The Hysterical and Yelling Customer, The Market Crash, and A FINRA Expungement

May 29, 2019

In a recent FINRA expungement case, the sole arbitrator recommended expungement of two customer complaints. In the first occurrence, employer Morgan Stanley had denied the customer's claim and no litigation or settlement ensued.  In the second occurrence, the stockbroker was not named as a Respondent in the customer's arbitration against Morgan Stanley. Unfortunately, in recommending expungement, the FINRA arbitrator unwittingly opens up a can of worms.

Case In Point

In a FINRA Arbitration Statement of Claim filed in February 2019, associated person Claimant Zech sought the expungement from her Central Registration Depository record ("CRD") of what the FINRA Arbitration Decision characterizes as:

a customer complaint and an arbitration in which customers complained regarding the callable nature of their Certificates of Deposit ("CDs") and Fixed Income Deposits ("FIDs") (Occurrence No. 1213532) and another customer complained regarding the suitability of the investments in her IRA account (Occurrence No. 1487495).

Respondent Morgan Stanley did not oppose the requested expungement. Although notified of the expungement hearing, the customers did not participate in the hearing and did not contest the requested relief. In the Matter of the Arbitration Between Barbara J. Zech, Claimant, v. Morgan Stanley, Respondent (FINRA Arbitration Decision 19-00505)  
http://www.finra.org/sites/default/files/aao_documents/19-00505.pdf

Award

In recommending expungement, the sole FINRA Arbitrator made a FINRA Rule 2080 finding that the customers' claim, allegation, or information is factually impossible or clearly erroneous, and false. The Arbitrator offered the following rationale:

As to Occurrence No. 1213532: 

According to the testimony this occurrence involves two different clients. The first are the customers from Occurrence No. 1213532 - after several years of investing in CDs and FIDs, these customers raised a complaint with Respondent regarding their misunderstanding about the callable nature of their CD accounts. The customers had invested in callable CDs before transferring their account to Respondent and working with Claimant. Respondent investigated the internal complaint. Claimant participated in the investigation along with document review. Respondent determined that there was no liability to the firm or to Claimant and denied the customers' complaint. Based on the testimony of Claimant, she produced very detailed notes as to her conversations and interactions with the customers. There were notations as to informing the customer that the "issuer" made the decision as to the date to redeem, not the investor or Respondent or Claimant. After Respondent denied their complaint, the customers did not pursue the matter further and did not initiate any litigation or arbitration against Claimant or Respondent. The customers did transfer their accounts to another firm in the form of a self-directed account. This testimony was not refuted. There was no payment or settlement. The uncontroverted testimony was that the claim was false and clearly erroneous. 

As to Occurrence No. 1487495: 

The second customer complaint involved the customer from Occurrence No. 1487495. This customer filed a Statement of Claim with FINRA against Respondent only. Claimant testified she was not named in the arbitration and had nothing to do with any settlement, award or payment. The customer was retiring from Bell South and wanted to make her investments last through retirement. In 2007, Claimant met and spoke extensively with the customer and created four different allocation proposals, which were all reviewed with the customer. The customer finally agreed to a plan that Claimant proposed and she began to set up the accounts. Eventually, the customer filed a Statement of Claim with FINRA (Case No. 09-06370) against Respondent claiming breach of fiduciary duty, breach of contract, unsuitability, negligence and gross negligence, fraud and failure to supervise. Claimant testified as to her many conversations with the customer as referred to in her notes, about the hysteria of the customer after watching television and reading about the market crisis. Claimant's notes reflect that the customer was hysterical and yelling at times during their conversations. There were notes and testimony that the customer did not remember conversations. The customer executed a Fund Solution Agreement in May 2008 and her funds were invested based on the allocation plan agreed upon. The customer had an "auto-rebalancing" feature in her account which was designed to protect her accounts. Claimant testified that a form was sent to the customer several times to remove or change the "auto rebalance" feature which the customer did not return. The customer's accounts were serviced based on her wishes and income requirements and instructions. The customer received various documents as to her investments and the strategies and was informed of the risks associated and involved. 

The customer did file an arbitration with FINRA against Morgan Stanley only. Claimant testified she was not named in the arbitration and had nothing to do with any settlement, award or payment. The Arbitrator did review the public Award, which does not mention Claimant. The Statement of Claim was for compensatory damages, return of fees and punitive damages. The Award was for a small amount based on the amount demanded. The Panel in the Award did not mention Claimant or any other Morgan Stanley employee and did not refer Claimant or any other Morgan Stanley employee for any disciplinary matter. There are no specifics as to the finding of the Panel in the Award. The market crash -- financial crisis in 2008 -- was not the fault or cause of anything done by Claimant. Unprofitability of an account does not make it unsuitable. The uncontroverted testimony was that the claim was false and clearly erroneous. 

The testimony, documents reviewed by the arbitrator and the argument of counsel demonstrate that Claimant has met the burden of proving that the Petition for Expungement is granted based on FINRA Rule 2080(b)(1)(A) and (C).

Bill Singer's Comment

I couldn't resist looking up the FINRA Arbitration "(Case No. 09-06370)" referenced in the second rationale above: In the Matter of the Arbitration Between Vivian Escandon, Claimant, v. Morgan Stanley & Co., Inc. (FINRA Arbitration Decision 09-06370 / November 3, 2010). 
https://www.finra.org/sites/default/files/aao_documents/09-06370-Award-FINRA-20101103.pdf  

First and foremost, the Zech Arbitration Decision asserts that public customer Claimant Escandon sought:

compensatory damages of at least $179,000.00, return of fees of approximately $11,400.00, well managed portfolio damages, punitive damages of $571,200.00, pre-award interest, costs, . . .

The Escandon Panel of Arbitrators rendered in part the following Award:

Respondent is liable for failure to supervise and suitability and shall pay to Claimant compensatory damages in the sum of $75,000.00, pre-judgment interest specifically excluded. 

Respondent is liable and shall pay to Claimant expert witness fees in the sum of $3,750.00. 

Respondent is liable and shall pay to Claimant the sum of $375.00 representing reimbursement of the non-refundable portion of the claim filing fee previously paid by Claimant to FINRA Dispute Resolution.  

In the rationale cited in the Zech Arbitration Decision, the sole Arbitrator asserts in part that:

[T]he Arbitrator did review the public Award, which does not mention Claimant. The Statement of Claim was for compensatory damages, return of fees and punitive damages. The Award was for a small amount based on the amount demanded. The Panel in the Award did not mention Claimant or any other Morgan Stanley employee and did not refer Claimant or any other Morgan Stanley employee for any disciplinary matter. . . .

I concur with the Zech Arbitrator's observation that the Escandon Decision "does not mention Claimant [Zech]." I'm not sure that I concur that the award of $75,000 in compensatory damages plus $3,750 in witness fees and $375 in filing fee reimbursement "was for a small amount based on the amount demanded." If we only consider the $179,000 in compensatory damages sought by public customer Escandon, she got about 42% of her demanded compensatory damages. I am not blind to the customer's demand for nearly $600,000 in punitive damages, and additional interest, costs and fees -- all of which were essentially denied. Consequently, we can debate whether an award of 42% of what was sought is a "small amount," and then further debate whether the fair test of a "small amount" should or should not include a calculation of punitive damages requested. I'm not fixed in my opinion in terms of either side of the argument but that doesn't inhibit me from raising the point.

Finally, although the Zech Arbitrator is absolutely correct that the Award "did not mention Claimant or any other Morgan Stanley employee," it's also true that the Escandon Award specifically awarded $75,000 in compensatory damages for "failure to supervise and suitability."  Not stated in Escandon are the names or roles of the individuals who Morgan Stanley failed to supervise; and not stated are the names or roles of the individual who recommended unsuitable investments. Assuming that Zech was NOT the individual who Morgan Stanley had failed to supervise and she was NOT the individual who rendered unsuitable investment advice, then I would have preferred that such be spelled out in the Zech rationale and Decision. I'm guessing that if this omission or comission of facts caught my attention that it will likely catch other industry veterans'. Perhaps Claimant Zech might want a Revised Decision that clarifies the points at issue. I suspect that the Zech Arbitrator got it right and that Zech was largely collateral damage and deserved an expungement; notwithstanding, I still can't quite reconcile the Arbitrator's conclusion in Zech that:

The uncontroverted testimony was that the claim [Escandon's] was false and clearly erroneous. 


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