May 22, 2014
I often warn potential clients that it is often just as expensive to defend an innocent person as a guilty one. Frankly, sometimes it's more expensive to represent someone who is not guilty of the charges. As a recent FINRA expungement arbitration demonstrates, the cost of representing an individual who was not even named in a lawsuit may be astronomical. All of which reminds me of that famous Marx Brothers routine about the exorbitant cost for asking musicians to not practice -- you couldn't afford it!
Case In Point
In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in August 2013, Claimants asserted causes of action including breaches of contract and fiduciary duty, unsuitability, fraud, and negligence in connection with an assertion that Respondent Wells Fargo Advisors, LLC had endorsed an unsuitable investment strategy of maintaining a concentrated United Parcel Service, Inc. (UPS) stock position. Claimants sought $1,500,000 in compensatory damages, punitive damages, under performance damages, interest, attorneys' fees, and costs. In the Matter of the FINRA Arbitration Between Gregory Niemann Living Trust, Leila Niemann Living Trust, and The Niemann Family Revocable Trust, Claimants, vs. Wells Fargo Advisors, LLC, Respondent (FINRA 13-02477, May 14, 2014).
In December 2013, Claimants' counsel advised FINRA that Claimants withdrew their claims without prejudice against Respondent.
Unnamed But Not Unharmed
In January 2014, Wells Fargo filed a Motion for Expungement to remove the Niemann customer arbitration from non-party Steve John Christensen's Central Registration Depository records ("CRD").
Who the hell is Christensen?, you ask -- noting that his name appears nowhere in the pubic customer arbitration caption. Apparently, he was the unfortunate broker of record for the customers.
Without the Niemann Claimants' attendance at the expungement hearing, with the advice that those Claimants took no position on the expungement application, the FINRA Arbitration Panel proceeded to consider the motion on Christensen's behalf. After taking into account the circumstances under which the account was serviced and testimony presented at the April 2014 hearing, the FINRA Arbitration Panel recommended expungement. In offering its rationale, the Panel explained that it had relied, in part:
[O]n non-party Steve John Christensen's testimony given during the hearing on this matter to the effect that he did do what Claimants alleged he did not do, namely: 1) he did advise the Claimants about the risks associated with maintaining a concentrated position; 2) he did recommend an alternative plan that involved elimination of this concentrated position; and 3) he did advise the Claimants about an option available for mitigating certain risks associated with the Claimants' concentrated position, which the Claimants chose not to do. In reaching this finding, the Panel has further relied on the fact that Claimants dismissed their claims without Respondent filing a response and without the payment of any money or compensation.
Bill Singer's Comment
According to online FINRA records as of May 22, 2014, Wells Fargo denied the customer's complaint seeking $188,000 in damages, which it had received on December 13, 2005. The online "Allegations" and "Broker Statement" dated January 11, 2006, assert, respectively, that:
POWER OF ATTORNEY OF TEXAS RESIDENTS ALLEGES IN WRITING TO THE SEC THAT HER PARENTS FORMER FINANCIAL ADVISOR ALLOCATED THE SUBACCOUNTS IN THE CLIENT'S [sic] THREE VARIABLE ANNUITY CONTRACTS IN FUNDS THAT WERE AGGRESSIVE GROWTH AND CAUSED LOSSES, WHEN IN FACT THE LOSSES IN HER PARENTS' ACCOUNT WERE CAUSED BY WITHDRAWALS REQUESTED BY CLIENTS, AND ALL PROPER FORMS WERE SIGNED. POA FURTHER STATES THAT FA SURRENDERED ANNUITIES PREMATURELY TO GENERATE SURRENDER CHARGES, WHEN IN FACT ONLY ONE ANNUITY WAS SURRENDERED PURSUANT TO A 1035 EXCHANGE IN OCTOBER OF 2000. THE EXCHANGE GENERATED A SURRENDER CHARGE AND WAS CONDUCTED DUE TO THE POOR PERFORMANCE OF THE EXISTING ANNUITY. ALL MATERIAL FACTS WERE DISCLOSED TO THE CLIENTS. THERE IS NO EVIDENCE OF WRONGDOING.
THE LOSSES IN THE ACCOUNT WERE CAUSED BY WITHDRAWALS REQUESTED BY CLIENTS. THE SUB ACCOUNT ALLOCATION WAS NOT CONTRARY TO CLIENTS' RISK OBJECTIVES. FA CONDUCTED SUITABILITY ASSESSMENT ON 1035 EXCHANGE. POA HAS BEEN RECEIVING STATEMENTS SINCE 2002, DELAY OF OVER TWO YEARS UNREASONABLE SINCE ANNUITIES PURCHAGED [sic] IN LATE 1990S. CLAIM DENIED. FAA COMMENTS: "THE ALLEGED TRANSACTIONS WERE SUITABLE AND AUTHORIZED, AS WELL AS FULLY DOCUMENTED, BY ALL NECESSARY PARTIES. THE POA'S HAS [sic] FAILED TO ACCOUNT FOR WITHDRAWALS AND THE TIMING OF THOSE WITHDRAWALS. A RECENT CLIENT SURVEY CLEARLY INDICATES THAT CUSTOMER'S [sic] WERE MORE THAN SATISFIED WITH OUR SERVICES BY GIVING US THE HIGHEST POSSIBLE RATING OF "HIGHLY SATISFIED" FOR BOTH "HOW WELL DO I UNDERSTAND YOUR FINANCIAL GOALS" AND "HOW WELL DO I COMMUNICATE WITH YOU."
According to online FINRA documents as of May 22, 2014, after having their 2005 customer complaint denied in 2006, the Niemann accounts filed a FINRA Arbitration Statement of Claim, which apparently was received by Respondent Wells Fargo on August 30, 2013. At this time, the alleged damages mushroomed to $1,500,000. Thereafter, on December 12, 2013, the following "Allegations" and "Broker Statement" assert, respectively:
CLAIMANTS ALLEGE THAT IN OR AROUND 2001 UNSUITABLE RECOMMENDATIONS WERE MADE TO MARGIN A CONCENTRATED POSITION IN UPS STOCK, WITHOUT ADVISING OF RISKS OR RISK ;MANAGEMENT STRATEGIES
THE CLAIMANTS' CLAIM AGAINST WELLS FARGO FOR "FAILURE TO COLLAR OR PROTECT (THEIR) UPS STOCK" IS FACTUALLY INCORRECT, WHICH MAKES THEIR ACCUSATION COMPLETELY UNFOUNDED. IN THE ARBITRATION CLAIM, THE CLAIMANTS ALLEGE "WELLS FARGO FAILED TO RECOMMEND A COLLAR AND/OR PROTECTIVE PUT OPTION AS A RISK MANAGEMENT STRATEGY TO PROTECT [CLAIMANTS'] CONCENTRATED POSITION IN UPS STOCK". NOT ONLY DID WELLS FARGO RECOMMEND SUCH A STRATEGY, THE CLAIMS ALSO IMPLEMENTED THIS RISK MANAGEMENT STRATEGY. THE FACTS ARE UNDENIABLY CLEAR; WELLS FARGO HAS SIGNED CONFIRMATIONS TO PROVE THAT IT RECOMMENDED AND IMPLEMENTED THE EXACT STRATEGY THE CLAIMANTS' CLAIM SHOULD HAVE BEEN IMPLEMENTED. WELLS FARGO INTENDS TO VIGOROUSLY CONTEST THESE INACCURATE AND UNFOUNDED ALLEGATIONS." **CLAIMANT WITHDREW HIS CLAIM AGAINST RESPONDENT WITHOUT PREJUDICE ON DECEMBER 12, 2013.
Permit me a brief, albeit impassioned, rant, yet again, about the inequities of FINRA's expungement protocol for cases in which an:
- unnamed registered person is involved in a settled or withdrawn public customer arbitration and
- the customer did not oppose the requested motion for expungement and
- the arbitration settled for "nuisance value" or for no cash payment whatsoever and
- the unnamed party did not contribute to any settlement and
- a FINRA Arbitration Panel has determined that the unnamed party did not engage in any misconduct relevant and material to the allegations.
Why do I rage about all those "and" factors? For starters, they do not present a particularly rare or nonrecurring fact pattern. Moreover, please consider this admonition in the expungement decision in Christensen's favor:
The Panel recommends the expungement of all references to the above-captioned arbitration from non-party Steve John Christensen's (CRD # 1787459) registration records maintained by CRD, with the understanding that pursuant to Notice to Members 04-16, non-party Steve John Christensen must obtain confirmation from a court of competent jurisdiction before CRD will execute the expungement directive.
Unless specifically waived in writing by FINRA, parties seeking judicial confirmation of an arbitration award containing expungement relief must name FINRA as an additional party and serve FINRA with all appropriate documents.
What do those two seemingly innocuous paragraphs in the expungement decision mean? Christensen is a registered person who was not named as a respondent in a public customer arbitration, which was subsequently withdrawn without settlement after having been denied years earlier as a customer complaint years. Additionally, in response to his motion for expungement of that customer matter, the Panel found that Christensen did not engage in wrongful conduct. Despite all of that, the Panel is relegated to issuing nothing more potent than a "recommendation" of expungement.
What is Christensen supposed to do now?
Oh, he's supposed to continue to pay a lawyer (assuming that a former or current employer isn't prepared to foot the bill) to take this FINRA Arbitration Panel "recommendation" to a state or federal court and obtain a court Order. Then, assuming that a court entertains the application within his lifetime, Christensen is then supposed to present the Order to CRD and, thereafter, hope that within his lifetime the ponderous bureaucracy expunges the offensive commentary from his record. Mixed into that stew is an obligation to petition FINRA to waive the requirement to name the self-regulatory organization as a party to all this legal fiction and nonsense.
Whether Christensen's legal tab for the expungement will be fully paid for by Wells Fargo is not the point. Many individuals who find themselves in the same predicament have moved on from the employing brokerage firm where the customer complaint occurred and such former employers may not be disposed to foot the bill (and some former firms may no longer be in business).
Without any doubt, there is tremendous validity and merit in NOT permitting named or unnamed registered persons to simply obtain a self-executing expungement from a FINRA Arbitration Panel. For far too long, the FINRA community has abused such relief in a way that has burdened Wall Street with recidivists and fraudsters. I get that. I support appropriate restrictions to deter such circumstances. Notwithstanding, in cases where all the "ands" noted above exist, it is a travesty to burden largely innocent men and women with the investment of time and money required to exonerate their besmirched names under circumstances that demand a fairer, cheaper, and more expeditious process.