The LPL Stockbroker, The Customer Lawsuit, The Expungement Arbitration, and The SLAPP Lawsuit

December 1, 2020

If a customer complaint is not filed by a customer, is it a customer complaint? If a brokerage firm discloses in regulatory filings that a stockbroker was the subject of a customer complaint but the firm itself disputes that the complainant was a customer, does that give the firm a free pass to file the complaint anyway? And as we all contemplate Wall Street's regulatory and compliance navel and seek peace with the universe, we should remember that the issues under scrutiny are of serious concern for the stockbroker, whose otherwise unblemished reputation has been tarnished. Yes, he's a victim. No, there is no simple, direct process by which he can clear his name and obtain recompense for his ordeal.

2019 FINRA Expungement Arbitration

In a FINRA Arbitration Statement of Claim filed in June 2019, Claimant Arges sought the expungement of a settled civil court lawsuit from his Central Registration Depository record ("CRD"). Arges and Respondent LPL were Co-Defendants in the court lawsuit; however, LPL did not oppose the requested expungement in Arges's FINRA Arbitration. In the Matter of the Arbitration Between Terrance W. Arges, Claimant, v. LPL Financial LLC, Respondent (FINRA Arbitration Award 19-01360 / November 22, 2019)
https://www.finra.org/sites/default/files/aao_documents/19-01360.pdf

The Plaintiff in the underlying civil litigation (her name is not disclosed in the FINRA Arbitration Award) stated that she had received and reviewed a copy of the FINRA Arbitration Statement of Claim but declined to participate in the hearing and supported Claimant Arges's requested expungement. 

SIDE BAR: Online FINRA BrokerCheck records as of December 1, 2020 disclose the following registration history for Terrance Arges:
  • August 2008 to November 2009: Charles Schwab & Co., Inc.
  • March 2010 to August 2011: Charles Schwab & Co., Inc.
  • July 2011 to October 2011: Vanguard Marketing Corporation
  • October/November  2011 to February 2013: Merrill Lynch, Pierce, Fenner & Smith Incorporated
  • March 2013 to April 2016: LPL Financial LLC
  • April 2016 to September 2019: Cuso Financial Services, L.P
  • September 19, 2019 to present: Raymond James Financial Services, Inc.and Raymond James Financial Services Advisors, Inc.

In recommending expungement, the FINRA Arbitration Panel noted in part that Arges did not contribute to the civil court settlement and that LPL had "agreed to settle as a business decision in order to avoid the costs of litigation." Further, the Panel found that Claimant Arges was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation, or conversion of funds, and that the claim/allegation/information is false. In addition to Claimant Arges's $1,575 FINRA Initial Claim Filing Fee, the Panel assessed against him an additional $3,375 in FINRA Hearing Session fees. In part, the Panel offered this rationale for its recommendation of expungement:

The relationship which gave rise to the Underlying Litigation involved claims by Claimant's former fiancé following the termination of the relationship by Claimant. The former fiancé, the Customer, filed suit naming both Claimant and Respondent alleging breach of fiduciary duty, breach of contract, fraud, misrepresentation, negligence, extortion and failure to supervise, solicitation to invest in allegedly unsuitable securities, and that she sustained losses of $120,000.00, which Claimant allegedly extorted her not to disclose.

The Panel determined that the claims of the Customer were entirely false and that there was no breach of fiduciary duty, negligence or other wrongful conduct. The Panel determined that the allegations were false because the Customer never had an account with Claimant or Respondent. Furthermore, it was uncontroverted that Claimant never gave the Customer any financial advice, never handled an account for the Customer, and never gave the Customer any suggestions about investments of any type.

The complaining customer, who filed the lawsuit in court against Agres and LPL, was Claimant Arges' former fiancé. In and of itself there is nothing untoward with that fact but it does bring context to the customer's allegations and her claim that Arges had engaged in extortion. In a different case with different circumstances, it may well be that a stockbroker had extorted his former fiancé/customer, and that said stockbroker had engaged in industry misconduct attendant to handling the customer's account. In this case involving Arges and his former fiancé, however, an independent panel of two Public and one Non-Public arbitrators unequivocally found that the former fiancé's claims "were entirely false." As the arbitrators so succinctly and forcefully explained, the "Customer never had an account with Claimant or Respondent. Furthermore, it was uncontroverted that Claimant never gave the Customer any financial advice, never handled an account for the Customer, and never gave the Customer any suggestions about investments . . ." It just doesn't get more blunt than that.

Superior Court: Arges v. LPL

As is often the case with FINRA expungement arbitrations, we never quite learn from the Award the name of Claimant Arges' fiancé, or the specifics of her allegations, or the specifics of the settlement. Thankfully for our curiosity, Arges sued LPL in the Superior Court of San Diego County, California, citing his former employer's reporting of the former fiance's litigation on his Uniform Termination Notice for Securities Industry Registration (the "Form U5"). Unfortunately for Arges, the Superior Court granted LPL's Special Motion to Strike Arges's Complaint under the State's anti-SLAPP law. 

SIDE BAR: SLAPP is the acronym for "Strategic Lawsuit Against Public Participation." In recent years, SLAPP-suits have been brought as a means of intimidating those who post social media/blog comments, submit OpEds or Letters to the Editor, provide public testimony, etc. A hallmark of a SLAPP-suit is its intent to chill free speech via the prospect of costly litigation and the threat of revealing the identity of an otherwise anonymous poster. 

SIDE BAR: California Code of Civil Procedure (the "CCP"), Section 425.16:

(a) The Legislature finds and declares that there has been a disturbing increase in lawsuits brought primarily to chill the valid exercise of the constitutional rights of freedom of speech and petition for the redress of grievances. The Legislature finds and declares that it is in the public interest to encourage continued participation in matters of public significance, and that this participation should not be chilled through abuse of the judicial process. To this end, this section shall be construed broadly.

(b)(1) A cause of action against a person arising from any act of that person in furtherance of the person's right of petition or free speech under the United States Constitution or the California Constitution in connection with a public issue shall be subject to a special motion to strike, unless the court determines that the plaintiff has established that there is a probability that the plaintiff will prevail on the claim.

. . .

(e) As used in this section, "act in furtherance of a person's right of petition or free speech under the United States or California Constitution in connection with a public issue" includes: (1) any written or oral statement or writing made before a legislative, executive, or judicial proceeding, or any other official proceeding authorized by law, (2) any written or oral statement or writing made in connection with an issue under consideration or review by a legislative, executive, or judicial body, or any other official proceeding authorized by law, (3) any written or oral statement or writing made in a place open to the public or a public forum in connection with an issue of public interest, or (4) any other conduct in furtherance of the exercise of the constitutional right of petition or the constitutional right of free speech in connection with a public issue or an issue of public interest.

Arges appealed the Superior Court's Order granting LPL's motion to strike his complaint to the Court of Appeal. Terrance Arges, Plaintiff/Appellant, v. LPL Financial, LPL Defendant/Respondent (Opinion, California Court of Appeal, Fourth Appellate District, D076790 / November 24, 2020)
http://brokeandbroker.com/PDF/ArgesCalCtAppOp201124.PDF

The Romero Lawsuit -- naming names

In the Court of Appeals Opinion, we learn more about the substance of Arges's former fiancé's lawsuit (including her name):

In March 2017, an individual named Yulia Romero filed a state court complaint against Arges and LPL based on conduct Arges allegedly undertook while he was a registered representative of LPL. Romero alleged Arges convinced her to "entrust her funds to his control and decision-making, so that he could create and build a client portfolio . . . ." She alleged Arges opened a stock trading account in her name, "traded, gambled, and lost $120,000 of [her] money on speculative, unsuitable, risky, market-timing stock trades," and threatened her to "prevent her from seeking redress for his improprieties." She also alleged LPL, in its capacity as Arges's principal, failed to advise her of the risks associated with Arges's stock trades. Based on these allegations, Romero asserted a negligence cause of action against LPL and breach of fiduciary duty, breach of contract, fraud, negligent misrepresentation, unfair business practices, negligence, and extortion causes of action against Arges. 

Soon after Romero filed suit, Romero and LPL reached a settlement agreement. Under the settlement agreement, Romero dismissed LPL from the case in return for $15,000. 

Arges filed a cross-complaint against Romero, the details of which are not apparent from the record. Romero and Arges later reached a settlement agreement under which Romero dismissed her causes of action against Arges. According to Arges, Romero "pa[id] a substantial settlement amount" to him under the settlement agreement.

at Pages 5 - 6 of the Court of Appeals Opinion

First, we got the name of the ex-fiancé: Yulia Romero. Second, we find that Romero settled with LPL for $15,000 attendant to her claimed losses of $120,000 -- that's about a 12.5% settlement based upon the initial demand. Given what legal fees run these days, we lawyers would likely view LPL's payment of $15,000 as something akin to "nuisance value," based upon the likelihood that a full-fledged defense of the customer's claims in state court would likely run as much if not more in legal fees. Third, Arges did not go down quietly in the Romero's lawsuit; and not only did he file a Cross-Complaint against Romero but she seems to have blinked. Apparently, Romero dismissed her charges against Arges and seems to have paid him a cash settlement, which he characterized as a "substantial amount."

LPL U5 Disclosures

Let's put the whole Romero-LPL-Arges settlement aside for the moment. 

Now, let's focus on what LPL did upon receiving the Romero's complaints/lawsuit about Arges's conduct. As set forth in part in the Court of Appeals Opinion:

LPL reported the Romero litigation to FINRA on its U-Form filings. The reported information was added to the CRD and made publicly-available on Arges's BrokerCheck report. Under a heading that reads "Customer Dispute - Settled," Arges's BrokerCheck report includes two disclosures related to the Romero litigation. 

LPL provided the first disclosure, which identifies the Romero litigation by caption, docket number, and court, and summarizes the Romero litigation as follows: 

[ROMERO] ALLEGES BREACH OF FIDUCIARY DUTY, BREACH OF CONTRACT, FRAUD, MISREPRESENTATION, NEGLIGENCE, EXTORTION, FAILURE TO SUPERVISE WITHREGARD TO CLAIMS THAT [ARGES] SOLICITED HER TO INVEST IN ALLEGEDLY UNSUITABLE SECURITIES VIA AN ONLINE BROKERAGE ACCOUNT, WHICH BROKERAGE ACCOUNT WAS NEITHER OFFERED NOR APPROVED BY LPL, AND FURHTER [sic] THAT SHE SUSTAINED LOSSES OF $120,000, WHICH [ARGES] EXTORTED HER NOT TO DISCLOSE. 

LPL's disclosure states the Romero litigation was settled, there was a "Monetary Compensation Amount" of $15,000, and there was an "Individual Contribution Amount" of zero for the settlement. It also includes a statement from LPL indicating that, according to LPL's records, Romero was not an LPL customer. 

Arges provided the second disclosure, which includes substantially the same information as LPL's disclosure, as well as the following statement from Arges: 

[Romero] is my ex-fiancé who sued me after our relationship ended. She traded her own account at a discount broker [sic] and made some of the trades I did in my account. She also bought stocks that I did not. I never asked for or received any commissions. She chose not to open an account with me to avoid paying any fees to my firm. There was no contract, compensation, or brokerage relationship. The claims are false and I will seek expungement under the applicable FINRA rules. 

at Pages 6 - 7 of the Court of Appeals Opinion

You know -- I sorta see why Arges might have gone ballistic with both his former fiancé's allegations and the response of his former employer LPL. On a very, very basic threshold level, if LPL had determined, which it did, that "Romero was not an LPL customer," then what was the basis for disclosing this complaint on Arges's industry record?  If the complaint did not come from a customer, why was Arges's record marked up? 

Arges Seeks Damages from LPL

As we now know, Arges fought his fight on two fronts. First, he sued LPL in a FINRA arbitration seeking an expungement, which three independent arbitrators recommended (said recommendation was apparently confirmed by a court on August 7, 2020). Second, Arges filed a Superior Court lawsuit against LPL:

for reporting the Romero litigation on its U-Forms. He alleged the charges in the Romero litigation were false and Romero sued him because he and Romero were in a romantic relationship that ended poorly. He alleged LPL knew Romero's allegations were false and reported them to FINRA "to undermine his ability to obtain and keep his financial clients." Arges asserted breach of contract, breach of the implied covenant of good faith and fair dealing, negligence, intentional misrepresentation, negligent misrepresentation, and defamation causes of action against LPL. He sought damages and declaratory relief expunging the Romero litigation from the CRD and his BrokerCheck records. 

at Page 8 of the Court of Appeals Opinion

U4 and U5: Protected Communications

As previously noted, in response to LPL's Motion, the Superior Court found that:

[A]rges's complaint arose from LPL's "filing of forms U-4 and U-5 with FINRA" and concluded the forms were protected "communications made before an official proceeding." The court also determined Arges did not establish a probability of success on his causes of action because LPL's statements were absolutely privileged under Civil Code section 47, subdivision (b). It found the privilege barred Arges's entire complaint, including the breach of contract cause of action, because "[t]he gravamen of all of [Arges's] causes of action [was] the statements contained in Forms U-4 and U-5 ." Therefore, the court struck Arges's complaint and entered judgment in LPL's favor.

at Page 10 of the Court of Appeals Opinion

Court of Appeals Applies Two-Step Anti-Slapp Test

In evaluating Arges's appeal, the Court of Appeal undertook a two-step approach concerning LPL's anti-SLAPP motion:

['Initially,] the moving defendant bears the burden of establishing that the challenged allegations or claims "aris[e] from" protected activity in which the defendant has engaged.' " (Wilson, supra, 7 Cal.5th at p. 884.) "A defendant satisfies the first step of the analysis by demonstrating that the 'conduct by which plaintiff claims to have been injured falls within one of the four categories described in subdivision (e) [of section 425.16]' [citation], and that the plaintiff's claims in fact arise from that conduct [citation]." (Rand Resources, LLC v. City of Carson (2019) 6 Cal.5th 610, 620.) 

If the defendant satisfies its burden under the first step of the analysis, " 'the burden shifts to the plaintiff to demonstrate the merit of [its] claim[s] by establishing a probability of success.' " (Monster Energy Co. v. Schechter (2019) 7 Cal.5th 781, 788 (Monster Energy).) At this second step, the plaintiff  " 'may not rely solely on its complaint, even if verified; instead, its proof must be made upon competent admissible evidence.' " (Ibid.) " 'The court does not weigh evidence or resolve conflicting factual claims. Its inquiry is limited to whether the plaintiff has stated a legally sufficient claim and made a prima facie factual showing sufficient to sustain a favorable judgment. It accepts the plaintiff's evidence as true, and evaluates the defendant's showing only to determine if it defeats the plaintiff's claim as a matter of law. [Citation.] "[C]laims with the requisite minimal merit may proceed." ' " (Ibid.) 

at Page 11 of the Court of Appeals Opinion

FINRA: An Official Body

At to step one of the two-part test, the Court of Appeals admonishes him that he "did not present the trial court with his claim that LPL's disclosures were unprotected activities based on Romero's alleged status as a non-consumer. Arges has forfeited the argument by raising it for the first time on appeal." at page 13 of the Court of Appeals Opinion. Pointedly, the Court concluded that:

[I]n her lawsuit, Romero alleged Arges served as her financial advisor and broker. She further alleged Arges, as an agent of LPL, engaged in investment-related misconduct, including losing $120,000 of her funds, failing to disclose known risks associated with his stock trades, and depriving her of investor protections. This is precisely the type of action that is subject to disclosure on a U-Form. Thus, it is evident LPL was obligated to disclose the Romero litigation to FINRA. And it is equally evident that a FINRA investigation was a possible consequence of LPL's disclosures. Because LPL's disclosures were preparatory to an investigation, we conclude they were protected communications made before an official proceeding.8 
= = = = =
Footnote 8: Arges asserts in passing that LPL was not required to notify FINRA of the Romero litigation because he departed LPL before the Romero litigation was filed. There is no merit to this argument. LPL was required to amend its Form U-5 when it learned of facts causing its previously-filed Form U-5 to become inaccurate or incomplete. (FINRA Bylaws, Art. V, § 3(b).) This duty to amend arose when LPL learned of the Romero litigation, which concerned allegations of wrongdoing during Arges's tenure at LPL. 

at Page 15 of the Court of Appeals Opinion

As to Agres's contention that Romero was never a "customer" -- a fact that even LPL determined -- the Court rebuffs that point:

Indeed, FINRA mandates the reporting of credible and baseless investment-related actions alike. (Dawson v. New York Life Insurance Co. (7th Cir. 1998) 135 F.3d 1158, 1164 ["[E]ven meritless complaints against agents must be reported on Forms U-5"] disapproved on another ground as recognized by Glickenhaus & Co. v. Household International, Inc. (7th Cir. 2015) 787 F.3d 408.) To the extent Arges claims that certain references on the U-Forms to "consumer-initiated" actions restrict firms' disclosure duties only to those situations in which firms know the complainants are consumers, we do not adopt Arges's cramped reading of the U-Forms. (See Andrews v. Prudential Securities, Inc. (6th Cir. 1998) 160 F.3d 304, 307-309 [concluding firm-solicited consumer claims constituted consumer-initiated claims subject to disclosure on Form U-5].) Rather, we conclude a firm's duty to disclose turns on whether a registered representative was named as a defendant in, or the subject of, an investment-related complaint, arbitration, or lawsuit in 15 which it is alleged that he or she committed sales practice violations against a consumer. (Form U-4 Question 14I(1)-(5); Form U-5 Question 7E(1)-(5).) 

at Page 14 of the Court of Appeals Opinion

Step Two: Probability of Success

Having flamed out in satisfying the first step of the two-part test, it seems merely an exercise in futility but the Court does tackle the so-called "probability of success" aspect of its task. As a threshold issue, the Court of Appeals affirms the Superior Court's finding that because LPL's U-Form disclosures were privileged under Civil Code 425.16(b) that Arges could not prove a probability of success. In arguing against the privileged nature of the cited disclosures, Arges asserted that because Romero was not a consumer of LPL that firm was not obligated to report the litigation. As noted above, the Court was not impressed by the "consumer" "non-consumer" distinction and rejected this argument.

Further, Arges argued the U4 and U5 disclosures should be subject only to a qualified immunity, which can be overcome by a showing of malice. In rejecting such a limitation, the Court held in part that [Ed: footnote omitted]:

[B]y contrast, California extends the official proceeding privilege to "communications made in preparation for or to prompt an investigation." (Ibid.) Given the reach of our state's official proceeding privilege, we adopt the Fontani court's conclusion that an absolute privilege applies to qualifying U-Form disclosures. (Ibid.; cf. Rosenberg, supra, 8 N.Y.3d at pp. 367-368 [Form U-5 statements receive absolute privilege under New York law].)

at Page 18 of the Court of Appeals Opinion

In similar fashion, the Court made quick work of Arges's arguments that a privilege afforded to an "official proceeding" should not attach to a Breach of Contract action or to his request for an Order of Declaratory Relief. Accordingly, the Court affirmed the Superior Court's Order and found LPL entitled to recover fees and costs of appeal as will be determined by the lower Court.

Bill Singer's Comment

Grievance

It may prove quite the challenge to distinguish between a non-disclosable customer communication and a disclosable customer complaint, and then deciding who was the intended subject of the "complaint." All of which presents some interesting issues for in-house compliance staff. The mere fact that there is a customer and that individual has filed a complaint does not automatically transform that customer complaint into one about the customer's servicing stockbroker -- nor does it justify any compliance officer's decision to automatically deem that any complaint from any customer is filed naming the current, servicing stockbroker. Such a compliance protocol is lazy. It's sloppy. Frankly, it's borderline fraud, which could also be viewed as potential defamation, and certainly little more than going through the motions rather than doing your job in good faith. As such, let's take a look at some pertinent FINRA rules addressing the nature of customer complaints:

FINRA Rule 4513: Records of Written Customer Complaints

(a) Each member shall keep and preserve in each office of supervisory jurisdiction either a separate file of all written customer complaints that relate to that office (including complaints that relate to activities supervised from that office) and action taken by the member, if any, or a separate record of such complaints and a clear reference to the files in that office containing the correspondence connected with such complaints. Rather than keep and preserve the customer complaint records required under this Rule at the office of supervisory jurisdiction, the member may choose to make them promptly available at that office, upon request of FINRA. Customer complaint records shall be preserved for a period of at least four years.

(b) For purposes of this Rule, "customer complaint" means any grievance by a customer or any person authorized to act on behalf of the customer involving the activities of the member or a person associated with the member in connection with the solicitation or execution of any transaction or the disposition of securities or funds of that customer.

FINRA Rule 4530: Reporting Requirements

(a) Each member shall promptly report to FINRA, but in any event not later than 30 calendar days, after the member knows or should have known of the existence of any of the following:

(1) the member or an associated person of the member:
. . .

(B) is the subject of any written customer complaint involving allegations of theft or misappropriation of funds or securities or of forgery;
. . .

(G) is a defendant or respondent in any securities- or commodities-related civil litigation or arbitration, is a defendant or respondent in any financial-related insurance civil litigation or arbitration, or is the subject of any claim for damages by a customer, broker or dealer that relates to the provision of financial services or relates to a financial transaction, and such civil litigation, arbitration or claim for damages has been disposed of by judgment, award or settlement for an amount exceeding $15,000. However, when the member is the defendant or respondent or is the subject of any claim for damages by a customer, broker or dealer, then the reporting to FINRA shall be required only when such judgment, award or settlement is for an amount exceeding $25,000; or . . .
. . .

(d) Each member shall report to FINRA statistical and summary information regarding written customer complaints in such detail as FINRA shall specify by the 15th day of the month following the calendar quarter in which customer complaints are received by the member.

(e) Nothing contained in this Rule shall eliminate, reduce or otherwise abrogate the responsibilities of a member or person associated with a member to promptly disclose required information on the Forms BD, U4 or U5, as applicable, to make any other required filings or to respond to FINRA with respect to any customer complaint, examination or inquiry.In addition, members are required to comply with the reporting obligations under paragraphs (a), (b) and (d) of this Rule, regardless of whether the information is reported or disclosed pursuant to any other rule or requirement, including the requirements of the Form BD. However, a member need not report: (1) an event otherwise required to be reported under paragraph (a)(1) of this Rule if the member discloses the event on the Form U4, consistent with the requirements of that form, and indicates, in such manner and format that FINRA may require, that such disclosure satisfies the requirements of paragraph (a)(1) of this Rule, as applicable; or (2) an event otherwise required to be reported under paragraphs (a) or (b) of this Rule if the member discloses the event on the Form U5, consistent with the requirements of that form

FINRA Minefield

FINRA member firm compliance departments uniformly characterize far too many "communications" from customers as involving a "complaint," when, in fact, the communication is merely an inquiry or comment. Further, not every customer complaint necessarily rises to the level of an event requiring disclosure; for example, a complaint that a stockbroker was rude on the telephone or that the firm's online platform is not user-friendly would not (absent more) require a regulatory disclosure.

Additionally, even if a communication involves what may be deemed a complaint, another important determination is whether the communication emanated from a customer or was transmitted subject to the customer's authorization (through a lawyer or agent as two common examples). At times, a customer's family member or friend may complain to an employer brokerage firm about a stockbroker who is servicing the subject customer. If the sender of that complaint is not the customer and not a "person authorized to act on behalf of the customer," then that communication may not require regulatory disclosure -- which is not to suggest that a firm's compliance department should not inquire as to the issues raised.

A peculiar quirk of FINRA's rules is that the self-regulator's reporting requirements require the prompt reporting of "any written complaint" but do not similarly address the mere "oral complaint. " Additionally, FINRA's reporting requirement limits the reporting of "any written customer complaint" to those "involving allegations of theft or misappropriation of funds or securities or forgery."


As if any normal human being would not, by now, be crumbling under the weight of FINRA's rules and their lack of meaningful guidance, you have to add to that pressing weight the need to discern between the obligations imposed upon a FINRA member firm to report events to the self-regulatory organization and the separate disclosure obligations of the Uniform Application for Securities Industry Registration or Transfer("Form U4"). Notably, under the Form U4 heading "Customer Complaint/Arbitration/Civil Litigation Disclosure," we find, in part, the following:

(2) Have you ever been the subject of an investment-related, consumer-initiated (written or oral) complaint, which alleged that you were involved in one or more sales practice violations, and which:

(a) was settled, prior to 05/18/2009, for an amount of $10,000 or more, or;

(b) was settled, on or after 05/18/2009, for an amount of $15,000 or more?

(3) Within the past twenty four (24) months, have you been the subject of an investment-related, consumer-initiated, written complaint, not otherwise reported under question 14I(2) above, which:

(a) alleged that you were involved in one or more sales practice violations and contained a claim for compensatory damages of $5,000 or more (if no damage amount is alleged, the complaint must be reported unless the firm has made a good faith determination that the damages from the alleged conduct would be less than $5,000), or;

(b) alleged that you were involved in forgery, theft, misappropriation or conversion of funds or securities?

Ah yes, the regulatory minefield for the unwary:
  • FINRA Rule 4530(a)(1)(B) requires prompt reporting when an associated person is "the subject of any written customer complaint involving allegations of theft or misappropriation of funds or securities or of forgery."
  • Form U4, Item 14I (2) requires reporting of both written and oral investment-related, consumer-initiated complaints alleging a sales practice violation that settled for $15,000 or more.
To add to the confusion, Item 14I(3) on the U4 requires the reporting of only written investment-related, consumer initiated complaints made within the past 24-months alleging at least $5,000 in compensatory damages; but if no monetary amount is alleged, "the complaint must be reported unless the firm has made a good faith determination that the damages from the alleged conduct would be less than $5,000." On the other hand, if that same 24-month-complaint merely alleged that "you were involved in forgery, theft, misappropriation or conversion of funds or securities," then it has to be disclosed regardless of the dollars alleged.

Yeah, I know, that's all crystal clear. The important takeaway is that FINRA's regulatory scheme assumes too much and depends upon unmanageable notions such as common sense and reasonableness. Common sense? Reasonableness? Try referencing those concepts if you're a registered rep, associated person, or compliance office with the need to figure out just what constitutes a "grievance."  

Without question, my sympathies are wholly with Terrance W. Arges, who seems to have been victimized by FINRA's reporting process. Let's remember these stark words from the FINRA Arbitration Award:

The Panel determined that the claims of the Customer were entirely false and that there was no breach of fiduciary duty, negligence or other wrongful conduct. The Panel determined that the allegations were false because the Customer never had an account with Claimant or Respondent. Furthermore, it was uncontroverted that Claimant never gave the Customer any financial advice, never handled an account for the Customer, and never gave the Customer any suggestions about investments of any type.

In the spirit of beating a horse to death, let me set the FINRA Arbitrtion Panel's findings in bullet-point fashion:
  • Romero's claims were entirely false.
  • Claimant Arges never gave Romero any financial advice.
  • Claimant Arges never handled Romero's account.
  • Claimant Arges never gave Romero any investment suggestions.
  • LPL reported to FINRA that Romero was not an LPL customer. 
I could go on and on with the back-and-forth analysis but it's not going to be much more than an academic exercise. Ultimately, it just doesn't seem right that Arges had to sue LPL and incur legal fees in order to revise the disclosures at issue. I would like to think that common sense would compel us all to agree that a mere telephone call to FINRA with follow-up supporting documentation could have carried the day -- but for the fact that FINRA remains an often impenetrable bureaucracy bereft of common sense or the motivation to drain its swamp. 

Also READ:

Download a PDF copy of Bill Singer Esq.'s analysis of FINRA's Expungement Rules
  • 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