Ex-Man Fights Superhero Battle For FINRA Expungement

May 29, 2014

We all know about the mutant superheroes X-Men. Lesser known are the registered representatives Ex-Men, who fight for an expungement. Frankly, it might help if some of those men and women working at FINRA member firms had super powers. Anyone know someone at Marvel Comics to whom I can pitch this edgy idea?

Case In Point

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in September 2013, Claimant Charles Schwab & Co., Inc. sought an expungement of a FINRA arbitration case filed by Respondent Baggarly. In the Matter of the FINRA Arbitration Between Charles Schwab & Co., Inc., Claimant, vs. Brad A.Baggarly, Respondent 
(FINRA Arbitration 13-02727, May 19, 2014).

That's about the last straightforward, commonsense statement that will likely appear in this commentary. So - sit down, take a deep breath, and try and follow me from here.  

Public customer Baggarly filed an arbitration case against Charles Schwab. Schwab settled the matter. As a result of the allegations in the customer's complaint, Jeffrey S. Sharpe was required to disclose the matter on his Central Registration Depository file ("CRD").
Look Sharpe

Who the hell is Jeffrey S. Sharpe, you may ask? 

Oh, he was a registered representative who got sucked into this vortex of regulatory silliness. 

Since this FINRA expungement arbitration is pretty much a legal sham coupled with legal fiction, the public customer Respondent did not file an Answer to Schwab's Statement of Claim and didn't bother to contest the sought relief or appear at any hearing. Why the hell did Schwab have to even name the Respondent?  Because FINRA's rules requires that there be an arbitration filed in order to seek an expungement recommendation, and, since the matter on Sharpe's CRD involved a settled customer arbitration case, why, of course, it makes perfect sense that the unnamed stockbroker's employing law firm would sue a public customer with which it had settled the underlying claim in order to convince a new panel of arbitrators to "recommend" an expungement of the public customer's arbitration from the unnamed party's CRD. Ya got that?

Oh, according to the FINRA Arbitration Decision in the pending matter:  

The Panel determined that Respondent is subject to FINRA Dispute Resolution's jurisdiction pursuant to the e.Schwab IRA Application executed by Respondent on October 8, 1997. The Panel further determined that Respondent is required to submit to arbitration pursuant to the Code of Arbitration Procedure (the "Code"), and is bound by the determination of the Panel on all issues submitted. 

On December 20, 2013, FINRA Dispute Resolution received Respondent's email advising that Respondent will not be participating in this expungement action.  

Following a telephonic hearing, the FINRA Arbitration Panel and after a review of the parties' Settlement Agreement and General Release in the underlying public customer Arbitration and in consideration  the amount of payments made to any party and any other terms and conditions of settlement, the Panel recommended expungement. In a lucid and thoughtful explanation, the Panel offers us its rationale:

[I]n the underlying Arbitration, FINRA arbitration case number 10-02919, giving rise to this expungement request, Dr. Baggarly purchased the Schwab YieldPlus ultra-short term bond fund ("bond fund") in his self-directed SEP-IRA account. Mr. Sharpe was the broker of record on the account and had limited interactions with Dr. Baggarly, according to the testimony of Mr. Sharpe. 

Mr. Sharpe discussed the bond fund with Dr. Baggariy but the purchase in the account was made later and online without any assistance. Furthermore, Jeffrey S. Sharpe was not named as a Respondent in the underlying Arbitration. He is mentioned only once on page 5 of the original Statement of Claim in the underlying Arbitration and not mentioned at all in the Summary of Claim. 

Dr. Baggariy's account was 10 years old and he had a good deal of investment experience according to page 4 of the original Statement of Claim in the underlying Arbitration. On the Schwab IRA account application, Dr. Baggariy states his investment objective as "Growth" while the Statement of Claim in the underlying Arbitration mentions Dr. Baggariy's investment objective as "very conservative." The original Statement of Claim in the underlying Arbitration mentions that Mr. Sharpe "recommended" the bond fund. Under oath during the expungement hearing, Mr. Sharpe testified that he did mention the fund to Dr. Baggarly and they both discussed its merits and risks. According to Mr. Sharpe, Dr. Baggarly ended that conversation with the understanding that he wanted to conduct some more research on his own. This is not refuted and Dr. Baggariy then placed the order online. Dr. Baggarly did not appear for the expungement hearing. 

Involvement under Rule 2080(b)(1)(B) is an objective standard that has been met in this case. The evidence does not support a finding of improper conduct or a securities violation of any kind by Mr. Sharpe. For these reasons, the full panel believes the expungement is warranted. 

Rule 2080(b)(1)(C) 

The Panel found that expungement was additionally warranted under FINRA Rule 2080(b)(1)(C) which provides for expungement relief if "the claim, allegation or information is false." 

The claim is "false" in the sense that the claim in the underlying Arbitration refers to the bond fund and the fund managers and not Mr. Sharpe. The Disclosure Event on Mr. Sharpe's BrokerCheck report states: "Customer Alleges Misrepresentation in connection with the purchase of the Schwab YieldPlus Fund..." And yet the Panel finds that Mr. Sharpe is peripheral to the claim and peripheral to the allegation reported in his CRD record as well. The bond fund and fund managers are referenced in the underlying Arbitration and not Mr. Sharpe. The Panel finds the claim to be false under this standard of Rule 2080. 

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