Enforcement Actions
Financial Industry Regulatory Authority (FINRA)
NOTE: Stipulations of Fact and Consent to Penalty (SFC); Offers of Settlement (OS); and Letters of Acceptance Waiver, and Consent (AWC) are entered into by Respondents without admitting or denying the allegations, but consent is given to the described sanctions & to the entry of findings. Additionally, for AWCs, if FINRA has reason to believe a violation has occurred and the member or associated person does not dispute the violation, FINRA may prepare and request that the member or associated person execute a letter accepting a finding of violation, consenting to the imposition of sanctions, and agreeing to waive such member's or associated person's right to a hearing before a hearing panel, and any right of appeal to the National Adjudicatory Council, the SEC, and the courts, or to otherwise challenge the validity of the letter, if the letter is accepted. The letter shall describe the act or practice engaged in or omitted, the rule, regulation, or statutory provision violated, and the sanction or sanctions to be imposed.
May 2010
Mission Securities Corporation and Craig Michael Biddick (Principal)
2006003738501/May 2010
Following appeal of a FINRA Office of Hearing Officers (OHO) decision in which the Firm was Expelled and Biddick was Barred, FINRA's National Adjudicatory Council (NAC) additionally  ordered that Mission and Biddick disgorge $38,946.06 in ill-gotten gains stemming from their misconduct and pay such proceeds, plus interest, to 13 Mission customers.sanctions based on findings that the firm and Biddick converted and misused customer securities. The firm and Biddick intentionally caused the transfer, without any prior customer authorization or notification, of securities from customers’ accounts to the firm’s account, sold a portion of the shares and used some of the proceeds for the firm’s operating expenses.

This decision has been appealed to the Securities and Exchange Commission (SEC) but the bar and expulsion are in effect pending consideration of the appeal.

Mission Securities Corporation: Expelled; Ordered to pay, jointly and severally, $38,946.06, plus interest, to customers.

Craig Michael Biddick:
Barred ; Ordered to pay, jointly and severally, $38,946.06, plus interest, to customers.
Tags:  Taping Rule    Two Party Consent     |    In: Cases of Note : FINRA
Bill Singer's Comment
An interesting aspect of this case is the discussion about the Firm's failure to provide notice to its customers that it was tape recording phone calls, which FINRA's Enforcement argued was in violation of California Penal Law and, as such, in violation of FINRA Rule 2110. See the commentary in the OHO Decision at Pages 16 -21 at http://www.finra.org/web/groups/industry/@ip/@enf/@adj/documents/ohodecisions/p118004.pdf

Enforcement contends that Mission’s failure to provide notice that it was recording calls violated California law, and that Biddick was responsible for the violation. Enforcement further argues that by failing to give notice as required by California law, Respondents violated the Taping Rule, or, alternatively, violated Rule 2110’s requirement that members and associated persons “observe high standards of commercial honor and just and equitable principles of trade.”

. . .

Enforcement also argues that Respondents’ failure to comply with California law violates Rule 2110 because it “prevents FINRA from enforcing its Taping Rule requirement designed to protect a customer’s rights with respect to their broker-dealer.” This is so, according to Enforcement, because under California law “FINRA may not use any such recorded but unnoticed calls in the pursuit of its regulatory mission.” Specifically, Enforcement points to the provision of Section 632 of the Penal Code that provides, “no evidence obtained as a result of eavesdropping upon or recording a confidential communication in violation of this section shall be admissible in any judicial, administrative, legislative, or other proceeding.”

There are several problems with this argument. First, it is by no means clear that the provision of Section 632 on which Enforcement relies would prevent FINRA from using the recorded calls in the pursuit of its regulatory mission, and Enforcement cites no cases applying Section 632 in such circumstances.18 Moreover, because FINRA’s regulatory mission is conducted pursuant to federal law, there is a strong argument that FINRA’s use of calls recorded by Respondents pursuant to the Taping Rule would be governed by federal, not California law. See Zhou v. Pittsburg State Univ., 252 F. Supp. 2d 1194, 1204 (D. Kan. 2003) (“evidence obtained in contravention of [Section 632] is admissible in federal court [in cases arising under federal law], so long as no federal law is thereby violated”); see also Credit Suisse First Boston

fn.18 Certainly Respondents could not invoke Section 632 to preclude FINRA from utilizing the recorded calls; “allowing such offensive use of section 632 by the party who violated it offends fundamental notions of fairness.” Frio v. Superior Court, 203 Cal. App. 3d 1480, 1493 n. 5 (1988). It would turn Section 632 on its head to find that a firm that violated its customers’ privacy rights could use its wrongdoing to frustrate the efforts of federal regulators to determine whether the firm or its representatives had committed sales practice violations during the calls.

Corp. v. Grunwald, 400 F. 3d 1119, 1132 (9th Cir. 2005) (“if a state law prevents [FINRA] from complying with its rules or if it interferes with the Congressional goals underlying the Exchange Act, the state law is preempted by federal law”); Jevne v. Superior Court, 35 Cal. 4th 935 (2005) (same). In any event, even assuming that California law would preclude FINRA from using the recorded calls, once again, Enforcement has cited no prior cases finding a violation of Rule 2110 in analogous circumstances.

To resolve the alleged taping violations, therefore, the Panel would have to address several difficult legal issues of first impression, each of which could have significant ramifications beyond this case for FINRA members and associated persons. If it were essential to do so in order to protect the investing public, the Panel would, of course, address the issues. But in this case it is not necessary to resolve the alleged taping violations. As explained above, the evidence—generally undisputed—establishes that Respondents misused and converted customer securities, in clear violation of Rules 2330 and 2110, and, under the Sanction Guidelines and to protect the investing public, the sanctions for that violation can only be to expel Mission and to bar Biddick. Under these unusual circumstances, the Panel declines to determine whether Respondents violated California law, or whether, if they did, they violated the Taping Rule or Rule 2110, leaving those questions for another Panel to resolve in some future case in which they are material to the outcome.
Enforcement Actions