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Saturday, May 25, 2024 | Back issues
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Judge Denies Request to Unseal FINRA Documents

(CN) - A federal judge in Manhattan denied an attempt by the New York Times, Barron's and Bloomberg to unseal documents that may show SEC Chairman Mary Shapiro and others misled brokers while soliciting support for the creation of the Financial Industry Regulatory Authority.

The news organizations sought to lift a protective order that kept secret financial data passed between the Internal Revenue Service and the National Association of Securities Dealers (NASD), now part of FINRA.

The NASD merged with NYSE Regulation, the enforcement arm of the NYSE, in 2007 to form FINRA.

FINRA is a private regulator and not a government agency, though it works closely with the SEC.

The plaintiff class, led by California brokerage Standard Investment Chartered, claimed that Shapiro and the other officers falsely told NASD members that $35,000 was the maximum amount each one could be paid for agreeing to the consolidation, or $175 million total.

According to the lawsuit, the IRS said NASD could have been paid its members even more than what it had stated to brokers both verbally and through proxy materials.

The news organizations were seeking the exact figure.

The class pointed to a December 2006 proxy statement in which the organization stated that "$35,000 is the maximum amount the IRS will permit NASD to make to members and still retain tax-exempt status."

The statement was signed by Shapiro. It also failed to mention that several FINRA officers "stood to gain substantially by the transaction," the class claimed.

Former FINRA CEO Shapiro, now head of the SEC, saw her compensation jump 57 percent from 2006 to 2007, which "resulted from bonuses for completing the transaction," the class claimed. She allegedly made a little less than $2 million in 2006 and more than $3.1 million in 2007.

Shapiro also received a severance bonus between $7 million to $25 million in 2009 when she left to take the SEC post, the plaintiffs claimed.

U.S. District Judge Jed S. Rakoff took over the case that was first handled by the late Judge Shirley Wohl Kram, who decided to seal the IRS data.

Judge Kram concluded that making the information public "could cause NASD significant competitive disadvantage, because competitors and those with whom NASD contracts could, upon obtaining the data, figure out NASD's (and now FINRA's) negotiating strategy."

Judge Rakoff backed his former colleague's decision -- which was upheld by the 2nd Circuit -- but hinted that he might have ruled differently.

"If this court were writing on a clean slate, it might disagree with the conclusion that disclosure of the IRS data could provide material information about NASD's/FINRA's negotiating strategy beyond the particular transactions involved in the instant litigation, and the court might also conclude that, in any event, the risk of such harm is more than outweighed by the public and private interest in the disclosure of this information," he wrote.

But in the end, he fell in line with the 2nd Circuit's ruling.

"It is doubtful that a district court, absent of the most extraordinary circumstances, could ever refuse to follow the ruling of the Court of Appeals rendered just six months ago," Rakoff concluded. "What Hilda is to Rumpole, the Court of Appeals is to this Court: she who must be obeyed."

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