Damnable Costs of FINRA Expungement

March 20, 2017

Let's imagine that a traffic agent wrote a parking ticket but transposed two numbers on the license. Lucky you: You open your mail and find out that you were mistakenly issued a $100 parking ticket at a time when you knew that you were actually driving your car to work. The ticket says that you double parked a lightning-blue Ford F-150 truck but you own a carmine-red Porsche 718 Boxster. How the hell could anyone confuse those two? In order to appeal the ticket, you're forced to cough up a $1,575 court filing fee. After you prove that the ticket was wrongly issued and the judge rules in your favor, the court not only refuses to refund your filing fee but also charges you $2,250 for conducting the hearing by which you were exonerated! Okay, sure, they rip up the $100 parking ticket.

In a recent Financial Industry Regulatory Authority expungement arbitration, the victorious claimant proved that his industry record was tarnished by inappropriate regulatory disclosures. Notwithstanding, FINRA kept his filing fees and also charged him for the time three arbitrators spent hearing his case and then exonerating him. Talk about adding insult to injury. BrokeAndBroker.com Blog publisher Bill Singer thinks that FINRA should refund and forgive those charges.

Case In Point

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in December 2015, associated person Kesterson, appearing pro se, sought an expungement of a previously filed arbitration claim made by public customers, Jim and Judy Pinegar. 

In that earlier customer arbitration, the Pinegars did not name Kesterson but had named both Lincoln Financial Distributors, Inc. (Kesterson's former employer) and another financial advisor. Kesterson asserted that he had never even met the Pinegars and was referenced in their case solely as a result of his wholesaler role at Lincoln Financial. In their Answer, the Respondents Pinegars indicated that they did not oppose Kesterson's request for an expungement and they:

confirmed that they never had personal contact with Claimant, that all of the information came from a separate associated person, and that Claimant was not named as a party in their previous arbitration claim.

Claimant Kesterson sought the expungement from his record of all references to the Pinegars' arbitration and reimbursement for the filing fees that he incurred in filing for the expungement. In the Matter of the FINRA Arbitration Between Shawn Thomas Kesterson, Claimant, vs. Jim Pinegar and Judy Pinegar, Respondents (FINRA Arbitration 16-00018, March 3, 2017).

We Ain't Payin'

Notwithstanding the admissions in Respondents Pinegars Answer as to the lack of any contact between them and Kesterson, their concession that all investment information was provided to them but another associated person, and their decision to not even name Kesterson as a respondent in their arbitration, they objected to Claimant Kesterson's request for damages and argued that all forum fees should be assessed solely against him.

SIDE BAR: The Pinegars' position is understandable: They didn't even name Kesterson in their arbitration claims. Frankly, Kesterson's alleged defamation appears to be largely caused by Lincoln Financial's belief that FINRA regulatory-disclosure rules required the member firm to submit commentary about the implied or inferred involvement of Kesterson in the underlying events. In fairness, it would seem that the filing fee should more properly be paid by Lincoln or waived by FINRA when an associated person prevails given such a set of facts.

FINRA Expungement Hearing

In January 2017, the Kesterson FINRA Arbitration Panel conducted an expungement hearing.Respondents did not attend the hearing. The Kesterson FINRA Arbitration Decision states that:

At the expungement hearing, the Panel inquired as to the settlement agreement. Claimant stated that he was not a party to the settlement and that he requested a copy of the settlement agreement, but neither party involved would release a copy to him. The Panel determined that, based on Claimant's unrebutted testimony, Claimant was not party to any settlement agreement. Further, the Panel determined that Claimant was never presented with a settlement agreement that would affect his rights thereunder, was not a party thereto, and in the absence of any indication that the organization for which he worked was a party to the settlement agreement, it would be a fundamental violation of due process to make him subject to any terms included therein. Therefore, it is the belief of the Panel that while any settlement agreement would be pertinent if Claimant was indeed a party, if he failed to appear, or he acquiesced in some way to being represented, none of those possibilities occurred here and as such any settlement agreement has no bearing on his involvement. Therefore, the Panel finds that Claimant was not involved in the settlement, did not contribute to the settlement agreement, and that the settlement was not conditioned on an agreement to not oppose an expungement.

SIDE BAR: The Pinegars didn't name Kesterson as a Respondent in their FINRA Arbitration, and since Kesterson was not a "party" in the prior customer arbitration, he would typically not be a party to any settlement agreement among the named parties. Further, many FINRA arbitration settlements contain a confidentiality provision, which would give the parties thereto pause before turning over a copy of their settlement agreement to any non-party to that agreement: In this case, Kesterson was not a party to the  settlement agreement and "neither party involved would release a copy to him." Pointedly, the FINRA arbitrators concluded that "it would be a fundamental violation of due process to make him subject to any terms included therein."

FINRA Arbitration Panel Award

Following the expungement hearing, the FINRA Arbitration Panel recommended expungement but denied Claimant Kesterson's request for damages relating to reimbursement of his filing fees. The Panel presented the following rationale for granting the requested expungement:

Kesterson worked as a wholesaler for the company that offered the annuity that was the focus of Respondents in the underlying arbitration case. Kesterson never met with Respondents nor did he ever assert, or otherwise indicate, that he believed the annuity in question was suitable for Respondents. Because Kesterson had no dealings with Respondents, he had no opinion as to whether the annuity was suitable or unsuitable for their investment objectives. Kesterson had no role in this matter. As a wholesaler, it was his job to meet with retail brokers and investment advisors and make them aware of his product. Kesterson produced for the Panel e-mails that showed that he had met with representatives of the investment firm that ultimately sold the annuity product to Respondents, but Kesterson never had any dealings with Respondents themselves. There exists no basis to find Kesterson was involved in the sales activity or that he ever provided the retail sales representatives any information to encourage the sale of the annuity product to Respondents or any other retail investor(s).

Bill Singer's Comment

A thoughtful analysis of the facts and a commendable rationale by this FINRA Arbitration Panel. Unfortunately, I am left at a loss as to why the arbitrators denied reimbursement of Kesterson's filing fees. If he did nothing wrong, then why is he paying a cent to clear his name?

Keep in mind that the arbitrators unequivocally stated that there was "no basis" to find that Kesterson was involved in any sales activity cited by the Pinegars or that he had provided the named associated person with any information to encourage the sale of the subject annuity. Further, since the Pinegars did not name Kesterson as a party, he would not have been able to participate at their arbitration hearings unless someone decided to call him at a witness. Accordingly, having no standing in the Pinegars' arbitration, Kesterson lacked the ability to inject himself into any settlement discussions or to demand that he be included in any settlement agreement. All of which would frustrate me and fill me with outrage if I were Kesterson.  

Some may think that the charges at issue are inconsequential. After all, FINRA can't possibly charge an industry employee all that much money to merely file an arbitration Statement of Claim pursuant to seeking an expungement. What are we talking about here: $50 . . . $250?
Before you pooh-pooh Kesterson's costs as penny-ante, consider this from the Decision:


Pursuant to the Code, the following fees are assessed:

Filing Fees

FINRA Office of Dispute Resolution assessed a filing fee* for each claim:

Initial Claim Filing Fee =$ 1,575.00

*The filing fee is made up of a non-refundable and a refundable portion.

Member Fees

Member fees are assessed to each member firm that is a party in these proceedings or to the member firm that employed the associated person at the time of the events giving rise to the dispute. Accordingly, as Claimant's former firm, Lincoln Financial Distributors, Inc is assessed the following:

Member Process Fee =$ 3,750.00

Hearing Session Fees and Assessments

The Panel has assessed hearing session fees for each session conducted. A session is any meeting between the parties and the arbitrators, including a pre-hearing conference with the arbitrators, that lasts four (4) hours or less. Fees associated with these proceedings are:

One (1) pre-hearing session with the Panel @ $1,125.00/session =$ 1,125.00
Pre-hearing conference: August 12, 2016 1 session

One (1) hearing session on expungement request @ $1,200.00/session
Hearing Date: January 20, 2017 1 session =$ 1,125.00

Total Hearing Session Fees =$ 2,250.00

The Panel has assessed $2,250.00 of the hearing session fees to Shawn Thomas Kesterson.

All balances are payable to FINRA Office of Dispute Resolution and are due upon receipt.