Stockbroker In Auction Rate Securities Expungement Quicksand

May 30, 2014

Yet again, another registered representative is entangled in the Auction Rate Securities mess and gets snagged in the idiotic web of FINRA's expungement protocol.  In today's trip to the land of self-regulatory absurdity, the BrokeAndBroker Blog presents the struggle of a registered person seeking to clear his name despite no allegation of misconduct against him personally by the complaining public customer and the absence of circumstances suggesting to the rep that he had, in fact, wrongfully recommended anything.

Case In Point

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in November 2013, registered person Claimant Pettijohn sought the expungement of an auction rate securities ("ARS") customer complaint from his Central Registration Depository records ("CRD") record. In the Matter of the FINRA Arbitration Between Karl Austin Pettijohn, Claimant, vs. Health Solutions, Respondent (FINRA Arbitration 13-03406, May 20, 2014).

Why was the public customer named? Ah, now you're trying to make sense out of the senseless.  It's all part of the legal fiction that we have agreed not to question in order to process these expungement applications.  In any event, the Respondent public customer declined to participate in the hearing and concurred in Claimant Pettijohn's request for the expungement. 

The SEC / UBS Settlement

In considering the Claimant's request for expungement, the Sole FINRA Arbitrator relied, in part, upon  Securities and Exchange Commission Release 2008-171, UBS Securities LLC and UBS Financial Services, Inc. Agree in Principle to Auction Rate Securities Settlement /  Firm Will Provide Liquidity and Remediate Losses (SEC Press Release 2008-171, August 8, 2008). As noted in the 2008 SEC ARS Press Release:

The Securities and Exchange Commission's Division of Enforcement today announced a preliminary settlement in principle with UBS Securities LLC and UBS Financial Services, Inc. (collectively, UBS) including proposed charges and a plan that would restore approximately $22 billion in liquidity to its customers who invested in auction rate securities (ARS). This plan includes approximately $8.2 billion for individual investors, small businesses, and charitable organizations, $3.3 billion for holders of tax-exempt Auction Preferred Shares (subject to regulatory review), and $10.3 billion for institutional investors.

The ARS market collapsed in mid-February 2008, leaving over 40,000 UBS customers holding these illiquid securities indefinitely. The conduct underlying the proposed charges stems from UBS's marketing of auction rate securities as cash alternatives. However, the liquidity of these securities was premised on UBS providing support bids for auctions it managed when there was not enough customer demand, but this was not adequately disclosed to customers. When UBS stopped supporting auctions in February 2008, it led to widespread auction failures for UBS customers. . .

In considering Claimant Pettijohn's motion for expungement, the FINRA Arbitrator found that there was

no "settlement" between the subject broker (or firm) and the complaining party, as the term "settlement" is used for purposes of expungement consideration. .  .

The Arbitrator's conclusion was somewhat driven by the circumstances set forth in the 2008 SEC ARS Press Release, which announced a settlement between UBS and the SEC but, pointedly, did not constitute a settlement between any public customers and their UBS registered representatives.  According to online FINRA records as of May 30, 2014, Pettijohn was employed at UBS from about 2002 to 2009.

No Valid Reason

In recommending the requested expungement of Claimant Pettijohn's CRD, the Sole FINRA Arbitrator adjudicating this matter offered the following rationale for recommending the sought expungement:

There does not appear to be any valid reason for the report being put on Claimant's CRD record, other than he was the broker that dealt directly with the complaining party. It also does not appear that the complaining party was even alleging any wrongdoing by Claimant or complaining about the Claimant There was no reason for the broker to suspect or to be aware of any potential or future problem with the subject auction rate securities. There was nothing that the broker could have done to determine any potential or future problem existed. The broker simply was not involved in any wrongdoing whatsoever with regard to the subject transaction that involved the auction rate securities.

Bill Singer's Comment

As Blog readers know, I often become apoplectic when discussing many of these ARS expungement cases when these purported customer disputes do not allege any sales practice violations by the stockbroker of record but, in fact, cite the misconduct of both the auction place participants and the originators of these purportedly good-as-cash products. 

To add insult to injury in Pettijohn, the independent FINRA Arbitrator could not find "any valid reason" for this matter to have even been put on Claimant's CRD. Moreover, the perplexed Arbitrator noted that it didn't even appear that the public customer had alleged "any wrongdoing by Claimant."  On top of all of that, the Arbitrator found that there was "nothing that the broker could have done to determine any potential or future problem existed." 

Given all of that zilch, nada, zippo, and nothing, we still put Pettijohn through the ordeal of a FINRA expungement hearing and the subsequent cost and delay of seeking a court order.

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