May 15, 2019
Our publisher Bill Singer finds himself in the unusual and uncomfortable position of questioning a FINRA Arbitrator's expungement recommendation. As Bill makes clear, he may simply not have all the facts or he may misunderstand the arbitrator's rationale. Consequently, justice may well have been served in the recommendation of expungement. On the other hand, solely going by what's set forth in the FINRA Arbitration Decision, Bill isn't convinced and he raises a number of troubling questions. See what you think.
Case In Point
In a FINRA Arbitration Statement of Claim filed by associated person Claimant in November 2018, she sought the expungement of an allegedly inaccurate report filed by Respondent Morgan Stanley on her Central Registration Depository record ("CRD"), and she requested $1 in compensatory damages. Pointedly, Claimant asserted that Respondent Morgan Stanley had improperly reported allegations by customers that Claimant had "failed to supervise the associated person assigned to their account while Claimant was the interim branch office manager." In the Matter of the Arbitration Between [NOTE: Name deleted as discretion of BrokeAndBroker.com], Claimant, v. Morgan Stanley, Respondent (FINRA Arbitration Decision 18-04018) http://www.finra.org/sites/default/files/aao_documents/18-04018.pdf
Respondent Morgan Stanley took no position with respect to the requested expungement but opposed any award of compensatory damages.
The customers involved with the underlying complaint were notified of the expungement hearing but did not participate in the matter or contest the requested relief.
In recommending expungement, the sole FINRA Arbitrator noted that the underlying customers' complaints had settled without any financial contribution from Claimant. The Arbitrator denied the requested $1 in compensatory damages but found that the customers' claim, allegation, or information was clearly erroneous and false. The FINRA Arbitration Decision states in part that:
Claimant was the branch manager at Respondent's Boca Raton, Florida office for four (4) months in 2011. In 2017, the underlying customers filed an action based on an alleged failure to supervise by four or five past managers of the associated person assigned to the underlying customers' account. There is no evidence that during Claimant's times as manager there were any complaints from these customers against the associated person at issue. At one point, the compliance department had informed Claimant that the associated person was trading excessively in the underlying customers' account. Claimant performed her managerial due diligence and contacted the underlying customers, who expressed their satisfaction with the associated person's services. the customers had a 35-year relationship with the associated person and had no complaints about his work. Thereafter, Claimant sent the customers a follow up letter confirming their investment objectives.
Bill Singer's Comment
Can't say that I necessarily agree with the Arbitrator's decision or rationale, which in part states that:
[A]t one point, the compliance department had informed Claimant that the associated person was trading excessively in the underlying customers' account. Claimant performed her managerial due diligence and contacted the underlying customers, who expressed their satisfaction with the associated person's services. the customers had a 35-year relationship with the associated person and had no complaints about his work. Thereafter, Claimant sent the customers a follow up letter confirming their investment objectives.
My inference from the above quoted material is that Morgan Stanley's Compliance Department found excessive trading in multiple customers' accounts by one associated person. As such, there was no dispute or debate about the nature of the associated person's conduct: Compliance said that he engaged in excessive trading in multiple accounts.
Although the Arbitrator asserts that Claimant "performed her managerial due diligence" by contacting the customers at issue, I'm not quite sure that such an exercise is calculated to yield a meaningful result or amounts to "due diligence." Sure . . . and I freely concede the point . . . in speaking to each of those customers, a manager might find that there were exceptional circumstances whereby the indicia of "excessive trading" could be justified. The FINRA Arbitrator emphasizes the fact that the customers had a "35-year relationship with the associated person" and none of them were complaining about his trading. Assuming for argument's sake that my account has been excessively traded, why would it matter that I had a 35-year relationship with my stockbroker -- and wouldn't my lack of complaint indicate that I am either unaware of what's going on in my account or worse?
The transmission by Claimant of a so-called happiness letter to the customers at issue seems more cover-your-ass than due diligence. Going even further, where the hell was Morgan Stanley's Compliance Department once it had concluded that the associated person was engaged in excessive trading in multiple accounts? You'd sort of expect that further trading in the accounts would have been frozen and immediately subjected to contemporaneous oversight and approval by someone in Compliance and/or a supervisor. In fairness to Claimant, she was not trading the accounts and it may well be that she did, in fact, reasonably supervise the associated person -- which is apparently the core issue for her requested expungement relief. Ultimately, I'm just not persuaded by the Arbitrator's rationale that an expungement was warranted here but I do allow that my skepticism may simply be the byproduct of a lack of content and context in the rationale.
Online FINRA BrokerCheck records as of May 15, 2019, disclose that Claimant was first registered in 1998, and was registered with "MORGAN STANLEY" from June 2009 to October 2015.
BrokerCheck discloses under the heading "Employment Separation After Allegations," that on October 9, 2015, Claimant was "discharged" based upon:
Allegations concerning employee's conduct related to outside activities that were not disclosed to the Firm.
2017 Settled Customer Dispute
Under the BrokerCheck heading "Customer Dispute - Settled" is a disclosure from Morgan Stanley Smith Barney ("MSSB") indicating that the firm had settled a FINRA Arbitration Statement of Claim filed in December 2017 for $668,000 on October 9, 2018. This settled customer complaint appears to be the subject of Claimant's expungement claim. MSSB stated on the BrokerCheck disclosure that:
In order to avoid the costs and uncertainties of litigation, Morgan Stanley agreed to pay Claimants $668,000 in full and final settlement of any and all claims asserted by Claimants in this proceeding.
2017 FINRA AWC
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Respondent submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. FINRA found that Respondent had violated FINRA Rules 2010 and 3270: Outside Business Activities of Registered Persons, and in accordance with the terms of the AWC, FINRA imposed upon Respondent a $5,000 fine and one-month suspension from association with any FINRA member, in any and all capacities. In the Matter of [NOTE: Name redacted at the discretion of BrokeAndBroker.com], Respondent (FINRA AWC 2015047359101, November 21, 2017).
As set forth in part in the AWC:
During the period from December 29, 2014 through October 9, 2015, [REDACTED] engaged in outside business activities without seeking prior approval from
Morgan Stanley. Specifically, [REDACTED] provided, among other things, consulting
services to various companies and received approximately $32,500 in related
At the time, Morgan Stanley's Written Supervisory Procedures generally provided
that employees may not engage in outside business activities without prior written
approval. [REDACTED] neither sought nor received prior written approval from the
Firm to engage in the aforementioned conduct. In addition, [REDACTED] failed to
disclose some of these outside business activities on a February 19, 2015 Firm