From the perspective of three Wall Street professionals, the customers' arbitration Statement of Claim could have been far worse; after all, the claimants did not name by name any of the three professionals as respondents. On the other hand, Wall Street compliance policies and regulatory rules being what they are, the three unnamed individuals still wound up having disclosure documents filed about their alleged involvement in the underlying lawsuit. Sometimes you dodge a bullet only to step on a landmine. In time, the three unnamed parties got another bit of seemingly good news: The case settled between the claimant customers and the respondent employer. The foundation was laid for each of the three unnamed parties to seek expungement of the lawsuit from their industry records. The thing about good news, however, is that it ain't always as good as we think. The thing about foundations is that sometimes they're faulty and collapse. In today's BrokeAndBroker.com Blog we consider good tidings that evaporated into a suffocating fog and a foundation that opened into a devouring abyss. Now there's a bit of cheery, dramatic foreshadowing!
Case In Point
In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in April 2015, public customer Claimants asserted breaches of contract, the implied covenant of good faith and fair dealing, fiduciary duty, and the duty of care; suitability; failure to supervise; churning; unjust enrichment; promissory and equitable estoppel; violation of Massachusetts General Laws and Securities Law; fraud and deceit; and negligence. Claimants sought restitution, rescission, disgorgement, compensatory and treble damages, fees, interest, and costs. In the Matter of the FINRA Arbitration Between George I. Farr David P. Farr 2008 Revocable Trust George I. Farr Revocable Trust George I. Farr 2011 Irrevocable Trust Judith A. Farr Revocable Trust Norene Farr 2008 Revocable Trust, Claimants, vs. Morgan Stanley & Co., LLC , Respondent (Decision, FINRA Arbitration 15-00774, December 15, 2016).
Respondent Morgan Stanley generally denied the allegations and asserted various affirmative defenses. Additionally, Respondent sought the expungement of the Central Registration Depositor records ("CRD")of "unnamed parties Joseph Verri, David Clayman and David Poulin."
NOTE: Although the FINRA Arbitration Decision uses the term "unnamed" parties, that reference is limited to the Claimants' Statement of Claim and did not extend to the Decision, which named the unnamed parties.
On September 15, 2016, Claimants notified FINRA that the arbitration was resolved but should remain open to allow Respondent to request expungement, which was submitted on November 10, 2016.
As explained in the FINRA Arbitration Decision:
[C]laimants did not submit a response to Respondent's request. After due deliberation, the Panel denied Respondent's request for a hearing and for expungement.
After considering the pleadings and all submissions regarding Respondent's Request for Expungement, the Panel has decided in full and final resolution of the issues submitted for determination as follows:
1. Respondent's request for expungement of the CRD records of unnamed parties Joseph Verri, David Clayman and David Poulin is denied.
2. Any and all claims for relief not specifically addressed herein are denied.
Second Case In Point
In response to the FINRA arbitrators' denial of their requests for expungement, Plaintiffs Verri, Clayman, and Poulin filed a Complaint in the United States District Court for the District of Massachusetts ("DMA") against FINRA seeking to vacate the arbitration award. Plaintiffs cited the Federal Arbitration Act ("FAA") in support of their claims and asserted that FINRA had failed to enforce its own rules, regulations, and procedures. Joseph Verri, David Clayman, and David Poulin, Plaintiffs, v. Financial Industry Regulatory Authority, Defendant (Complaint to Vacate FINRA Arbitration Award, DMA, 17-CV-10077 / January 18, 2017) (the "Complaint"). The Complaint asserts that FINRA had deprived Plaintiffs of a fair hearing when:
[F]INRA failed to require an arbitration panel to hear evidence pertinent to the controversy at issue, namely the expungement of a statement of claim from the respective registrations of Mr. Verri, Mr. Clayman and Mr. Poulin which are on file with FINRA's owned central licensing and registration system for the United States securities industry and its regulators.
Page 1 of the Complaint
SIDE BAR: Title 9: Arbitration / U.S. Code Section 10: Vacation; Grounds; Rehearing
(a) In any of the following cases the United States court in and for the district wherein the award was made may make an order vacating the award upon the application of any party to the arbitration-
(1) where the award was procured by corruption, fraud, or undue means;
(2) where there was evident partiality or corruption in the arbitrators, or either of them;
(3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced; or
(4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made. . .
Bay Colony Group
By way of background concerning the FINRA Arbitration, the Complaint alleges:
17. In their Statement of Claim, the Claimants did not seek to recover for any alleged investment losses that they suffered at Morgan Stanley. Rather, they sought as damages the difference between the returns in their accounts and that of the S&P 500 during the relevant time period.
18. During the relevant time period, the accounts at issue earned a net profit. Thus, the Claimants' theory was that although the accounts were profitable, the profit should have been greater.
19. In their Statement of Claim the Claimants alleged that the accounts were managed by a team of advisors known as the Bay Colony Group which was comprised of Mr. Verri (the lead advisor), Mr. Clayman (who had some involvement with certain investment recommendations) and Mr. Poulllin (who indisputably had little involvement in the advice and management of the accounts).
Hypothetical Lost Profits
The Complaint asserts that in answering the Claimants' FINRA Arbitration Statement of Claim, Morgan Stanley had asserted, in part, that Claimants were experienced and highly-educated business executive managing a multi-million dollar company and had executed documents affirming that they were "not relying solely upon their Morgan Stanley financial advisors with respect to the management of their accounts." Morgan Stanley purportedly further argued that hypothetical "lost profits" are not amenable to recovery as a matter of law.
In characterizing the resolution of the pending FINRA Arbitration claims, the Complaint asserts that:
23. A year after Morgan Stanley filed its Answer to the Statement of Claim, and after discovery had been exchanged, Claimants withdrew their claims with prejudice as part of a settlement that includes no payment from Morgan Stanley or the financial advisors.
24. No hearings were ever conducted, no witnesses testified, and no experts were heard from.
FINRA Rule 2080
The Complaint asserts that FINRA Rule 2080(b)(1) sets forth three grounds upon which expungement could be granted, and that Rule 2080(b)(2) further provides that an expungement may be granted when the requested relief is meritorious and the granting of said expungement would not have an adverse effect on investor protection, the integrity of CRD or regulatory requirements.
SIDE BAR: FINRA Rule 2080. Obtaining an Order of Expungement of Customer Dispute Information from the Central Registration Depository (CRD) System
(a) Members or associated persons seeking to expunge information from the CRD system arising from disputes with customers must obtain an order from a court of competent jurisdiction directing such expungement or confirming an arbitration award containing expungement relief.
(b) Members or associated persons petitioning a court for expungement relief or seeking judicial confirmation of an arbitration award containing expungement relief must name FINRA as an additional party and serve FINRA with all appropriate documents unless this requirement is waived pursuant to subparagraph (1) or (2) below.
(1) Upon request, FINRA may waive the obligation to name FINRA as a party if FINRA determines that the expungement relief is based on affirmative judicial or arbitral findings that:
(A) the claim, allegation or information is factually impossible or clearly erroneous;
(B) the registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation or conversion of funds; or
(C) the claim, allegation or information is false.
(2) If the expungement relief is based on judicial or arbitral findings other than those described above, FINRA, in its sole discretion and under extraordinary circumstances, also may waive the obligation to name FINRA as a party if it determines that:
(A) the expungement relief and accompanying findings on which it is based are meritorious; and
(B) the expungement would have no material adverse effect on investor protection, the integrity of the CRD system or regulatory requirements.
(c) For purposes of this Rule, the terms "sales practice violation," "investment-related," and "involved" shall have the meanings set forth in the Uniform Application for Securities Industry Registration or Transfer ("Form U4") in effect at the time of issuance of the subject expungement order.
SIDE BAR: FINRA Code of Arbitration Proceedings Rule 12805. Expungement of Customer Dispute Information under Rule 2080
In order to grant expungement of customer dispute information under Rule 2080, the panel must:
(a) Hold a recorded hearing session (by telephone or in person) regarding the appropriateness of expungement. This paragraph will apply to cases administered under Rule 12800 even if a customer did not request a hearing on the merits.
(b) In cases involving settlements, review settlement documents and consider the amount of payments made to any party and any other terms and conditions of a settlement.
(c) Indicate in the arbitration award which of the Rule 2080 grounds for expungement serve(s) as the basis for its expungement order and provide a brief written explanation of the reason(s) for its finding that one or more Rule 2080 grounds for expungement applies to the facts of the case.
(d) Assess all forum fees for hearing sessions in which the sole topic is the determination of the appropriateness of expungement against the parties requesting expungement relief.
Failure to Conduct Expungement Hearing
The Complaint asserts that the FINRA Arbitration Panel improperly denied the requested expungements because the arbitrators failed to consider the facts at issue and failed to convene the required hearing. As further alleged:
38. The FINRA arbitration panel simply and without basis, denied the request for expungement based on nothing more than the pleadings and the application despite Morgan Stanley's application stating that it had additional supporting materials to submit and requesting the required hearing.
In addition to attorneys' fees and costs, Plaintiffs seek Orders vacating the FINRA arbitration award, re-opening the arbitration, and convening a new arbitration panel.