In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in April 2012, Claimant Brownstein asserted the cause of action of inaccurate recording of customer information on his Central Registration Depository (the "CRD") record. In the Matter of the Arbitration Between Edward Joseph Brownstein, Claimant, vs. TD Ameritrade, Inc., Respondent (FINRA Arbitration 12-01358, October 15, 2012). In its Answer, Respondent TD Ameritrade did not oppose the requested expungement.
Brownstein's arbitration against TD Ameritrade is largely a derivative action that is required by FINRA's expungement protocol. Essentially, inBrownstein v. TD Ameritrade, Claimant is seeking the expungement of information concerning a prior settled arbitration: Fiorentino and Fiorentino, Claimant, vs. TD Ameritrade, Inc. and Edward Joseph Brownstein, III, Respondents (FINRA Arbitration 09-03936).
Prior Customer Arbitration
According to online FINRA records as of October 25, 2012, describe the customer's allegation inFiorentino and Fiorentino as:
CLIENT ALLEGES MISREPRESENTATION AND MATERIAL OMISSION OF FACT REGARDING PURCHASE OF MAIN STREET BONDS
Apparently, the customer alleged that he had sought stockbroker Brownstein's assurance of bond quality and risk as part of a contemplated swap; and that the two had discussed the security, risk, and ability to pay income and to repay principal of a particular issue (Main Street) from Lehman Brothers. FINRA's online records disclose that the client had alleged $290,000 in damages in the Arbitration Statement of Claim filed on July 13, 2009. On October 3, 2010, TD Ameritrade apparently settled the dispute for $65,000 without contribution from Brownstein.
Notwithstanding the settlement to which he did not contribute, Brownstein apparently persisted in his belief that he was wholly innocent of the charges - if not victimized by the blot on his record - and, to put it mildly, the stockbroker's pursuit of an expungement suggests that he was outraged by the customer's claims. Consequently, FINRA requires that Brownstein engage in the legal fiction, as it were, of suing TD Ameritrade in order to expunge from his CRD the various assertions and allegations arising in the customer arbitration.
A Monty Python Skit?
It's not that Brownstein has any dispute with TD Ameritrade, which didn't even oppose his request for expungement; it's that FINRA requires the asinine pretense of a dispute between the broker and brokerage firm in order to justify the submission of the expungement to arbitration. One would think that there would be no place at FINRA for such Monty Python Nudge Nudge Wink Wink silliness; but, alas, there seems to be endless amounts of room for such nonsense.
And let's not forget the added cost to the broker of having to retain a lawyer and pay FINRA arbitration filing and forum fees in order to clear his name - all the more irksome if the customer's allegations are baseless. Yes - I fully appreciate the historic abuses of the expungement process and recognize that there was a need to reform this process; on the other hand, the failures of a former protocol do not justify the unfairness of its replacement.
Let's Go To The Tape
According to testimony at the expungement hearing, TD operated a recording system for all calls between its employees and anyone else, including customers. Recorded calls were purportedly preceded by a message of notice and consent. The sole FINRA Arbitrator conducting the expungement hearing listened to six tapes deemed relevant to the issues and in rendering a decision to recommend expungement, the Arbitrator provided us with his compelling rationale:
[I]t was the customer who initiated every aspect of the bond swap idea, including identifying all the bonds in his portfolio that he might sell and the bonds he might buy; notably the Lehman " Main Street" issue of 2017 with a 5 and 14 coupon. Throughout, the customer depicted himself as a " trader" who was self-managing his ladder of bonds,seeking increased yield in response to changes in the prices in the bond market. He was working from home using his calculator and his screen showing existing holdings details. It was the customer who originated the idea about the Main Street issue, having picked up the name from another brokerage house. The customer was shopping, getting ideas and prices from one place and then seeking availability and price quotation from TD Ameritrade.
Throughout, the customer did 90% of the talking, musing aloud as he analyzed the coupons, maturity dates, prices he had paid for older issues, and the price he hoped to pay for the new bond. His entire focus was on the elements of yield. He said he was doing this possible transaction to raise his annual cash flow by about $900.00 to $1000.00 per year. There was a brief question from him about the letter ratings of the older issue and the Main Street bonds, to which the broker replied with the letter ratings published by several rating agencies and the issuer. At no time did the customer ask about ability to repay principal. He asked about the annual schedule for interest payments and the broker responded with the dates from the bond, noting that no payment would be made for 12 months in the first year.
There was zero evidence of salesmanship by Claimant during these calls. He confined himself to reporting on availability and price.
It is demonstrably false to allege that the customer was induced to sell some of his holdings in favor of a new issue based on assurances of quality from the employee of the brokerage house. The customer sold himself on the idea, from start to finish, and did so entirely on prices, coupons, and maturity dates.
To sum it up, the FINRA Arbitrator concluded that the public customer:
Further, the Arbitrator found "zero evidence of salesmanship " by Brownstein, whose role seemed largely confined to reporting about availability and price. Moreover, in as damning an indictment of a public customer's credibility as can be imagined within the circumstances presented in this expungement matter, the Arbitrator found it "demonstrably false that the customer was induced" into the disputed swap and, to the contrary, the adjudicator concluded that the "customer sold himself."
One can and likely should sympathize with customers who purchased the Main Street Bond garbage backed by Lehman Brothers. As an industry, Wall Street failed investors by failing to adequately disclose the potential conflicts and dangers of such an issue; and there's also more than enough blame to go around in terms of Wall Street's regulators who largely sat on the sidelines while the toxic dump of dubious issues built up and eventually crashed down upon us all. That being said, there are "solicited" and "unsolicited" trades, and for the latter, there is only so much liability that should be borne by a stockbroker.
In the case of Auction Rate Securities ("ARS"), by way of example, many stockbrokers were told by their firms and sincerely believed that the ARS were as solid as money market funds and that the underlying auction markets were liquid and free of any history of freezing up - under such a scenario, it would be hard to condemn a stockbroker for not urging a client to avoid an unsolicited purchase of ARS. In some sense, the same construct applied to Brownstein's role in the Main Street Bond transaction at issue.
Also READ these "Street Sweeper" columns on FINRA expungements: