September 1, 2017
Today's BrokeAndBroker.com Blog features an intra-industry employment dispute involving allegations of defamation, libel, slander, and wrongful termination. The former employee took exception with his former employer's characterization that he had been terminated because of his inappropriate behavior. In stark contrast to the employer's allegation, the employee argued that he was retaliated against after complaining about sexual harassment. There are lots of aspects of this FINRA arbitration that should catch the eye of both lawyers and industry participants. For one thing, it took over five years from the date of termination until the rendering of the FINRA Arbitration Decision. For another thing, the employer has a history of former-employee lawsuits alleging similar claims of improper disclosures.
Case In Point
In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in August 2013, and as amended thereafter, Claimant Walter asserted defamation; libel and slander on his Form U5; tortious interference with prospective economic advantage; and wrongful termination. Claimant alleged that after he had complained about sexual harassment, he was wrongfully terminated based on Respondent PNC's allegations of inappropriate behavior. In addition to seeking an expungement, at the close of the hearing, Claimant sought at least $225,416 in special damages and lost wages; $2,479,576.00 in punitive damages; costs, and fees. In the Matter of the FINRA Arbitration Between Jeffrey J. Walter, Claimant, vs. PNC Investments, LLC, Respondent (FINRA Arbitration # 13-02391, August 18, 2017).
Respondent PNC generally denied the allegations and asserted various affirmative defenses.
The FINRA Arbitration Panel found Respondent PNC liable and ordered it to pay to Claimant Walter $290,485.00 in compensatory damages plus 6% per annum interest until paid in full.
The Panel deemed that the U5 disclosure at issue was defamatory. Although the arbitrators declined to recommend the expungement of the Form U5 "Reason for Termination," they recommended the expungement of the Form U5 by proposing the revision from "YES" to "NO" of question 7(F)(1) with the deletion of the accompanying "Termination Disclosure Report Page." The Panel further recommended the expungement of the Form U5 via a proposed revision of the "Termination Explanation" as follows:
Jeffery J. Walter was terminated for a violation of an internal code of conduct. No securities or securities customers were involved in this matter.
Is this a FULL TERMINATION?
Note: A "Yes" response will terminate ALL registrations with all SROs and all jurisdictions.
Discharged Other Permitted to Resign Deceased Voluntary
If the Reason for Termination entered above is Permitted to Resign, Discharged or Other, provide an explanation below:
If amending the Reason for Termination and/or termination explanation, provide an explanation below:
7F. Did the individual voluntarily resign from your firm, or was the individual discharged or permitted to resign from your firm, after allegations were made that accused the individual of:
1. violating investment-related statutes, regulations, rules or industry standards of conduct?
2. fraud or the wrongful taking of property?
3. failure to supervise in connection with investment-related statutes, regulations, rules or industry standards of conduct?
Bill Singer's Comment
Truly, I have no idea what the precipitating incident(s) was here from a reading of this FINRA Arbitration Decision. FINRA's online BrokerCheck records as of September 1, 2017, disclose that Walter had been "discharged" by PNC on August 15, 2012. I would urge all readers to focus on that date: It took Walter over five years to obtain some redress of his disputed termination -- and counting from the date of his filing of his claims in 2013, the FINRA arbitration process required over four years to reach the Award stage.
Walter's BrokerCheck Comment
In trying to make some sense of the underlying events, consider the screenshot below of Walter's "Broker Comment" on BrokerCheck in response to PNC's allegations concerning his discharge:
Recent PNC Expungement Cases
If Walter's complaints about PNC were isolated, then we might chalk this lawsuit up to the inevitable nature of the workplace; however, PNC has a recent history of inaccurate commentary about underlying events involving its former employees:
Claimant asserted PNC Investments failed to investigate the customer's allegation with due diligence, that the allegation and claim are false, and finally that he was not involved with the alleged misconduct. He presented proof supporting this position during his testimony at the hearings."
[T]he Panel recommends that the language be expunged in its entirety and replaced with the following language: "A FINRA arbitration panel determined that the termination of John Gross by PNC Investments was arbitrary and unreasonable."
The Panel found that the cited language placed by PNC on Kost's Form U5 was defamatory. The Panel retained the Form U5 "Reason for Termination" but recommended the deletion of the "Termination Explanation" in Section 3 of Claimant Shawn Kost's Form U5 filed by PNC on December 17, 2014. The Panel recommended that the explanation be revised to:
Sean Kost was terminated by PNC Investments as an at will employee without cause, but due to management decisions made.
Only a Recommendation
The trouble with these FINRA expungement cases it that they do not always end with a self-executing "Order" from the FINRA Arbitration Panel but, to the contrary, are issued merely as a "recommendation." When there is a "customer dispute" component involved, the arbitrators' recommendation requires an order of confirmation from a court. Intra-industry disputes are often resolved in-house at the regulator pursuant to the arbitrators' recommendation. Regardless of whether a customer dispute is involved, there is often quite of bit of legal work involved after a former employee secures an arbitration recommendation of expungement. Which raises the question as to why FINRA member firms are not required by rule to bear all reasonable costs, fees, and expenses attendant to obtaining and confirming a recommended expungement when a FINRA Arbitration Panel finds the existence of defamation or bad faith. For the intricacies of the expungement process, read FINRA's "Notice to Arbitrators and Parties on Expanded Expungement Guidance." Also, see:
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.
Uneven FINRA Regulation
FINRA's regulatory response to arbitration findings of defamation or materially false statements filed by its member firms is, at best, tepid. Notwithstanding that FINRA has empowered arbitrators under FINRA Arbitration Code Rule 12104 of the Customer Code and Rule 13104 of the Industry Code to "refer to FINRA for investigation any matter or conduct that has come to the arbitrator's attention during and in connection with the arbitration," it does not appear that arbitrators are regularly referring these U5 cases for regulatory investigation. Similarly, the self-regulatory organization doesn't appear to be carefully monitoring for regulatory issues arbitration decisions with a recommendation of expungement.
When it comes to investigating the men and women working for its member firms, FINRA has proven remarkably agile and adept at fining, suspending, and barring those folks for their non-disclosures on their Forms U5. When it comes to tossing folks out of the biz for filing misleading or false responses on their firm's in-house annual compliance questionnaires, FINRA is quick to take action. In cases where the transgression is deemed intentional, FINRA drags out a finding of "willful" misconduct, which frequently results in an individual's statutory disqualification from the industry, even if the fine or suspension imposed is relatively modest.
Would FINRA expel a member firm if there was a finding that a misstatement or defamatory comment was willfully placed on a Form U5?
To answer my own question: I doubt it. And let's not muddy the issue by pointing out how FINRA expelled some pennystock firm or boiler-room long after that member firm came under criminal investigation and collapsed amid civil lawsuits and inadequate capital. I'm looking at the history of so-called "reputable" Large and Mid-sized FINRA member firms. I'm looking at the so-called household names. I'm looking at the big boys with the fancy television ads. These are the recidivists that just don't seem to fall within FINRA's field of vision when it comes to troubling Form U5 practices. When it comes to redressing the wrongs of its member firms that are filing misleading and/or defamatory Forms U5, FINRA has at its disposal two arrows in its regulatory quiver:
FINRA Rule 1122. Filing of Misleading Information as to Membership or Registration
No member or person associated with a member shall file with FINRA information with respect to membership or registration which is incomplete or inaccurate so as to be misleading, or which could in any way tend to mislead, or fail to correct such filing after notice thereof.
FINRA Rule 2010. Standards of Commercial Honor and Principles of Trade
A member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.
READ the BrokeAndBroker.com Blog Expungement Archive
FINRA Rule 2080: Obtaining Customer Dispute Expungement
FINRA Rule 2081: Prohibited Conditions Relating to Expungement of Customer Dispute
FINRA Rules 12805 and 13805: Expunging Customer-Dispute Information Under Rule 2080