June 1, 2018
One stockbroker, five customers, four complaints: That's the setting for today's Wall Street expungement drama. Add a simmering feud between two former stockbroker partners. Toss in a wife. Toss in a mother and father. Introduce one helluva an industry lawyer. Appoint a FINRA Arbitrator who was on top of her game. Shake. Stir. Cook. Serve.
Case in Point
In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in November 2017, registered representative Claimant Graham sought the expungement of four customer complaints from his Central Registration Depository record ("CRD") and $1 in compensatory damages. The FINRA Arbitration Decision refers to the four underlying customer complaints as numbered occurrences involving customers identified only by initials as noted below:
- 1336832 (Mrs. M);
- 1336833 (Mr. and Mrs. B);
- 1336834 (Ms. W); and
- 1336835 (Ms. V)
Claimant Graham alleged that the underlying complaints were all false, factually impossible or clearly erroneous. Additionally, Claimant alleged that as to occurrence 1336833, he was not involved in alleged investment-related sales practice violation, forgery, theft, misappropriation, or conversion of funds. In the Matter of the FINRA Arbitration Between Aaron Brian Graham, Claimant, vs. Raymond James Financial Services, Inc.,Respondent (FINRA Arbitration 17-02985, May 30, 2018)
Respondent Raymond James Financial Services did not oppose Claimant's request for expungement.
The sole FINRA Arbitrator ordered Claimant Graham to serve on all the customers in the underlying complaints his Statement of Claim, notice of the telephonic expungement hearing, and a statement that any customer intending to participate in the hearing shall provide notice of that intention and an estimated time for the presentation of any evidence to FINRA by May 9, 2018. Claimant complied with the Arbitrator's orders, and a telephonic hearing was conducted on May 21, 2018. Respondent Raymond James Financial Services did not participate in the expungement hearing and did not oppose the requested expungement. No customers appeared at the hearing.
Claimant Graham withdrew his request for $1 in compensatory damages at the hearing.The sole FINRA Arbitrator recommended the expungement of references to all four underlying complaints. In reaching that decision, the FINRA Arbitration Decision noted, in part, that the "Arbitrator found
that the Underlying Complaints were not settled and therefore there were no settlement documents to review." Consequently, it would appear that the Arbitrator based her expungement recommendations largely upon the customers' letters of complaint and Claimant Graham's testimony. As noted in the FINRA Arbitration Decision, the Arbitrator discerned the following factor underpinning all four of the contested complaints:
Ms. M married Claimant's ex-business partner, Mr. JB, who threatened to ruin Claimant after the business relationship between Claimant and his business partner deteriorated.
Complaint letters were sent from Mr. JB's office to investors who had stayed with Mr. JB after Claimant and Mr. JB severed their business relationship. These letters, prepared on the same date for the signature of the investors, made claims that Claimant had placed these customers into unsuitable investments. The letters revealed Claimant's social security number which the investors would have no way of knowing. The claims in these letters were untrue. The signed complaint letters were sent by Mr. JB to Claimant's current employer and to Respondent. These claims were investigated by the employers and denied.
Occurrence 1336832: Ms. M
As to occurrence 1336832 involving the complaint of Ms. M, who was Mr. JB's wife, the Arbitrator found that the customer had received and acknowledged information about the nature, risk, charges, penalties, surrender charges, and tax aspects of what she apparently characterized as unauthorized investments. The Arbitrator also found that the annuity at issue was part of a suitable strategy deployed on Ms. M's behalf and that the customer had reviewed and signed all of the annuity paperwork. As such, the Arbitrator found no merit in Ms. M's claims and recommended the expungement of her complaint.
Occurrence 1336833: Mr. and Mrs. B
As to occurrence 1336833 involving complaints of customers Mr. and Mrs. B, we learn that they were Mr. JB's parents. The Arbitrator characterized Mr. and Mrs. B as "experienced investors whose investment adviser was their son, for the investments at the time they were placed, not Claimant." The Arbitrator found that Mr. and Mrs. B's complaint letters were
similar in significant ways to the letter sent on behalf of Ms. M to the SEC and other regulatory bodies. The NASD denied the claim finding that Mr. and Mrs. B signed the necessary paperwork. Further, Mr. and Mrs. B acknowledged the suitability of the investment in an annuity. Claimant was not involved with in the alleged investment-related sales practice.
Occurrence 1336834: Ms. W
As to occurrence 1336834 involving customer Ms. W, the Arbitrator found that Ms. W and her husband had received annuity applications, an investment advisory agreement, statements; and had numerous conversations about their investments with Claimant and his business partners. Yet again, the Arbitrator found that Ms W's complaint letter was
similar to the letter sent from Mr. JB's office to Ms. M and Mr. and Mrs. B for signature on the same date was also sent to regulatory agencies. In 2007, Ms. W made a claim with the NASD alleging that the annuity investment was unsuitable and unauthorized. The allegations were false as Claimant had a reasonable basis to believe that the annuity was suitable for Ms. W and her husband . . ."
Occurrence 1336835: Ms. V
Finally, as to occurrence 1336835 involving customer Ms. V, the Arbitrator found that Ms V had signed account forms for the annuity she purchased, spoke with Claimant on several occasions about the annuity, and executed a withdrawal request. The Arbitrator again found that the complaint letter was
similar to the letter sent to the parties involved in the other occurrences which are the subject of this hearing was also sent to regulatory bodies and to Respondent. Respondent denied the claim.
Bill Singer's Comment
Solely going by the independent FINRA Arbitrator's findings, Claimant Graham appears to have been victimized by a former partner who sought retaliation, in part, through the preparation of what the FINRA Arbitrator found to be baseless, cookie-cutter customer complaints. Notwithstanding the positive outcome for Claimant Graham, this FINRA Arbitration exposes the flawed expungement process that FINRA has foisted upon the registered representatives employed by its member firms. Claimant Graham likely incurred thousands of dollars in legal fees, costs, and expenses -- and faces even more costs as the FINRA Arbitrator's recommendation of expungement needs to be presented to a court for confirmation and entry as an Order compelling CRD to expunge the customer complaints. The victim is victimized yet again by the system.
In expressing my disdain for FINRA's expungement process, I frequently concede two points. First, that this byzantine expungement process has, in part, been forced upon FINRA by state regulators and public advocates. Second, that the concerns expressed by those state regulators and public advocates about the dangers of unwarranted expungements are credible and deserving of consideration.
Consequently, for those lazy bastards among my readers who prefer simplistic solutions to complex problems, don't put words into my mouth and don't set me up as a strawman. Prior to the current expungement protocol, far too many disclosures were routinely eradicated via cynical settlements with customers. As a result, a lot of bad guys and recidivists bought "cover" for their ongoing sales practices fraud. Unfortunately, when rulemaking occurs in response to a crisis, the resulting rules are often extreme in their design and implementation. Wall Street made this Procrustean bed and must uncomfortably sleep in it.
When injustice and unfairness call out to us, it is our duty to respond. FINRA's expungement process needs fixing in a manner that protects the investing public but also implements a better protocol for contemporaneous challenges to erroneous or defamatory complaints -- and provides for similar redress when such complaints are no longer of recent vintage but become legacy matters. In my opinion, FINRA, the Public Investors Arbitration Bar Association, and the North American Securities Administrators Association need to re-visit the out-of-control expungement process. And, you know, just throwin' in a thought here, but, hey, how about inviting a working stiff from the ranks of stockbrokers to that meeting?
Clearly, there needs to be some regulatory body before which aggrieved registered representatives can timely petition before a challenged disclosure becomes part of their permanent record and published for all to read. Such a challenge is not the stuff of private arbitration with its costs and delays but within the proper purview of industry regulation. The petition process should be free and swift. Maybe you provide for five-business-days notice for the filing of an appeal. Maybe the appellate panel has to render a decision within five-business-days. Thereafter, expungement applications should still remain within a regulatory pipeline subject to appeal to the SEC and federal courts. There is something unseemly in creating a profit center for FINRA that relies upon charging reps to clear their names when a subsequent adjudication finds that they were falsely accused or defamed. Worse, there is something unfair in posting false and/or defamatory allegations online without having provided for a fair opportunity to challenge such disclosure at the inception.
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
READ the BrokeAndBroker.com Blog "Expungement" Archive