Chapter 16 - § 16.23 • ACTIONS AGAINST FINRA (FORMERLY THE NASD)

• Jurisdiction: Colorado

§ 16.23 • ACTIONS AGAINST FINRA (FORMERLY THE NASD)

Many have attempted to sue FINRA when they have felt wronged by the regulatory process, and will likely attempt to sue FINRA in the future. Courts have found that, as a quasi-governmental organization, FINRA is immune from suit for conduct during an investigation. See Scher v. NASD,⁵⁹⁴ where an attorney sued FINRA for failing to advise her specifically that she could be liable for perjury if she lied under oath. She also made constitutional claims that FINRA should have advised her of her rights. The court said:

[C]ontrary to plaintiffs contention, it is by no means "inconsistent" to find that, on the one hand, the NASD exercises insufficient state action to trigger constitutional protections in a case such as this, while nevertheless holding that the NASD is entitled to absolute immunity in the exercise of its quasi-public regulatory duties.⁵⁹⁵

On the other hand, the Eleventh Circuit found that FINRA was not immune from claims made by private plaintiffs claiming that damages flowed from FINRA's and NASDAQ's actions in a commercial capacity as compared to its quasi-governmental capacity. Plaintiffs brought litigation under a Florida statute for deceptive advertising against FINRA and the NASDAQ on two general grounds: (1) for dissemination of financial statements and other reports of WorldCom that later proved to be fraudulent, and (2) for television commercials that featured WorldCom's president, Bernard J. Ebbers, under captions stating "Keeping Our Markets True - It's All About Character" and "Our Beliefs Stand in Good Company." WorldCom later was found liable for securities fraud and Mr. Ebbers was jailed. The Eleventh Circuit held that the NASDAQ and FINRA has immunity when acting in a quasi-governmental capacity — being regulatory, adjudicatory, or prosecutorial activities under the 1934 Act; they do not enjoy immunity from their commercial activities.⁵⁹⁶

In Pfannenstiel v. Merrill Lynch, Pierce, Fenner & Smith,⁵⁹⁷ the court found that FINRA was protected by the doctrine of arbitral immunity when a dissatisfied investor sued the NASD over missing boxes of...