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Federal Court Denies Broker-Dealer's Request for Internal FINRA Documents in SEC Enforcement Action

By Erik M. Ideta, Esq. of Shustak Reynolds & Partners, P.C. posted on Friday, February 16, 2018.

Erik M. Ideta, Esq.
619.696.9500 ext. 125
[email protected]

On February 13, 2018, a federal district court judge denied a U.S. broker-dealer’s request for leave to compel internal regulatory documents from FINRA in an SEC enforcement action captioned SEC v. Lek Securities Corp., et al., Case No. 17-cv-1789 (S.D.N.Y. filed Mar. 10, 2017).

The SEC initiated its action against Lek Securities Corporation and its principal, Samuel Lek (the “Lek defendants”), on March 31, 2017, alleging that they aided and abetted a foreign firm’s manipulative trading scheme known as “layering.” Layering occurs when multiple non-bona fide trade orders are placed but later canceled, thereby tricking others into buying or selling stocks at artificial prices. According to the SEC, the foreign firm made more than $21 million in illicit profits over a five-year period using this tactic. On March 27, 2017, FINRA also initiated a disciplinary action against the Lek defendants for their assistance in the scheme, but that proceeding has been stayed pending the outcome of the SEC action.  

On February 8, 2018, the Lek defendants wrote a letter to Judge Denise L. Cote of the United States District Court for the Southern District of New York, requesting a discovery conference and leave to file a motion to compel FINRA to produce its internal correspondence, training materials, and surveillance guidelines. According to the Lek defendants, these documents are necessary to show how FINRA defines impermissible layering, and how the regulator identifies, surveils, and stops the violative conduct.  

In her February 13 Order denying the request, Judge Cote reasoned that, to the extent FINRA provided guidance to the Lek defendants or the market in general regarding layering or manipulative trading practices, the Lek defendants already had access to, or possession of, that guidance through the FINRA disciplinary proceeding. More importantly, the Court ruled that FINRA’s internal documents did not have any significant relevance to the SEC action and that access to such documents would run a substantial risk of compromising FINRA’s effectiveness as a market regulator.

The Court’s denial of the broker-dealer’s request for FINRA documents underscores the judicial system’s support of, and respect for, FINRA’s internal processes and procedures designed to ferret out and curtail manipulative trading practices.

Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes. We represent many broker-dealers, registered representatives, investment advisors, investors and businesses. For more information, or if you or your company require counsel in these areas, contact us today for a confidential, complimentary consultation.

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