A federal judge dismissed a lawsuit accusing the Financial Industry Regulatory Authority of lying about the 2007 merger that created the brokerage watchdog, saying plaintiffs can't sue "quasi-governmental" entities.
So-called self-regulatory organizations such as Finra and their officers are "absolutely immune from private damages suits challenging official conduct performed within the scope of their regulatory functions," U.S. District Judge Jed Rakoff wrote in his decision Tuesday.
Two brokerages sued Finra, saying it misled member firms by claiming it could not pay more than $35,000 each before the NASD combined with most of the New York Stock Exchange's regulatory unit. Rakoff's decision is a victory for Mary Schapiro, who led NASD through the merger and became chairman of the Securities and Exchange Commission in 2009.
Benchmark Financial Services Inc. sued Finra in 2008, and Standard Investment Chartered Inc. had filed suit a year earlier. Both brokerages said the NASD told brokerages during road shows that it could not pay more than $35,000 because the Internal Revenue Service limits payments by tax-exempt organizations to members.
Sealed court documents showed that the NASD could have paid its members "something" between $70,000 and $111,000 each, Jonathan Cuneo, the lawyer for Benchmark and Standard Investment, said at a December hearing. Finra said Cuneo's estimate was inaccurate.
"We anticipate filing an appeal," Cuneo said in an interview. "We have to consult with our client."
Washington-based Finra, which is funded by Wall Street, overseen by the SEC and with representatives from securities firms on its board, inspects and writes rules for almost 5,000 brokerages. Schapiro, 54, was Finra's chief executive officer when President-elect Obama nominated her to lead the SEC in December 2008.
SEC spokesman John Nester declined to comment on Schapiro's behalf.
"We are pleased with today's decision," Finra spokeswoman Nancy Condon said. "We have said from the outset these cases were without merit, and today's ruling more than demonstrates that."
NASD offered each member firm $35,000 in anticipation of expected cost savings before they voted on the merger. In January 2007, 65% of the members approved the merger.
