Not being particularly fond of the times that I live in, I am a student of Ancient Greek and Ancient Roman history. In presenting today's BrokeAndBroker.com Blog's coverage of a FINRA expungement arbitration, I am reminded of the Battle of Asculum, during which Pyrrhus of Greece defeated the Roman army. As far as defeats go, this was a lopsided one in which Pyrrhus sustained about half the losses of his enemy; however, his losses were still substantial and many of his field commanders were killed. As is famously ascribed to Pyrrhus ""If we are victorious in one more battle with the Romans, we shall be utterly ruined."
Fast forward about 2,300 or so years and we leave the bloody field of Asculum and arrive at the more sedate setting of a FINRA arbitration hearing room. After the stockbroker Claimant and two of his former firms do battle, the Claimant emerges with a victory that is Pyrrhic in nature. He won the recommended expungment of a customer complaint. Unfortunately, he lost the sought expungement of a second customer complaint and that lack of redress may not be permanently etched into his industry record -- what was once written in pencil now takes on the appearance of being carved in stone.
Case In Point
In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in August 2017 and as amended thereafter, associated person Claimant Bellew sought $1 in compensatory damages (which was subsequently withdrawn at the hearing) and the expungement of two customer complaint occurrences from his Central Registration Depository files ("CRD"). In the Matter of the FINRA Arbitration Between Richard Joseph Bellew, Claimant, vs. Moors & Cabot, Inc. and Morgan Stanley DW Inc., Respondents(FINRA Arbitration 17-02107, April 11, 2018)
No Position -- sort of
Respondent Moors & Cabot generally denied the allegations and asserted affirmative defenses but otherwise, as stated in the FINRA Arbitration Decision "took no position as to Claimants [sic] specific requests for expungement." As set forth in the Decision:
In its Statement of Answer, Respondent Moors & Cabot, Inc. requested that the Arbitrator in this matter:
1. deny Claimant's request for damages in the amount of $1.00;
2. order Claimant to remove exhibits 7 and 10 from the Statement of Claim, and any language in the Statement of Claim, which violated the confidentiality provisions of the Settlement Agreement and/or the Ancillary Agreement;
3. order Claimant to remove all language disparaging Moors & Cabot, Inc. from the Statement of Claim, or in the alternative, order Claimant to pay monetary damages to Moors & Cabot, Inc. in accordance with the provisions of the Non-Disparage Clause in the Ancillary Agreement; and
4. any and all other relief that the Arbitrator deems just and proper.
Respondent Morgan Stanley DW took no position on the requested expungement but opposed the demand for $1 in compensatory damages.
A Matter of Contribution
Claimant Bellew notified FINRA that the customers related to the two occurrences at issue in the expungement request are deceased. The sole FINRA Arbitrator reviewed the two customer settlements and determined that Claimant Bellew did financially contribute to one. As to the second settlement, the FINRA Arbitration Decisions asserts that although online FINRA BrokerCheck records disclose that Claimant Bellew contributed financially to this second settlement, his sworn testimony was that he had not. In finding that Claimant had not contributed financially towards the second settlement, the Arbitrator noted that Respondent Morgan Stanley failed to produce any documents corroborating any payments by Claimant Bellew.
The sole FINRA Arbitrator denied Respondent Moors & Cabot's requested relief.
The Arbitrator denied Claimant's requested expungement of the first customer matter but provided no explanation or rationale for such a rejection.
The Arbitrator recommended expungement of the second customer matter. In favoring the expungement in the second occurrence, the Arbitrator found the claim, allegation, or information to be factually impossible or clearly erroneous, and false. The Arbitrator offered, in part, this rationale:
The customers related to occurrence number 1180644 began taking monthly systematic withdrawals of $2,000 per month in income from an annuity holding. Those annuity withdrawals were deposited into the customers' account at Morgan Stanley. While the payment showed in the customers' account as a cash deposit, the value of the annuity in the account declined by the $2,000 withdrawal every month. The $2,000 from the annuity was then paid out to the customers as part of a $3,000 per month income payment, which they took from their account.
After leaving Morgan Stanley, the Claimant spoke with the customers, who informed the Claimant that their son-in-law was now in charge of their affairs. The customers' son-in-law believed that the customers' account value was less than it should be and he did not understand that the account's lower value was due to the customers' monthly income withdrawals. The customers provided in support of their claim an account summary, wherein their losses were overstated by at least $50,000. The $2,000 that the customers had been taking from their annuity as part of their monthly $3,000 income from their account was accounted for, incorrectly, twice in said account summary. First, it was accounted for as negative for the decline in the annuity, and second, it was counted as incorrectly increasing the customers' invested amount in their account by $2,000 per month (when it was received into the account from the annuity company). The $2,000 withdrawal per month, between June of 2001 and January of 2004, is reflected in the account summary as a "cash deposit."
The allegations of unsuitability and mismanagement are factually impossible, because the customers' monthly income withdrawals were the largest contributor to the decrease in their account's value. Furthermore, the customers' account outperformed the market during its decline. Additionally, the allegations of unsuitability and mismanagement are clearly erroneous, because the customers never expressed any concerns about mismanagement to the Claimant over their six-year trading relationship. The complaint was only initiated due to the customers' son-in-law's failure to appropriately evaluate the account in consideration of the customers' monthly withdrawals
Bill Singer's Comment
Compliments to the FINRA Arbitrator for an excellent rationale for recommending expungement of the second customer matter. On the other hand, given the Pyrrhic nature of Claimant's victory in light of the denial of the sought expungement of the first customer matter, I don't quite understand why the Arbitrator didn't offer some explanation -- brief as it might be -- as to why there was a split decision. Yes . . . the simple answer is that Claimant failed to prove his case but I would have preferred some statement from the Arbitrator as to the what was at issue and why Claimant's proof came up short. If you're satisfied with the disparity in the FINRA Arbitration Decision, so be it. Let's just say I'm a curious guy.
Online FINRA BrokerCheck records as of April 19, 2018, disclose that Bellew was first registered in 1995 and was registered with Morgan Stanley DW Inc. from July 1995 to July 2003, with Advest Inc. from July 2003 to December 2005, and with Moors & Cabot Inc. from December 2006 to December 2008. Bellew is currently registered.
2005 NYSE Suspension
Under the BrokerCheck heading "Regulatory - Final" is a disclosure indicating that on July 22, 2005, the New York Stock Exchange Division of Enforcement entered into a Stipulation and Consent to Penalty settlement alleging that Bellew had exercised discretionary power in the accounts of five customers without first obtaining their written authorization. In accordance with the terms of the settlement, the NYSE imposed upon Bellew a Censure, $50,000 fine, and a one-month suspension.
2009 Settled Customer Complaint
Under the BrokerCheck heading "Customer Dispute - Settled," Moors & Cabot, Inc. / Janney Montgomery Scott disclosed the receipt of a customer complaint on April 7, 2009, seeking $625,000 in damages that evolved into a FINRA Arbitration on May 11, 2009. The complaint involved the customer's purchase of Auction Rate Securities and her difficulties in liquidating the investment because of the auction market's illiquidity during the Great Recession. The matter settled for $100,000 on November 5, 2010, without contribution from Bellew.
2004 Settled Customer Complaint
Under the BrokerCheck heading "Customer Dispute - Settled," Morgan Stanley DW Inc. disclosed a customer complaint received on January 22, 2004, seeking $100,000 in damages based upon allegations that the account was mismanaged. The matter settled for $45,000 on July 13, 2004, and it is indicated that Bellew made a $20,000 contribution towards that settlement.
2003 Morgan Stanley Discharge
Under the heading "Employment Separation After Allegations," Morgan Stanley disclosed that it had "discharged" Bellew on July 3, 2003, based upon allegations that :
ALLEGED FAILURE TO FOLLLOW [sic] FIRM POLICY REGARDING CLIENT COMMUNICATION
Based upon the research I did as set forth above, I infer that the FINRA Arbitrator denied Bellew's requested expungement of the 2009 settled customer complaint involving the ARS allegations but recommended expungement of the 2004 matter involving the disputed reference to Bellew's $20,000 contribution to a $45,000 settlement. As I noted above, I'm puzzled as to why the FINRA Arbitration Decision didn't disclose that the so-called "first" customer matter involved an ARS dispute, which has generally been deemed a "toxic" product and in many similar cases the registered representative is granted an expungement because the customer's complaint tends to cite problems with the product rather than sales practices of the individual rep. To the extent that the FINRA Arbitrator found fault in Bellew's sales practices with the ARS at issue in the first customer matter, then that should have been set forth. Frankly, I was a bit shocked after doing the research to learn that relief was not granted in what seems like a perfunctory run-of-the-mill ARS complaint for which expungement is frequently granted.