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Monday, December 11, 2023 | Back issues
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FINRA Employee Files Whistleblower Suit

MANHATTAN (CN) - A financial examiner claims in court that FINRA fired him for detecting a loophole that helps large broker-dealers duck SEC rules and undercapitalize themselves.

Joseph Sciddurlo sued the Financial Industry Regulatory Authority, or FINRA, and its Chairman Richard Ketchum in Federal Court.

Sciddurlo joined FINRA as a financial examiner in May 2007, and he was promoted a year later to a Level 47 principal examiner for the New York Region, he says in his complaint.

Sciddurlo claims he got high performance ratings his first two years on the job - until he "detected a flaw in the FINRA system, which allowed larger broker dealers to be overleveraged."

That flaw allowed broker-dealers to skirt SEC rule 15c3-1(a)(1), which prohibits them from leveraging 15 times more than their net capital.

"Even though the SEC rules also allow broker-dealers with net capital of greater than $250,000 to be exempt for that regulation if their net capital exceeds 2 percent of customer receivables, from a rational and analytical perspective, a flaw was found to exist by the plaintiff for all broker-dealers filing under the Alternative Method of Net Capital, that would allow them to circumvent the SEC leverage limit of fifteen times the net capital and would allow large firms to leverage as much as they wanted," the complaint states.

Sciddurlo claims he made the discovery when devising the CAMELS project, at the urging of bosses who sought a better risk-rating methodology for broker dealers.

"Further, plaintiff recommended a 'quality of earnings' check, which would raise a red flag on the Examiner's Annual Audit Worksheet, whenever a broker-dealer's cash flow from operations is less than 50 percent of reported net income to prevent re-occurrence of certain bankruptcies that had occurred in the past," the complaint states.

For this, he claims, his bosses downgraded him "suddenly and without justification" from a Level 4 rating of "high contributor" to a Level 3, "solid contributor."

"Upon being downgraded to a solid contributor and in February of 2011, the plaintiff requested to be transferred to the Cycle Department at FINRA, since he had taken the initiative to pass the 'Securities Fraud' course offered by the Association of Certified Fraud Examiners which makes Examiners more proficient in detecting Ponzi schemes," the complaint states. "FINRA has been criticized for missing the massive multimillion and billion-dollar Ponzi schemes.

"The plaintiff was without justification denied a transfer to the Cycle Department in February of 2011, even though FINRA Human Resource Department had assured the plaintiff that as a 'Solid Contributor' he was allowed to transfer positions.

"In early 2011, the plaintiff was also warned by his superiors to stop using CAMELS or 'Cash Flow Analysis' even though his 'Cash Flow Analysis' correctly predicted the demise of a large broker-dealer in 2008."

This appears to be an allusion to Lehman Bros., whose shuttering triggered the global financial meltdown.

Sciddurlo claims he told his bosses in an Aug. 29, 2008 email: "Lehman is the entity that most closely resembles Bear (Stearns)," according to a June 2011 story in The New York Post.

Sciddurlo says in his complaint: "In April of 2011, and without any legitimate basis, the plaintiff was placed on probation, despite his excellent performance, evaluations and years of service to FINRA."

He says he was fired on May 17, 2011, a year before his pension vested.

"[I]n addition to plaintiff, other older individuals at FINRA, including Hans Reich, was also fired. Hans Reich was replaced with younger and less experienced personnel," according to the complaint.

Sciddurlo demands $25 million in punitive damages for age discrimination, wrongful termination, violation of New York Labor Law and whistle-blower protections under the Dodd-Frank Act.

He is represented by Marilyn Venterina with Sciretta & Venterina.

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