The SEC must approve or reject any rule, practice, policy or interpretation proposed by an SRO (see 15 USC § 78s [b]; Barbara, 99 F.3d at 51 []).
When Fiero applied for securities industry registration with NASD, he signed Form U-4 in which he "agree[d] to be subject to and comply with all requirements, rulings, orders, directives and decisions of, and penalties, prohibitions and limitations imposed by [NASD], subject to right of appeal or review as provided by law." Similarly, Fiero Brothers subjected itself to NASD's rules and discipline when it filed Form BD to apply for broker-dealer registration.
On February 6, 1998, NASD's Department of Enforcement filed a disciplinary complaint alleging that Fiero and Fiero Brothers (collectively the Fieros) had carried out a so-called "bear raid" to drive down the price of securities underwritten by another NASD member, causing that firm and its clearing firm to collapse while generating significant profits for the Fieros. In October 1999, an NASD hearing panel held a disciplinary hearing on the complaint; on December 6, 2000, the panel issued a decision finding that the Fieros had violated section 10(b) of the Securities Exchange Act (15 USC § 78j [b]), SEC rule 10b-5 and NASD rules 2120 and 2110. The panel ordered Fiero Brothers expelled from NASD membership; barred Fiero from associating with any member firm in any capacity; fined the Fieros, jointly and severally, $1 million; and imposed hearing costs totaling $10,809.25. The Fieros appealed to NASD's National Adjudicatory Council, which affirmed the panel's findings and upheld its sanctions in a decision dated October 28, 2002.
The Fieros did not exercise their statutory rights to appeal the NASD's final disciplinary disposition to the SEC and, if aggrieved by the Commission's final order, the United States Court of Appeals (see 15 USC § 78s [d]; § 78y [a]). The SEC may bring an action in federal district court to enforce its order affirming sanctions imposed by NASD for violation of the Securities Exchange Act and its implementing rules (see 15 USC § 78u [e][1]; see also United States Sec. & Exch. Commn. v. Vittor, 323 F.3d 930 [11th Cir.2003]).
On December 22, 2003, NASD commenced an action in Supreme Court, alleging that the Fieros had refused to pay the fine and costs, "although due and duly demanded," and seeking judgment against them in the amount of $1,010,809.25, plus interest, costs and disbursements. The Fieros subsequently moved to dismiss the complaint, principally claiming that NASD lacked authority to recover the fine because it "was not affirmed by the SEC, confirmed by a court, or otherwise converted into a judgment"; for its part, NASD moved to dismiss numerous counterclaims asserted by the Fieros.
On September 12, 2005, Supreme Court granted NASD's motion and denied the Fieros' motion, concluding that "NASD's claim [was] firmly based on ordinary principles of contract law" since the Fieros "expressly agreed to comply with all NASD rules, including the imposition of fines and sanctions" (National Assn. of Sec. Dealers, Inc. v. Fiero, 2005 N.Y. Slip Op. 30161[U], *2, 2005 WL 6012105) when they executed NASD registration forms. The court further observed that "New York state courts have long recognized the right of a private membership organization to impose fines on its members, when authorized to do so by statute, charter or by-laws" (id. at *4), and that "NASD is not `just a private club,' but a self-regulatory organization, federally-mandated under . . . the Exchange Act to discipline its members and enforce the federal securities laws as well as its own SEC-approved rules" (id. at *5). Supreme Court concluded that "[t]he NASD rules relied on by [NASD] appear[ed] to authorize imposition and collection of [the] fines" at issue (id. at *7).
The Fieros soon thereafter moved for summary judgment dismissing the complaint as time-barred under CPLR 215(5) and 7510, which prescribe one-year limitations periods for an action upon an arbitration award and a proceeding to confirm an arbitration award respectively. On December 14, 2005, Supreme Court denied this motion, rejecting the notion that the disciplinary proceeding was an arbitration.
Next, NASD moved for summary judgment, and on May 11, 2006, Supreme Court granted the motion, awarding NASD over $1.3 million in fines and costs plus interest from December 2, 2002. Supreme Court observed that "NASD [had] met its burden of establishing a prima facie basis for entitlement to summary judgment" by submitting documentary evidence demonstrating undisputed facts in what "really amount[ed] to a collection action to recover fines and costs levied by NASD against [the Fieros] in a . . . disciplinary...
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