Broker Wins FINRA Arbitration Expungement

February 20, 2015

Today's BrokeAndBroker Blog presents that most sought after of elusive goals: the Expungement. One determined registered person goes the distance to clear his name. It's an interesting case with a strong rationale presented by the Panel. It may also be one of the last -- if not the last -- to sneak in under the FINRA Rule 2081 deadline. On the other hand, it's what they left out of the Arbitration Decision that caught the attention of veteran industry lawyer Bill Singer.

Case In Point

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in March 2014, associated person Kelly sued public customer Grimes pursuant to an effort to obtain an expungement of a prior arbitration complaint.  Claimant Kelly alleged that the subject claim was settled solely between his employer brokerage firm and Grimes without any contribution from him. In the Matter of the FINRA Arbitration Between Thomas Edison Kelly, Jr., Claimant, vs. Charles Grimes, Respondent (FINRA Arbitration #14-00879, February 18, 2015).


The FINRA Arbitration Panel conducted a hearing on the expungement request at which Respondent Grimes' counsel appeared but did not opposed the request. Thereafter, the Panel considered and reviewed various materials and confirmed that the arbitration settlement was conditioned upon an agreement not to oppose the request for expungement, but the conditioned settlement was executed prior to the effectiveness of FINRA Rule 2081's prohibition on conditional settlements.

SIDE BAR:  As effective July 30, 2014:

FINRA Rule 2081. Prohibited Conditions Relating to Expungement of Customer Dispute

No member or associated person shall condition or seek to condition settlement of a dispute with a customer on, or to otherwise compensate the customer for, the customer's agreement to consent to, or not to oppose, the member's or associated person's request to expunge such customer dispute information from the CRD system.

READ FINRA Regulatory Notice 14-31 for a more extensive explanation of the Rule 


The FINRA Arbitration Panel recommended the expungement based upon this rationale:

Although the settlement agreement in FINRA Case No. 12-03053 contains a conditioned settlement of the arbitration upon an agreement not to oppose a request for expungement, the allegations of the underlying statement of claim in FINRA Case No. 12-03053 relating to Thomas Edison Kelly, Jr. are false in the following respects: 1.) The purported losses sustained by Mr. Grimes were a direct result of market depreciation and not the result of any actions by Mr. Kelly and any inconsistency with the Know You Customer Rule 2090. 2.) Mr. Kelly and Mr. Grimes were in frequent, 2 to 3 times per week, communications on a normal basis and 3 to 4 times a week during the 4th quarter 2008 downturn. 3.) Mr. Grimes was advised by the Broker Dealer and Mr. Kelly to be more conservative than he wished. 4.) Mr. Kelly advised of more conservative repositioning of the three holdings in the account that were in the complaint. 5.) The account was not a margin account as alleged. 6.) Other than the three positions and the margin allegation (which was false) there were no factual allegations in support of any claims.

Bill Singer's Comment

A very nicely presented rationale by this Panel. In the arbitrators' opinions, customer Grimes lost money because of market forces and, in part, because of his failure to follow Kelly's advice to pursue a more conservative posture. Ultimately, you get the sense that the arbitrators viewed the customer's allegations as more of an attempt to recoup losses than citing any provable misconduct.

But this isn't going to end up as a lovefest. Read on.

It's always frustrating, however, when I do a background inquiry and come up with information that I think should have been disclosed in a FINRA Arbitration Decision. For example, there is no mention in the above expungement recommendation of the underlying nature of the customer's complaint.  A review of online FINRA BrokerCheck records as of February 20, 2015, discloses that the employing brokerage firm (not mentioned in the Decision!) was National Securities Corp. Then there is the omission of the "allegations" by the customer, which are disclosed online as "SUITABILITY, NEGLIGENCE AND BREACH OF FIDUCIARY DUTY." Finally, even something as important as the amount of alleged damages, $118,000, is noted on BrokerCheck but not in the Decision.  

Finally, and perhaps the disclosure that caught my eye, is that Claimant Kelly's BrokerCheck record discloses 16 "Disclosure Events" from 1999 through 2012. Of that total, all are characterized as involving a "Customer Dispute" with the following status:

  • 1 is "denied"
  • 1 is "withdrawn"
  • 2 are "pending"
  • 6 are "closed no action"
  • 6 are "settled"