July 10, 2018
FINRA continues to have a hard time understanding the concept of "victim." In a recent FINRA expungement arbitration, two stockbrokers were victimized by complaints falsely filed against them by an imposter. Given that the customer repudiated the complaints, there isn't much dispute about them being bona fide. You'd sort of think that FINRA would have a procedure to quickly and without cost secure the expungement of such bogus complaints from a stockbroker's record. After reading today's featured BrokeAndBroker.com Blog case, you may wish to re-think your concepts of fair and reasonable.
Case In Point
In a Statement of Claim filed in December 2017, Claimants Brian and Timothy MacKinnon sought the expungement from their Central Registration Depository records ("CRDs") of two customer complaints referenced as Occurrences 1496274 (against Brian MacKinnon) and 1496276 (against Timothy MacKinnon). In the Matter of the Arbitration Between Brian Paul MacKinnon and Timothy Paul MacKinnon, Claimants, v. Morgan Stanley Smith Barney LLC, Respondent (FINRA Arbitration Decision, 17-03416, July 6, 2018).
Respondent Morgan Stanley Smith Barney requested denial of any allegation of wrongdoing and took no position on Claimants' request for expungement of their CRD records. Respondent did not file a Submission Agreement but answered the claim, appeared, and testified at the hearing.
Occurrences 1496274 and 1496276 were both filed by a then-86-year-old customer of both Brian and Timothy MacKinnon. Claimants did not serve the customer with notice of the expungement hearing and of his right to participate, which was approved by the FINRA Arbitration Panel after their consideration of a signed declaration from the customer in which the customer declared, among other things, that he withdrew the complaint because it was not true. Apparently, the Panel inferred/found that the customer did not desire to participate in the hearing.
In recommending the expungement of both occurrences from each of the respective Claimants, the FINRA Hearing Panel made a FINRA Rule 2080 finding that the claim, allegation, or information is factually impossible or clearly erroneous; the registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation, or conversion of funds; and the claim, allegation, or information is false. In recommending expungement, the Panel offered the same rationale for both occurrences:
A third party, in order to keep the customer as his client, misinformed the customer about certain information regarding his account. Based on the misinformation, the customer filed his original complaint. When the customer learned that he was misinformed, he withdrew his complaint, and remains a client of the Claimants.
Bill Singer's Comment
As to the Panel's determination that it was unnecessary to serve the client with notice of the hearing and his right to appear, that should be a disfavored practice when dealing with expungement requests. Notwithstanding that the Panel seems to have "inferred" the elderly customer's desire to not participate in the expungement hearing, I would have thought it prudent to confirm that via transmittal of the standard notices. On the other hand, the customer's written declaration may have made it very clear that he had absolutely no interest whatsoever in appearing at any hearing, deemed his complaint withdrawn, and urged the Panel to favor the Claimants' petition. If the latter was what the arbitrators found, then it should have been noted a tad more forcefully in the Decision.
Not particularly clear in the Decision is whether both MacKinnons were separately (but at the same time) the stockbroker of record for the elderly client or one after the other or on a joint basis. Although that fact is not a particularly important issue, it would have been helpful to clarify whether the client had two separate accounts each serviced by a MacKinnon or if the two Claimants handled the client's account on some joint basis.
Online FINRA BrokerCheck records as of July 10, 2018, disclose that the elderly customer's complaint was received on January 19, 2010, and sought $25,000 in damages based upon allegatoins that "investments purchased in his outside managed IRA account were unsuitable. September through December 2009." The customer's complaint is disclosed as having been "withdrawn" on March 3, 2010. As disclosed on BrokerCheck under "Broker Statement":
MORGAN STANLEY WEALTH MANAGEMENT REPRESENTATIVES HAVE CONFIRMED WITH THE CLIENT THAT THIS COMPLAINT WAS NOT IN FACT MADE BY THE CLIENT. THE CLIENT HAS WITHDRAWN THE COMPLAINT AND ALLEGES NO WRONG DOING. MORGAN STANLEY BELIEVES THAT IT HAS IDENTIFIED THE IMPERSONATOR AND HAS TAKEN MEASURES DESIGNED TO PREVENT ANY RECURRENCE. WE ARE IN THE PROCESS OF SEEKING EXPUNGEMENT OF THIS COMPLAINT FROM THE ADVISORS' CRD RECORD BECAUSE THIS "COMPLAINT" MADE BY AN IMPOSTER HAS NO MEANINGFUL INVESTOR PROTECTION OR REGULATORY VALUE.
Did you catch the year of the customer complaint? 2010 -- as in eight years ago! I mean, seriously, why the hell is this still an open item? What the hell happened to Morgan Stanley's asserted "we are in the process of seeking exungement of this complaint from the advisors' CRD record . . .?" Does it truly take eight years for FINRA to respond favorably to proof that wrongful regulatory disclosures were precipitated by a "complaint made by an imposter?"
As to why it took so long to render justice, the answer may be found, perhaps, in the profit-center that expungement hearings have become for FINRA. As the saying goes: follow the money:
Claimants were assessed a:
- $1,575 FINRA Initial Claim Filing Fee, and
- $1,125 in FINRA Hearing Session Fees.
Respondent Morgan Stanley Smith Barney LLC was assessed a:
- $1,900 FINRA member Surcharge, and
- $3,750 FINRA Member Process Fee.
Adding up all the fees and charges, FINRA made $8,350 from entertaining the MacKinnons' expungement requests. That's a nice chunk of change in order to have a panel of arbitrators "recommend" the expungement of two complaints that were apparently never made by any customer but by an imposter -- and the customer pointedly withdrew both complaints! All of which should prompt any fair-minded individual to wonder as to what kind of twisted regulatory system profits from such a set of facts. Why weren't the $2,700 in fees assessed against the MacKinnons have been waived under the circumstances presented in this case?