No Winners In FINRA Customer Arbitration

March 14, 2018

You ever watch a fight in which it's hard to tell who the winner is? In today's Blog we are asked to score a bout between a public customer and his former stockbroker.  Frankly, the customer is a loser in terms of the decision. On the other hand, it's sort of tough to find a winner on the other side of the card. I'm a loser. No . . . I'm a loser.

Case In Point

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in August 2016, public customer Claimant Sharman asserted unsuitability; churning; unauthorized trading; breach of contract; securities fraud; fraud; failure to supervise; negligent supervision; respondeat superior; and breach of the covenant of good faith and fair dealing in connection with his investments in what the FINRA Arbitration Decision characterizes as "unspecified options and securities in various, unspecified sectors, including the energy sector." At the close of the hearing, Claimant Sharman sought $417,000 in compensatory damages and $417,000 in punitive damages plus attorneys' fees. In the Matter of the FINRA Arbitration Between Gerald Sharman, Claimant, vs. Morgan Stanley Smith Barney LLC Richard Martin Shalhoub, Respondents (FINRA Arbitration  16-02576, March 7, 2018)

Respondents requested the dismissal of all charges and the expungement of the matter from Respondent Shalhoub's Central Registration Depository records ("CRD").

No Winners

The FINRA Arbitration Panel denied Claimant Sharman's claims and denied Shalhoub's requested expungement. In denying the requested expungement, the Panel offered in part this rationale:

Respondents' request for expungement of Shalhoub's CRD record is denied. The facts showed that Shalhoub had made some unauthorized trades. However, facts also showed that Claimant ratified the trades when told of them rather than object and take action to reverse them, and that Claimant had no damages to attribute to Shalhoub regarding the trades. Therefore, the Panel is denying the expungement request.

Bill Singer's Comment

As set forth in FINRA online BrokerCheck records as of March 14, 2018,. Shalhoub was first registered in 1998. The only "Disclosure Event" on his record is the Sharman arbitration, which was disclosed  by Morgan Stanley Smith Barney as having been received as a customer complaint on November 24, 2014, and evolved into a FINRA Arbitration on September 6, 2016. BrokerCheck disclose the allegations as follows:

Claimant alleged, inter alia, unauthorized trading and misrepresentation with respect to commissions - September 2011 to December 2014.

is an interesting case because the FINRA Arbitration Panel denied all of Claimant's claims but also declined to recommend an expungement of the customer's allegations from Shalhoub's CRD. Although such a double-denial is not unusual, it does make us wonder how arbitrators reject a public customer's claims but also reject a stockbroker's request to expunge those same allegations from his industry record. Public customer advocates would admonish (and with much merit) that the fact that a given customer could not satisfy the "burden of proof" (the "preponderance" standard) does not mean that the allegations were false. Accordingly, if allegations are dismissed because of the failure to move the needle in a "he-said-she-said" dispute, there may still be merit in maintaining a public record of such allegations. In contrast, and with equal merit, industry advocates argue that claims that were adjudicated and found meritless should not besmirch a registered rep's record.

In reviewing the Uniform Application for Securities Industry Registration or Transfer ("Form U4"), Item 14I, we find"

(1) Have you ever been named as a respondent/defendant in an investment-related, consumer-initiated arbitration or civil litigation which alleged that you were involved in one or more sales practice violations and which:
(a) is still pending, or;
(b) resulted in an arbitration award or civil judgment against you, regardless of amount, or;
(c) was settled, prior to 05/18/2009, for an amount of $10,000 or more, or;
(d) was settled, on or after 05/18/2009, for an amount of $15,000 or more?

Shalhoub should answer "NO" to the above questions about the Sharman arbitration because it is no longer "pending," there was no award, and it did not settle for the threshold sum. Notwithstanding such U4 "NO" answers, his CRD and BrokerCheck records may still reflect the customer's allegations. Fair or not, that's how the system works or is rigged.

Finally, this case raises a thought-provoking query: Would Shalhoub have been better off if he had not sought an expungement? If the case before the arbitrators was merely whether to find in favor of Customer Sharman, then the Decision would simply have ended with the denial of the customer's claims. On the other hand, by seeking an expungement recommendation, Shalhoub invited the arbitrators to comment on his conduct and to note, in part, that:

The facts showed that Shalhoub had made some unauthorized trades. However, facts also showed that Claimant ratified the trades when told of them rather than object and take action to reverse them, and that Claimant had no damages to attribute to Shalhoub regarding the trades. . .

The arbitrators found that Shalhoub had "made some unauthorized trades." Ouch -- that's not a finding any stockbroker would want to have on his permanent record. On the other hand, the arbitrators concede that Sharman was informed of the unauthorized trades, ratified them, and sustained no damages. Of course, if Sharman hadn't sustained any damages from the alleged unauthorized trading, then how the hell did he come up with at least $417,000 in alleged compensatory damages?

I'm often asked if there are cases when a registered rep might not want to ask for an expungement. Let's call this Exhibit A. No . . . I'm not second-guessing or even criticizing Shalhoub's decision to seek expungement. I don't have enough information on which to even hazard such a call. What I am saying is that with full benefit of hindsight, this is a scenario when it may have been better to simply hope that the Panel denied the customer's claims and leave it at that. Like I said, there are a lot of interesting aspects to this case. In the end, however, neither Sharman nor Shalhoub walk away winners. Both are losers.