January 22, 2019
You know how something bothers you but you decide to try and ignore it, but the longer you try to ignore it, the more it bothers you? The old festering wound . . . and it is brought to life in all its glory in today's blog about a 2009 customer complaint that slowly and painfully prompted a 2019 stockbroker's expungement. There's also an intriguing thought-piece about whether a stockbroker should ever fire a client.
2009 Public Customer Arbitration Complaint
In a FINRA Arbitration Statement of Claim filed in June 2009, public customer Claimants asserted breaches of written contract and fiduciary duty; failure to supervise; negligence and gross negligence; misrepresentations and omissions; fraud and constructive fraud; and, violation of
NYSE, NASD and/or FINRA Rules arising from their various investments in unspecified preferred stocks and from trading options. Claimants sought $5 million in compensatory damages plus punitive damages, interest, fees, and costs.In the Matter of the Arbitration Between Peter Graham Lee and Jennifer Patricia Lee, JTWROS, Claimants, v. Merrill Lynch, Pierce, Fenner & Smith, Inc., Respondent (FINRA Arbitration 09-03972/ April 20, 2012)
Respondent Merrill Lynch generally denied the allegations and asserted various affirmative defenses.
The FINRA Arbitration Panel denied Claimants' claims with prejudice. FINRA or the Panel assessed the following:
Claimants: $1,800 filing fee
Respondent Merrill Lynch: $2,800 Member Surcharge; $750 Pre-Hearingt Processing Fee; $5,000 Hearing Processing Fee; and $22,500 in Hearing Session Fees.
Bill Singer's Comment: How the hell does a FINRA Arbitration Panel dismiss all of the claims against a Respondent, yet that prevailing party winds up on the hook for $31,050 in charges and fees? I am no fan of FINRA's large member firm community (of which Respondent Merrill Lynch is a prominent member) but I expected that the hearing fees would have been fully shifted to the losing Claimants (or apportioned in some fair manner). As BrokeAndBroker.com Blog readers know, I oppose mandatory arbitration in all forms; however, I fully respect the rights of individuals to negotiate arbitration agreements. I raise the unfair imposition of $31,500 in FINRA charges/fees against Merrill Lynch in order to alert public customers and associated persons that they too could prevail in a FINRA arbitration but find themselves slammed with the same administrative financial burden.
2018 Expungement Arbitration Filed
In a FINRA Arbitration Statement of Claim filed in January 2018, associated person Claimant Halperin sought the expungement of a customer arbitration from his Central Registration Depository record ("CRD"). In the Matter of the Arbitration Between Michael P. Halperin, Claimant, v. Merrill Lynch Pierce Fenner & Smith Inc., Respondent (FINRA Arbitration 18-00414 / January 18, 2019)http://www.finra.org/sites/default/files/aao_documents/18-00414.pdf
Respondent Merrill Lynch did not take a position with respect to the requested expungement.
SIDE BAR: The 2019 Halperin v. Merrill Lynch FINRA Arbitration Decision references a "previously-settled customer arbitration claim: (Case No. 09-03972/Occurrence No. 1466778) . ." Lees v. Merrill Lynch is FINRA Arbitration No. 09-03972. Turns out that Claimant Michael P. Halperin was the stockbroker of record for the Lees during the times relevant to their earlier case against Merrill Lynch.
Apparently, Claimant Halperin tried to get over the insult to his reputation inherent in the Lees' claim, but at some point he couldn't, about a decade after they lost their FINRA arbitration, the stockbroker could not contain his anger and pursued his expungement claims. Despite attempting to locate and notify the customers of his intent to expunge their complaints, no one could find them in 2018, and the FINRA arbitration went ahead in their absence. The sole FINRA Arbitrator recommended the expungement of the Lees' allegations from Halperin's CRD based upon a Rule 2080 finding that the customers' claim , allegation, or information is factually impossible or clearly erroneous, and false. The Arbitrator offers this rationale:
Bill Singer's Comment
A unanimous FINRA Panel denied the underlying claim in Case Number 09-03972
The credible testimony of Claimant supports that the causes of action alleged in the
underlying claim were false and clearly erroneous.
Claimant met frequently with the underlying customers and reviewed their portfolios
with them. There were frequent telephonic discussions between Claimant and the
underlying customers as well. The underlying customers were sophisticated
investors and clearly understood their investments in the non-discretionary account.
Claimant advised the underlying customers of the risks of overleverage and
recommended a more conservative management of the account. All transactions
were approved or initiated by the underlying customers, and they received
confirmations of each transaction. The underlying customers' aggressive option
strategy, which was pursued against Claimant's advice, suffered losses during the
financial crisis of 2008-2009. The underlying customers' risk tolerance was
aggressive. Claimant advised them to reduce their risk exposure but the underlying
customers ignored his advice.
After the Award was issued in Case Number 09-03972, Respondent asked the
underlying customers to leave the firm against their desire to remain clients of
Note that in 2019, the sole FINRA Arbitrator emphasized the fact that all three of the FINRA arbitrators who heard the customers' arbitration against Merrill Lynch had voted to dismiss the claims with prejudice. A "majority" decision (the infamous split decision) might not have carried the day. That's all well and fine except for the fact that the 2019 Halperin v. Merrill Lynch FINRA Arbitration Decision references a "previously-settled customer arbitration claim: (Case No. 09-03972/Occurrence No. 1466778) . ." Ummm . . . "previously-settled?" As best I understand, the 2009 Lees v. Merrill Lynch did not settle but was adjudicated, you know, as in a unanimous decision by three arbitrators on a FINRA Arbitration Panel. Frankly, that's a startling misstatement and something that FINRA quality-control should have flagged for the Panel before publishing the Decision.
Halperin apparently documented his numerous conversations with the complaining customers, and was able to present his version of those crucial communications to the Arbitrator in a manner that the trier-of-fact pointedly characterized as credible. For those of you who don't think it's necessary to memorialize what you said, what they said, and when and where all that saying stuff was going on, please consider how that extra effort made a difference here.
Finally, consider these findings in the FINRA Arbitration Decision:
Claimant advised the underlying customers of the risks of overleverage and recommended a more conservative management of the account. . . Claimant advised them to reduce their risk exposure but the underlying customers ignored his advice.
According to the above quote, the customers wanted to engage in activity that their stockbroker thought involved too much leverage; and, additionally, the stockbroker advised his clients to "reduce their risk exposure." Without question, it is wholly acceptable for clients to not follow each and every bit of advice offered by their stockbroker -- frankly, I've always viewed it as a sign of a very healthy relationship when clients don't merely accept their stockbrokers' recommended stock picks and proposed portfolio re-allocation. Notwithstanding, stockbrokers should not sit idly by if their clients are intent on committing the equivalent of economic suicide. Such clients may need to be issued an ultimatum: If you persist on this likely disastrous course of conduct, I will cease servicing your account. It is an edgy decision to put your money where your mouth is and send a client packing because you don't want to sit by as they blow up their retirement account. There are times when a client comes to the very shores of the Rubicon, whose crossing may have momentous consequences for the stockbroker and/or the customers. Whether you hop into the boat or wave bye-bye is a difficult decision; however, every so often, be prepared to stand on terra firma when your clients are prepared to foolishly row out into the rapids despite your warnings.