Updated Friday, April 18, 2014 as of 6:51 AM ET
Practice - Regulatory/Compliance
Wall Street Broker Contests SEC’s Probe With Harassment Lawsuit
by: Zeke Faux
Wednesday, December 18, 2013
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(Bloomberg) -- Companies usually keep a low profile when the SEC investigates them. Robert DePalo decided to sue.

DePalo is accusing the SEC of asking investors “leading and alarming questions” during a 2 1/2-year probe of his Arjent, a New York-based brokerage with 40 employees, according to a complaint filed in Manhattan federal court. He said he’s done nothing wrong and that the regulator, which hasn’t taken action against Arjent, is biased against small Wall Street firms.

“I’m bringing this case to expose the injustice that small broker-dealers are subject to,” DePalo, 58, Arjent’s chief executive officer, said in an interview last week. “They have the ability to basically put small firms out of business.”

Wall Street’s biggest banks typically take another approach: If they can’t persuade the agency to drop a probe, they settle. Bank of America, the nation’s second-largest brokerage by number of advisers, agreed last week to pay $131.8 million to resolve claims its Merrill Lynch unit misled buyers of two mortgage-backed securities seven years ago.

Suing can backfire, said Thomas Sporkin, a former agency lawyer, without referring to DePalo’s case in particular.

“Why poke the bear?” said Sporkin, a partner at BuckleySandler LLP. “Now you’re basically forcing the SEC to put resources into this.”

HARASSMENT CLAIM

DePalo said in an Oct. 16 complaint that his firm is being unfairly burdened by SEC inquiries. He asked the court to find the agency abused its discretion and to halt the probe. He wrote that the regulator harasses small brokerages to project a tough image while going soft on Wall Street’s biggest firms.

His court filings include a copy of a confidential SEC order authorizing its staff to pursue information that “tends to show” the firm misled investors about how it used money raised in private placements. The Chicago Board Options Exchange claimed last year DePalo got improper payments from a brokerage.

The SEC responded to DePalo in a filing last month, saying it has sovereign immunity in deciding what to investigate and that it isn’t treating Arjent differently from other firms. John Nester, an SEC spokesman, declined to comment on the dispute.

U.S. laws give the SEC and other government agencies strong protections against any legal efforts to halt their probes, which can last for years, said Seth Taube, a former SEC attorney who now defends brokers as a partner at Baker Botts in New York. The regulator’s staff has wide latitude in probes even when the tactics are disruptive, he said. Clients ask him regularly whether they can sue.

“It’s a Hail Mary pass,” he said. “Very rarely will a court interfere with a federal investigation.”

AGENT'S CALL

The SEC started looking into Arjent in mid-2011, calling it a routine field examination, according to DePalo’s complaint. Arjent had raised money from investors for a fund called Pangaea Trading Partners, which itself invests in DePalo’s brokerage, and the SEC was looking into whether investors were misled about how much DePalo was paid, according to the broker’s court filings.

During the probe, the SEC “slanderously insinuated to investors” that DePalo illegally withdrew funds, even though the payments were disclosed in sales documents already in the agency’s possession, he said in his complaint.

An investigator “asked me how I would feel if I lost all the money I had invested,” Michael S. Ankers, an Arjent client, said in an affidavit filed in the case. The SEC agent “told me Robert DePalo had ‘put in his personal pocket’ very substantial sums,” Ankers said.

EMPLOYMENT RECORDS

The SEC routinely tells investors not to assume that a probe means laws were violated, according to its filing. The regulator said it’s entitled to investigate whether DePalo engaged in wrongdoing and doesn’t have to believe him when he says he hasn’t. The agency also asserted that the court lacks jurisdiction to decide whether to halt the investigation.

DePalo’s employment records with the Financial Industry Regulatory Authority show no customer complaints. The CBOE claimed last year he took improper compensation from Boulder, Colorado-based Arjent Capital Markets, a separate brokerage in which he had an interest, Finra records show. He’s “vigorously contesting” those allegations, according to the files.

The Commodity Futures Trading Commission accused that brokerage in a civil complaint last year of defrauding investors, without alleging that DePalo participated. In May, the firm, its principals and a related company were ordered to pay $1.8 million.

The case is Arjent v. U.S. Securities and Exchange Commission, 13-cv-07319, U.S. District Court, Southern District of New York (Manhattan).

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