Troubled brokerage can’t blame Zoom for its FINRA woes, judge rules

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Better get used to those Zoom meetings.

Alpine Securities, a Utah-based brokerage that’s in hot water with Wall Street’s self-regulator over $5,000 monthly fees, lost its bid to force FINRA to hear its high-stakes disciplinary case in person.

A federal district judge in Salt Lake City dismissed Alpine’s lawsuit against FINRA on Sept. 7.

Alpine Securities of Salt Lake City had its lawsuit against FINRA over Zoom hearings dismissed.

Alpine Securities of Salt Lake City had its lawsuit against FINRA over Zoom hearings dismissed.

Bloomberg News

Last summer, FINRA, which oversees brokerages, said that disciplinary and arbitration hearings would be held remotely as of Oct. 1, 2020, due to the COVID-19 pandemic. The so-called “Zoom amendment” was tacked on to FINRA’s long-standing rule that brokerages are “entitled to be heard in person” by regulators when a dispute arises. The agency resumed in-person mediations and arbitration hearings on Aug. 2.

Alpine, which is based in Salt Lake City, sued FINRA last November over the Zoom requirement, arguing that it violated the firm’s rights.

The civil lawsuit garnered attention from smaller brokerages and aggrieved customers who worried that not presenting their cases in person put them at a disadvantage. During hearings in 2020 for a high-profile case involving a wealthy Florida grandmother and two J.P. Morgan brokers who are her grandsons, one arbitrator dozed off.

Alpine’s legal defeat comes as FINRA ramps up its scrutiny of “high risk” firms and recidivist brokers who skip from job to job while cheating vulnerable investors.

Alpine argued in its lawsuit that Zoom didn’t help things because “the video frame displaying the witness is reduced to a thumb nail, making it difficult if not impossible to view the witness’s reaction and demeanor.” Zoom also involves the “burdensome” elements of “multiple data uploads and downloads before and during the testimony, as well as screen-switching,” the lawsuit said.

As such, FINRA was unfairly and unconstitutionally denying Alpine “a fair procedure for the disciplining of members.” FINRA’s rules, the lawsuit added, “expressly state that members are ‘entitled to be heard in person.’”

The Wall Street watchdog, for its part, sees Zoom video conferencing as likely to outlast the pandemic.

“From a FINRA perspective, we put our cards on the table that we think that Zoom is here to stay because we put all of our Zoom information on our regular website, not on the COVID-19 part of our website, but to the regular website,” Richard Berry, the executive vice president of FINRA’s dispute resolution services, told an agency podcast on May 18.

$5,000 a month account fees
Alpine’s woes began in August 2019, when FINRA started a disciplinary proceeding against the brokerage over excessive fees it had recently begun charging customers. The watchdog alleged two months earlier that “in the face of significant and mounting financial difficulties,” Alpine began charging its customers “exorbitant and arbitrary fees,” including a monthly $5,000 simply for having an account and another monthly $5,000 for “certificate withdrawals.”

The sky-high fees, which Alpine began hitting customers with in 2018, caused some clients’ accounts to have negative balances. That in turn prompted Alpine to seize customers’ investments to pay the fees. In one month, Alpine shifted $950,000 of clients’ securities to the firm’s proprietary account, which it used to “cover” the negative-balance accounts.

Alpine also “misappropriated” every client position worth $1,500 or less, saying that they were “worthless” securities that had been “abandoned,” FINRA alleged. The brokerage, which specializes in penny stocks, also sold hundreds of customers’ positions to itself for a penny per share.

In all, Alpine allegedly siphoned over $2.8 million of client money out of the firm. The brokerage argued in its lawsuit that the fees were “intended to help to pare down Alpine’s customer base, which consisted largely of inactive accounts holding illiquid securities that imposed massive carrying costs on Alpine and severely restricted its ability to conduct transactions for its active customers.”

In July 2019, FINRA slapped Alpine with a temporary cease-and-desist order and commanded it to return the fees to customers. Alpine has 46 disclosures on FINRA’s BrokerCheck, of which 44 are regulatory in nature.

Zoom carnival
Alpine executives and FINRA regulators first sat down for a face-to-face meeting on Feb. 18, 2020, in Salt Lake City. The COVID-19 pandemic was just beginning to unfold. Days later, the hearing was postponed, due to “an urgent personal matter affecting Alpine’s counsel,” court papers show.

FINRA and Alpine agreed to resume in-person proceedings in late April 2020, but the pandemic made that impossible. At some point, Alpine said, the two parties agreed again to resume in-person meetings last November, but on Nov. 2, FINRA’s chief hearing officer, Maureen Delaney, ordered that everything be done by Zoom video conferencing.

Alpine argued in its lawsuit that it was “unclear how speeding along through a virtual hearing that will potentially close a broker-dealer currently providing services to investors across the country in the middle of undisputedly volatile and unstable securities market (sic) furthers FINRA’s statutory obligations to protect investors and maintain fair and orderly markets.”

Alpine reported in unaudited financial statements dated May 31 that it has just over $31 million in assets. As of Sept. 30, 2020, it reported over $12 million in an audited statement.

Alpine argued that FINRA was also violating the brokerage’s constitutional right to due process in the Fifth and Fourteenth Amendments. (The Fifth Amendment says that in general, “No person shall be held to answer for a capital, or otherwise infamous crime, unless on a presentment or indictment of a grand jury.” The Fourteenth Amendment guarantees “equal protection under the laws.”)

Judge David Barlow of U.S. District Court in Salt Lake City didn’t agree, tersely dismissing Alpine’s lawsuit in five short sentences, with prejudice.

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