The high-profile Financial Industry Regulatory Authority (FINRA) arbitration between Lance R. Beck and SunTrust Robinson Humphrey, Inc. (STRH) has found a tortured path back onto the radar screen. A decision in this case was first announced on December 29, 2009, but an Amended Award was issued February 5, 2010. In the Matter of the Arbitration Between Lance R. Beck and SunTrust Robinson Humphrey, Inc. (Amended Award FINRA 08-02482 / February 5, 2010). The purpose for the amendment seems to be a technical substitution of the name of the Claimant's legal counsel.
In recent weeks I have received an increasing number of calls from brokers troubled by U5 disclosures and ongoing issues arising from prior Auction Rate Securities (ARS) sales. As such, Beck provides us with an excuse to re-visit that case and consider some of the still relevant issues.
In The Beginning
On July 18, 2008, Associated Person Lance R. Beck filed a FINRA Arbitration Claim against Respondent STRH, alleging wrongful termination and malicious defamation, causes of action that arose in connection with Beck's sale of Trapeze V, LLC Auction Rate Preferred Securities to his customer.
At the hearing. Claimant moved for leave to amend the Statement of Claim to include a request for attorneys' fees and for specific language to be included on the U5 should Claimant prevail. The Panel granted the motion. Additionally, Claimant sought expungement of the customer complaint by Adams Orange Park and to correct his U5 to state "Termination Without Cause" and amend the answer on his Form U5 for Item 7E (2) to say "no" (settled consumer-initiated, sales practice violations).
PRACTICE POINTER by Bill Singer: I am often asked by registered persons about the measure of their damages in "wrongful termination/defamation" cases. Here is a perfect answer. Moreover, for future reference, note that you should try to maintain records to corroborate the diminution in value of your income and your "book." Similarly, note the demand here for punitive damages. Also, note the demand to have the panel order revisions to offending portions of your U5.
Keeping It Private
In response to Beck's claims, STRH denied his allegations, asserted various affirmative defenses, and counterclaimed against Beck for Breach of an Employment Agreement. The former employer alleged that upon his separation from employment, Beck retained without authorization and improperly disclosed confidential information. STRH sought dismissal of Becks claims, and an assessment against the Claimant of all forum fees. Moreover, in its Counterclaim, STRH requested orders from the Panel directing:
PRACTICE POINTER by Bill Singer: Why do employer-Respondents in arbitrations fight to keep documents and information confidential? First off, unlike court proceedings, arbitrations are "private" so-called alternate dispute resolution proceedings. Consequently, the average citizen or reporter can't simply visit a courthouse and view the file. Claimants often include all sorts of incendiary materials in their Statements of Claim as a means of gaining leverage over publicity-shy employers. Similarly, Respondents will frequently seek confidentiality orders from FINRA arbitration panels as a means to blunt the potential negative press.
In addition to seeking the confidentiality order, Respondent filed a Motion to Exclude as irrelevant evidence of regulatory settlements/investigation and the "Diaz Litigation." STRH was likely sensitive to a May 31, 2006 Order by the Securities and Exchange Commission's (SEC's) http://http://www.sec.gov/rules/other/2006/33-8711.pdf that granted disqualification waivers to Suntrust Capital Markets Inc. and SunTrust Banks, Inc. See, the SEC's Auction Rate Securities (ARS) investigation Order Instituting Administrative and Cease-And-Desist Proceedings in The Matter of Bear Stearns & Co., Inc. et al. http://www.sec.gov/litigation/admin/2006/33-8684.pdf. Also, STRH had to contend with a Financial Industry Regulatory Authority (FINRA) ARS case that Repondent and four other FINRA member firms settled. See, FINRA Announces Agreements in Principle with Five Firms to Settle Auction Rate Securities Violations (September 18, 2008) http://www.finra.org/Newsroom/NewsReleases/2008/P117019
On or about October 29, 2009, the Panel issued an Order that granted Respondent's motion.
The FINRA arbitrtation panel found Respondent liable and ordered STRH to pay Claimant
The Panel recommended the expungement from Beck's registration records maintained by the Central Registration Depository ("CRD") of all references to a customer complaint from Abrams Orange Park, including the fact that Respondent paid money to Abrams Orange Park due to any act or omission by Claimant with the understanding that pursuant to Notice to Members 04-16 http://www.finra.org/Industry/Regulation/Notices/2004/P003233
PRACTICE POINTER by Bill Singer: Although the Panel cannot undo the fact that STRH apparently entered into a settlement of what the firm deemed to be a consumer-initiated, sales practice complaint, the Panel has pointedly determined that said customer complaint was not prompted by "any act or omission" by Beck. As such, this customer complaint would be viewed as one made against the firm or one alleging misconduct more of an institutional nature than properly attributed to the misconduct of an individual registered representative.
The Expungement Process
The panel found that the cited U5 claim, allegation, or information was factually impossible or clearly erroneous; and false. However, Beck must obtain confirmation from a court of competent jurisdiction before the CRD will execute the expungement directive. Unless specifically waived in writing by FINRA, parties seeking judicial confirmation of an arbitration award containing expungement relief must name FINRA as an additional party and serve FINRA with all appropriate documents.
PRACTICE POINTER by Bill Singer: FINRA Arbitration Code Rule 12805 or 13805 requires the panel to make an affirmative finding that the subject matter of the claim or the information in the CRD system meets one or more of the three standards, set forth in FINRA Rule 2080:
Such an affirmative finding is used in FINRA's determination to waive the requirement that it be named as a party in the court confirmation process. In addition, if the expungement relief is based on judicial or arbitral findings other than those described above, FINRA, in its sole discretion and under extraordinary circumstances, may waive the obligation to name FINRA as a party if it determines that
In reaching its decision to order the expungement, the Panel placed considerable weight upon the following:
The Panel specifically found that Beck did not violate STRH's sales practices policy,as had been alleged. Rather, the Panel found that Claimant had a reasonable basis for recommending Trapeza ARS to customer Abrams Orange Park. Further, after hearing testimony and reviewing documents, the Panel viewed the "customer complaint" not as one alleging a sales practice violation by Beck personally, but rather about the liquidity of the investment, which STRH stipulated that at the time of sale was appropriate and reasonable for Beck to believe that ARS were liquid and safe.
The Panel also viewed the customer's representative, a finance major and the customer's Treasurer, as someone duly entrusted to invest the large sum of money at issue. Had Beck sent the STRH marketing material to the customer, the Panel concluded that such disclosures would have been the same as those Beck had previously provided to the customer's representative. Respondents Exhibit 186 showed that Abrams Orange Park previously bought an ARS in 2006, inferring that such prior purchase evidenced an understanding about the nature of ARS.
Testimony demonstrated that other brokers who sold the same investment and whose clients complained (resulting in STRH having to buy back the securities) did not lose their jobs or have their U4s or U5s annotated to include customer complaints. One witness who improperly told her client that they could get their money at any time and who cost the firm far more money was placed on heightened supervision and was not fired.
The Panel found that STRH intended to terminate Beck based on Mr. Wheeler's note that Claimant was a product of the "old regime", "makes too much money" and was "walking too long in cushy loafers." The Panel further found that Respondent intended to defame Claimant. STRH was found to have completed Beck's U5 in such a manner as to make it unlikely he would work as a broker in the future and take clients with him to a new broker-dealer. Based on these facts, the Panel found that the allegations against Claimant were clearly false, and the information placed on his U5 is defamatory and should be expunged.
The Panel recommended the expungement of the "Permitted to Resign" reason for termination of and accompanying termination comment, "FAILURE TO FOLLOW FIRM SALES PRACTICE POLlCY from Claimant's Form U5 dated April 7. 2008 and maintained by the Central Registration Depository ("CRD") based on the defamatory nature of the information. The Panel recommended that the reason for termination be changed to "Other" with the following termination comment added, "Terminated Without Cause."
PRACTICE POINTER by Bill Singer: The Form U5 is not automatically amended to include the changes regarding Claimant's termination. Claimant must forward a copy of the Award to FlNRA's Registration and Disclosure Department for the amendments regarding Claimant's termination to be incorporated into the Form U5.