In a court of law, the accused has the right to face the witnesses testifying against him.
The details of a recent Financial Industry Regulatory Authority Inc. enforcement action show how far removed from a court of law such actions are taken, at times, by Finra against brokers.
The case involves Stanley Niekras, a broker with four firms over a 22-year career.
According to his BrokerCheck report, Mr. Niekras has seven customer arbitration claims brought against him; four were settled and three were denied. Some of the claims alleged he sold variable annuities that were unsuitable for his clients.
In 2016, Finra's enforcement unit filed a complaint against Mr. Niekras, alleging he violated Finra Rule 2010, a bedrock rule of the securities industry. Rule 2010 requires that all industry members conduct business with high standards of commercial honor and that they maintain just and equitable principles of trade. The language in the rule is broad and it is considered by many in the industry as a catch all. And individual who violates it can be barred from the securities business.
Finra's investigation and charges were triggered by a complaint letter sent a few years earlier by the daughter of an elderly couple who were Mr. Niekras' clients. Both were in their 90s and on the decline, both physically and mentally.
Mr. Niekras was registered at the time with MML Investors Services in Syracuse, N.Y. A substantial part of Mr. Niekras' business was selling variable annuities, according to Finra.
The elderly customers had been the broker's clients from 2002 to 2013. After the couple gifted each of the three children approximately $450,000, Mr. Niekras recommended each purchase a particular variable annuity. When the children declined to buy the annuities, he sought payment for his prior services to the couple, who are identified only as the "P" family in the Finra proceedings.
That's when the problems started, according to Finra.
Mr. Niekras "misrepresented to his elderly customers that he was entitled to more than $70,000 for purported 'estate planning' and 'financial planning' services,"
according to Finra's complaint. "Although Niekras did not have a financial planning or investment advisory agreement with [the couple], he presented [them] with bills claiming he had spent hundreds of hours over a four-year period working on his customers' 'financial future' and that he was entitled to receive retroactive compensation at a rate of $250 per hour."
In other words, Mr. Niekras wanted to get paid. And that raised flags, at first for the daughter, and then for Finra. Mr. Niekras later denied the charge and even "accused the children of having a vendetta against him," according to Finra.
Two of the couple's children testified before a hearing panel, but their parents did not testify or provide evidence. Finra described the couple as being wealthy, long-time customers and friends of Mr. Niekras. The husband was a retired real estate lawyer, and the couple had $4.5 million.
In 2017, a Finra hearing panel
dismissed the complaint, finding that Finra enforcement did not establish that Mr. Niekras made misrepresentations under Rule 2010 as charged.
Finra wanted another bite of the apple against Mr. Niekras and appealed the ruling.
Last week, a Finra National Adjudicatory Council panel affirmed the original hearing panel's decision to dismiss the complaint.
Key to the NAC's decision was the fact that the elderly couple did not testify against Mr. Niekras.
"Notably, in the hearing panel's view, [Finra] enforcement chose not to have either [of the Ps] testify at the hearing or otherwise participate in the underlying investigation, despite the availability of both,"
according the NAC decision. "We, like the hearing panel, find that the absence of witnesses — especially [the husband] — impacts our assessment of the evidence in this case."
A spokesperson for Finra, Michelle Ong, declined to comment. Mr. Niekras' attorney, Timothy J. O'Connor, also declined to comment.
Mr. Niekras business was to sell investments products — in this case, variable annuities — and get paid a commission. He showed a lack of judgment in discussing payment with his clients for advisory services without a contract or agreement.
But Finra's charging Mr. Niekras with breaking Rule 2010 without testimony from his clients is a foolhardy legal tactic. And after Finra initially lost its case, doubling down on its charges with an appeal to the NAC was highly questionable.
"To have people not testify is not common, unless a witness was disabled or senile," said Terry Lister, an industry legal consultant and the former chief regulatory officer at Waddell & Reed. "When I read [the Niekras case] I didn't understand why the client didn't come in."
Failing to prove its case against Mr. Niekras shows that Finra must do better when it brings these types of serious charges against brokers.
