Court of Appeals partially Rules in Favor of Alpine Securities but Alpine not out of the woods yet
On November 22, 2024, the United States Court of Appeals for the District of Columbia Circuit in Washington, D.C., made its ruling in a case involving Alpine Securities Corporation (“Alpine”) and the Financial Industry Regulatory Authority (“FINRA“), reversing a decision by a lower court and siding, in part, with Alpine.
Alpine had brought a lawsuit against FINRA challenging FINRA’s constitutionality after FINRA initiated an expedited hearing to expel Alpine from the industry. Alpine sought a preliminary injunction from the district court against the expedited proceeding, arguing that FINRA is unconstitutional because its expedited action against Alpine violates either the private nondelegation doctrine or the Appointments Clause. The district court denied the preliminary injunction.
Alpine then appealed the district court’s decision to the United States Court of Appeals for the District of Columbia Circuit in Washington, D.C. In its Decision, the Court of Appeals reversed the district court’s decision to allow FINRA to expel Alpine without an SEC review saying that:
“FINRA may not expel Alpine either before Alpine has obtained full review by the SEC of the merits of any expulsion decision or before the period for Alpine to seek such review has elapsed.“
At the same time, the Court of Appeals declined to order the SEC not to expedite its own review, writing that:
“Alpine has not demonstrated that it will suffer irreparable harm from participating in the expedited proceeding itself as long as FINRA cannot expel Alpine until after the SEC conducts its own review. For that reason, Alpine has not shown that it is entitled to a preliminary injunction halting that proceeding altogether.“
For now, Alpine is in the clear and allowed to continue operating as a FINRA-member broker-dealer. But it’s not out of the woods yet. The Court of Appeals only ruled to allow Alpine to continue to operate pending a full review by the SEC, delaying its expulsion for the time being. Time will tell if Alpine can avoid expulsion altogether.
Some Background
On March 22, 2022, a FINRA review hearing made the decision to expel Alpine from FINRA membership, ordered the firm to pay more than $2.3 million in restitution to customers for converting and misusing customer funds and securities, engaging in unauthorized trading, charging customers unfair prices in securities transactions and unreasonable fees, and making an unauthorized capital withdrawal, and imposed a permanent cease and desist order against the firm. The decision resolved charges brought by FINRA’s Department of Enforcement in August 2019.
According to the charges, Alpine provided minimal notice to its customers in 2018 when it decided it would stop carrying retail accounts and impose additional fees. As part of the fee hikes, Alpine raised customer account fees from $100 per year to $60,000 per year ($5,000 per month). This caused huge debts to mount in hundreds of client accounts, which Alpine satisfied by selling off the client’s holdings. Alpine made millions of dollars this way. Moreover, if a customer’s account had $1,500 or less of securities in it, Alpine deemed it “worthless,” closed the account and sold the securities without customer authorization to the firm’s own proprietary accounts for just one penny per position. According to a subsequent SEC complaint filed against Alpine and two of its employees, Christopher Doubek and Joseph Walsh, on August 10, 2022, Doubek and Walsh caused Alpine to declare 545 customer accounts “abandoned” and to transfer approximately $54 million worth of securities out of these “abandoned” accounts and into accounts that Alpine controlled.
Following the review panel’s decision, Alpine appealed to FINRA’s internal appellate body, which automatically stayed the expulsion order. However, Alpine’s appeal did not stay the cease-and-desist order against it. Alpine could have appealed that order to the SEC, but chose not to, and so that order went into and remains in effect.
Alpine and an affiliate business subsequently sued FINRA in the United States District Court for the Middle District of Florida, challenging FINRA’s constitutionality. Alpine raised challenges under the private nondelegation doctrine, Appointments Clause, First Amendment, Fifth Amendment, and Seventh Amendment. The United States intervened to defend the constitutionality of the relevant parts of federal securities law, such as the general requirement that a trader be a member of a self-regulatory organization as a condition of doing business. The district court in Florida subsequently transferred the case to the United States District Court for the District of Columbia.
While Alpine’s suit was pending, FINRA received reports that Alpine was continuing to charge fees and commissions in violation of the unchallenged cease-and-desist order. FINRA’s enforcement department then opened a second investigation that led to FINRA initiating an expedited disciplinary proceeding against Alpine. FINRA’s complaint alleged that Alpine had violated the cease-and-desist order more than 35,000 times by charging over $4 million in unreasonable fees and commissions. The complaint alleged only violations of internal FINRA rules; it did not allege any violations of federal securities laws or regulations. FINRA’s enforcement department sought Alpine’s immediate expulsion from FINRA.
Back in district court where its lawsuit against FINRA was pending, Alpine sought a preliminary injunction against FINRA’s expedited proceeding. The district court denied that request. The court held that FINRA is a private entity and not part of the government, so the Appointments Clause does not apply to its personnel. Next, the court held that FINRA does not violate the private nondelegation doctrine because the SEC can review all FINRA decisions.
Alpine appealed the lower court’s decision denying the preliminary injunction. While the Court of Appeals was deciding the case, it granted Alpine an emergency injunction, enjoining FINRA’s expedited proceeding.
In its Decision entered on November 22, 2024, the Court of Appeals determined that Alpine met its burden of demonstrating a likelihood that the private nondelegation doctrine requires that SEC review be available before Alpine can be expelled from FINRA because, under federal law, that decision would effectively ban Alpine from the securities trading industry. The Court of Appeals also determined that Alpine showed that it faces irreparable harm if expelled from the securities industry in that it will have to shut down its business immediately. For those reasons, the Court of Appeals determined that the district court erred in denying Alpine a preliminary injunction protecting it against being expelled from FINRA (should FINRA issue such an order) until either the SEC affirms FINRA’s decision or the time for Alpine to seek SEC review has elapsed.
For the foregoing reasons, the Court of Appeals reversed the district court insofar as it held that FINRA could singlehandedly expel Alpine and thereby exclude it from the securities trading industry, and remand for the court to enter a limited preliminary injunction enjoining FINRA from giving effect to any expulsion order issued against Alpine until either the SEC reviews the order on the merits or the time for Alpine to seek SEC review lapses.
The Court of Appeals stressed, however, that nothing in its opinion resolves Alpine’s claims on the merits.
To speak with a Securities Attorney, please contact Brenda Hamilton at 200 E Palmetto Park Rd, Suite 103, Boca Raton, Florida, (561) 416-8956, or by email at [email protected]. This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.
Hamilton & Associates | Securities Attorneys
Brenda Hamilton, Securities Attorney
200 E Palmetto Park Rd, Suite 103
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855
www.SecuritiesLawyer101.com
