Legal Ethics and Reform

The Lawyer Heading FINRA Has an Idea that Would Benefit Bar Associations

The organization that supervises stock brokerage activity is called the Financial Industry Regulatory Authority (FINRA). As is often the case the top management in regulatory organizations are lawyers, not people who have actually done the work they are supervising. In this case the regulatory organization is a “self” regulatory organization. It is supported by dues of its members, the brokerage firms of America. This means when FINRA spends money it is actually spending the money put in by its members, not taxpayers.

FINRA is conceived of as an organization that will implement the SEC’s wishes using money extracted from the firms that compose the industry. This structure was designed back in the 1930's as a way to regulate without cost to the taxpayers.

Lately FINRA under its lawyer-leader Richard Ketchum, has been using its money to run television ads on business channels inviting dissatisfied clients to contact FINRA and complain about their brokers or brokerage firms. These ads are particularly difficult for the brokerage industry as most client losses of late have been caused by the huge drop in stocks and bonds that occurred between July 2008 and March 2009. This drop was caused by a few bad apples at the top five brokerage firms in America. The vast universe of brokers and firms across the nation were as blind sided by this drop as were their clients.

Nevertheless FINRA is out there inviting complaints which will cost the firms, the brokers, and frankly the clients, as well, millions in legal fees even if most clients end up collecting nothing once the proceedings are concluded. After all no one involved in the buying, selling, and/or holding of securities expects that no losses will ever occur. So all things considered, these ads seem to be a particularly bad idea for the brokerage industry at this time.

However, there seems to be an area of life where these kinds of television ads might be very useful. The legal profession with its questionable tactics seem ideal:

1) Lawyers in civil practice might be criticized for bringing frivolous lawsuits simply to force others to a dollar settlement.

2) Lawyers in civil practice might be criticized for forcing truly injured clients to settle for pennies on the dollar because these clients lack the resource to pursue their cases’ through a trial,

3) Lawyers in civil practice might be criticized, in a contingency fee case, for forcing the client to settle for pennies on the dollar because the eventual judgement won’t be large enough to justify the lawyer’s time at $300 per hour,

4) Lawyers in civil practice might be criticized for getting a rich client to engage in insurance transactions, trust creations, and offshore account creation to avoid taxes; such documents having to be constantly changed or revised as the law changes thus creating a huge, repeating flow of legal fees.

5) Lawyers in civil practice might be criticized for failing to promptly file a lawsuit causing clients to lose their right to sue due to statutes of limitation,

6) Lawyers in civil practice might be criticized for staging show trials where the lawyers on both sides have agreed on a result, but because the injured party insists on going to trial, the trial has to held but must be “stage managed” so the jury and judge come to a result that is within an agreed upon range,

7) Prosecutors might be criticized for forcing those accused of crimes, who have limited ability to make bail or hire a good attorney, to plea bargain to lesser charges thus relieving the prosecutor from having to actually prove guilt in a courtroom.

8) Prosecutors might be criticized for failing to bring cases where the proof is easily to obtained; a common example here is a suit for perjury committed in civil trials where the accused party has, for instance, denied signing a document, but a hand writing expert has later determines the accused did sign; in such cases prosecutors simply refuse to look at the evidence.

There is also public dissatisfaction with the duration of legal processes, the cost of these processes, the uncertainty of the results caused by a) the unequal ability of lawyers and b) the low intelligence and poor education of many jurors. So complaints about the “legal system” itself should also be encouraged by these proposed television ads.

Now lawyers might complain if their Bar Associations used their dues money to encourage complaints. However, if lawyer Ketchum can use brokerage dues to run such ads if makes perfectly good sense for lawyers to get a little of this medicine themselves.

Before closing, there are a couple of observations that might add some understanding to this essay:

(1) Both brokers and lawyers are oftentimes advising clients about situations where future uncertainties color the nature of advice that can be given. In the case of brokers both bond and stock markets are certain to move in ways that no one can predict with precision. In the case of lawyers, advice is being given not knowing how jurors might react to the facts of the case once they are “shaped” by opposing counsel, and not knowing which conflicting interruption regarding the relevant law might be smiled on by the trial court judge. Whenever anyone evaluates a person, broker or lawyer, who has given advice in the face of future uncertainty, some considerable caution is appropriate.

(2) The FINRA management is to be forgiven a certain overzealousness in their decision to run these ads. FINRA is under heavy scrutiny by Congress as they decide how to reorganize America’s financial regulations. FINRA had multiple failures, as did the SEC, in the recent collapse. The difference is the huge salaries and bonuses that FINRA managers, mostly lawyers, took to execute these failures. These people naturally want to retain their jobs and salaries, free from government pay caps, so they naturally have decided on a program of window dressing to compensate for their earlier failures.

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