What's the Frequency FINRA?

August 25, 2017

Y'all remember that BrokeAndBroker.com Blog article we posted a few days ago with the public customer Claimant lawyer who went up against a FINRA member firm that had been expelled and that did not answer his claims or appear at the hearing? As you may recall, the Claimant's claims were denied but we had no explanation as to why. In today's blog, we consider yet another lawyer's complaints, these on behalf of his and another's IRA accounts. Yet again, we encounter some oddball moments in the wild and wacky world of FINRA arbitration.

Case In Point

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in May 2016, the Claimant IRAs asserted breach of fiduciary duty; misrepresentation/non-disclosures; and omission of facts in connection with their investments in Linn Energy, LLC. Claimants sought $99,999 in damages. In the Matter of the FINRA Arbitration Between Josette S. Hatter IRA and Rodney R. Hatter SEP IRA, Claimants, vs. Brian Henderson and UBS Financial Services Inc., Respondents (FINRA Arbitration 16-01608, August 10, 2017).

Respondents generally denied the allegations and asserted affirmative defenses.  At the last hearing session, Respondent Henderson requested the expungement of this matter from his industry record.  

Under the heading of "Representation of Parties," the FINRA Arbitration Decisions states:

For Claimants Josette S. Hatter IRA and Rodney R. Hatter SEP IRA, hereinafter collectively referred to as "Claimants": Rodney Ray Hatter, Esq. (Hatter"), Rodney R. Hatter & Associates, Irvine, California  

For Respondents Brian Henderson ("Henderson") and UBS Financial Services Inc. ("UBS"), hereinafter collectively referred to as "Respondents": Elizabeth H. Lindh, Esq. and Bryce Cullinane, Esq., Keesal Young & Logan, Long Beach, California  

What's the Frequency FINRA?

I've been on Wall Street for over 35 years and I've been practicing law since 1985. In all that time, I don't know if I've come across a more bizarre disclosure in an arbitration decision than this:  

Claimants' representative (Hatter) is the beneficiary of the Rodney R. Hatter SEP IRA. It was discovered at the beginning of the first evidentiary hearing session that Hatter and the Arbitrator frequented the same pharmacy in Laguna Beach, Califomia. The Arbitrator attested to the fact that he has been a resident of Laguna Beach, California for 37 years and has never met Hatter. All parties agreed to proceed with the hearing.  

Umm . . . okay . . . ummm . . . what?  

First off, just what the hell does it mean that Hatter and the Arbitrator "frequented the same pharmacy?" I'm guessing that in the course of many FINRA arbitrations that any number of parties and arbitrators likely "frequented" the same train, subway, bus, or Uber service to transport them to the hearing forum; or the same nearby Starbucks; or the same bathroom on the floor where the hearings were being conducted. And this matters why?

How the hell did Hatter and the FINRA Arbitrator even know that they both frequented the same pharmacy if, as "attested" by the arbitrator, they had never even met? After all, I doubt that in opening the hearings, the FINRA Arbitrator stated "I would like to disclose that I frequent the CVS pharmacy in Laguna Beach, California, am an Amazon Prime member, and have season tickets to the Lakers." Similarly, I doubt that the Claimants' counsel began his opening statement with the disclosure that "As a result of a painful and persistent hemorrhoid condition, I frequent the CVS pharmacy in Laguna Beach, California." Having set that absurd stage, are we to believe that Respondents' counsel jumped to his feet in protest and shouted "Objection! Move for mistrial! Move to recuse the Arbitrator!" Laugh all you want but recall that the Decision asserted that in response to this disclosure there must have been some discussion because we are advised that, notwithstanding, "all parties agreed to proceed." Which raises the fascinating question of what would have happened if Respondents refused to proceed citing a "frequenting of the same pharmacy" conflict? Is that a ground for ordering a mistrial or impaneling a new arbitrator? Would an aggrieved party cite that on appeal to the courts?

No . . . I'm not suggesting that the frequenting of the same pharmacy by an arbitrator and a party or a party's counsel could not raise issues of conflict or impropriety but, c'mon, you can't just throw that information out there in a FINRA Arbitration Decision without some further content and context so as to make the disclosure sensible.

Short-Order Justice

Having put that weird frequented-pharmacy issue behind us, in a fairly abrupt manner, the FINRA Arbitration Decision states:  

By Order dated June 27, 2017, the Arbitrator determined to deny Claimants' claims and closed the record concerning Claimants' claims. . .  

By Order? By Order you're denying all of Claimants' claims? You think you might have explained to us what that Order was in response to? And, while you're explaining the genesis of the Order dismissing the customers' claims, perhaps you could share with us why the claims were denied.  

In any event, having deep-sixed all of the Claimants' claims, the sole FINRA Arbitrator proceeded to an expungement hearing at which Claimants did not participate or contest the request.  As set forth in the FINRA Arbitration Decision:

Pursuant to Rule 12805 of the Code, the Arbitrator has made the following Rule 2080 affirmative finding of fact: The claim, allegation, or information is factually impossible or clearly erroneous.

The Arbitrator has made the above Rule 2080 finding based on the following reasons: All Claimants' allegations/charges were denied in their entirety at the arbitration hearing . . .

It took a minute for me to process the above statements but, wow, what an incredible bit of circular logic. Think about it. The Arbitrator found the claims factually impossible or clearly erroneous. Why? His explanation is because all of Claimants' allegations/charges were denied. Who denied them? The Arbitrator. Why did he deny them? Because they were impossible/erroneous. Why did he deem the charges impossible/erroneous? Because the Arbitrator denied them. Why did the Arbitrator deny the charges? Because he deemed them impossible/erroneous. Why did the Arbitrator deem them impossible/erroneous? Because he denied them. Why . . . .

Regardless of my somewhat pissy analysis, the sole FINRA Arbitrator redeemed himself with a very tidy rationale for his granting of the expungement request (which, by inference also offers some explanation for the denial of the underlying Claimants' claims):

[H]atter was an experienced, sophisticated investor and attorney that worked in the financial industry for many years, including time on Wall Street. Hatter developed and exercised his own investment strategy, making at least half of the investment decisions to buy and sell on his own, using his personal system/strategy.  

The claims/allegations for this case were about one particular investment, the remainder of Claimants' accounts were not in question. For this particular investment in the oil industry, Hatter relied on his personal research and advice from his brother-in-law. Henderson, on more than one occasion, recommended selling the position. Hatter instead chose to pursue his own counsel and did not sell in a timely manner. The resulting loses were the result of his decisions, and not Henderson's. . .  

Bill Singer's Comment

A sincere thank you to this Arbitrator for providing us with a rationale replete with content and context sufficient to render his explanation comprehensible.

In the recent "FINRA Public Customer Arbitration Decision Becomes A Legend"(BrokeAndBroker.com Blog, August 23, 2017), we considered the denial of the claims of a Claimant lawyer who sued a FINRA member firm that had its registration cancelled and was subsequently expelled from the industry. That expelled brokerage firm did not answer the Claimant lawyers charges and did not appear at the hearing. Inexplicably, the Claimant's claims were dismissed. In response to that blog article, I received a number of communications from many readers offering their insights as to the likely reason for the dismissal.  Two of the most common ruminations were that the Claimant had failed to satisfy his burden of proof (which exists even in the absence of a participating respondent) and that the Claimant was deemed so sophisticated as to render not credible his sales practices allegations. Those are two excellent explanations. Unfortunately, they are nothing but speculation because the FINRA Arbitration Decision didn't offer any rationale for the denial of all claims. We should not be left to guessing games after reading such a published document.

To the credit of the sole  FINRA Arbitrator in the Hatters IRAs arbitration, he provided us with a rationale -- albeit one oriented towards recommending an expungement -- that explains the findings that prompted the dismissal of the Claimants' claims. 

As to that whole side-trip about the frequenting of the same drugstore, for whatever it's worth, all I could imagine was this in the transcript:

RESPONDENT: Did you meet Mr. Jimmy?
CLAIMANT: I went down to the Laguna Beach drugstore
RESPONDENT: Objection. Non-responsive.
ARBITRATOR: Sustained. Why don't you first explain why you were frequenting the drugstore?
CLAIMANT: To get my prescription filled. I was standing in line with Mr. Jimmy, and man, did he look pretty ill.
RESPONDENT: Objection. Move to strike the reference to Mr. Jimmy's alleged health.
ARBITRATOR: Sustained. Why were you standing in line with this Mr. Jimmy?
CLAIMANT: We decided that we would have a soda.
RESPONDENT: Objection. What kind of soda?
ARBITRATOR: Sustained. Answer the question.
CLAIMANT: My favorite flavor, cherry red.
RESPONDENT: And what did you do after you met Mr. Jimmy?
CLAIMANT: I sung my song to Mr. Jimmy.
RESPONDENT: And what, if anything, did Mr. Jimmy say to you?
CLAIMANT: He said one word to me, and that was "dead"
RESPONDENT: Objection. Move to strike. Irrelevant. Immaterial.
ARBITRATOR: Denied. You can't always get what you want.
RESPONDENT: Objection.
ARBITRATOR: Denied. You can't always get what you want.
RESPONDENT: Objection.
ARBITRATOR: Denied. You can't always get what you want.
RESPONDENT: Application -- can we take a bathroom break? I need to go to the bathroom.
ARBITRATOR: But if you try sometimes well you just might find you get what you need. Application granted.

  • FINRA Rule 2080: Obtaining Customer Dispute Expungement
  • FINRA Rule 2081: Prohibited Conditions Relating to Expungement of Customer Dispute
  • FINRA Rules 12805 and 13805: Expunging Customer-Dispute Information Under Rule 2080