The Double Edged Sword of Facts And A FINRA Expungement

June 28, 2018

Sometimes facts are double-edged. They can prove or disprove a complaining customer's case -- or, they can defend or upend a stockbroker's explanations. All of which explains why a savvy lawyer, who knows what to look for and how to use it, can make all the difference in the outcome of litigation. And, yes, for the cynics among you, that would also explain why certain evidence is oddly lost, destroyed, or never produced. On the one hand. On the other hand. Slash and slash. In today's Blog we consider a FINRA expungement arbitration in which an arbitrator's rationale provides us an opportunity to use and duck from the back-and-forth blade of facts as presented in litigation.

Case In Point

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in October 2017, Claimant Faro asserted that a settled customer arbitration claim ("Occurrence #1475402") had been inaccurately reported on his Central Registration Depository record ("CRD"). Claimant sought $1 in compensatory damages and the expungement of all references to Occurrence #1475402 from his CRD. In the Matter of the FINRA Arbitration Between Nelson Frederick Faro, Claimant, vs. Michael Lichtenfeld and Deborah Haney Lichtenfeld, Respondent (FINRA Arbitration  17-02664, June 25, 2018).

Respondents Michael and Deborah Lichtenfeld did not file a Statement of Answer, did not sign Submission Agreements, but notified the sole FINRA Arbitrator that they did not oppose the requested expungment and would not participate in this proceeding.

Expungement Recommendation

In considering the requested expungement, the FINRA Arbitrator noted that the customers settled for about 25% of their alleged damages.  Further, the Arbitrator found the claim, allegation or information is factually impossible or clearly erroneous, and false. The Arbitrator denied the request for $1 in compensatory damages but recommended the expungement of Occurrence No. 1475402 from Claimant Faro's CRD. In part, the Arbitrator offered the following rationale:

At the expungement hearing, Claimant testified as follows: Claimant is an experienced broker. Respondents opened a joint account and two IRAs with Claimant on January 17 and 29, 2008. Respondents were experienced investors; Respondent Michael Lichtenfeld was a former pilot and business man and real estate broker and Respondent Deborah Haney Lichtenfeld was a flight attendant. Respondents utilized the online access to the accounts.

Respondents accounts were transferred in from an account held at a different firm than Claimants employer at the time of the dispute. Respondents held preferred securities in their portfolio even before they became Claimants customers. Even after Claimant left his employer, Respondents followed him. It was not until Respondents' attorney was going to file a claim against Claimant's employer at the time of the dispute that Respondents left Claimant at their counsel's advice.

There was a market crash/decline in 2008/2009. In 2010, Respondents' accounts had improved and Respondents were making money, as exhibited in Tab 15 of Claimant's expungement hearing binder -- Profit and Loss Analysis of Securities Transferred. The preferred securities were not unsuitable -- 17% were diversified and not over concentrated and Respondents were comfortable with them. Also, about 10% of Respondents' portfolio was comprised of Lehman and Fannie Mae securities and was not over concentrated. Claimant could not predict the crash or that Lehman would file for bankruptcy. Placing the annuities in an IRA with a death benefit and living benefit is what Respondents wanted. Respondents also bought an annuity product in December of 2008 with Claimant which was similar to the other investments at issue. This is the first time that Claimant applied for expungement and it became an issue as it impacts his reputation; more clients look at CRD which impacts his ranking. The allegations of unsuitability as reported on his CRD are impossible, erroneous and false.

The testimony, documents reviewed by the Arbitrator and the argument of counsel demonstrate that Claimant has met the burden of proving that the unopposed  Statement of Claim for Expungement is granted based on FINRA Rules 2080(a) and (c).

Bill Singer's Comment

In today's FINRA expungement arbitration we find guidance and warnings for how best to prosecute a potential public-customer lawsuits and how best to defend against same: The double-edged sword cuts both ways. 

Upfront, much is made by the sole FINRA Arbitrator of the "experience" of both the customers in terms of their investing histories, and the stockbroker in terms of his industry expertise. A reduction in the perceived levels of expertise could render customers as more vulnerable to dubious investment recommendations or raise questions as to whether the stockbroker truly appreciated the risk of what he was recommending. 

An important attribute in adjudicating customer disputes is whether customers had the savvy to monitor their account on their own without communicating with their stockbroker. As noted by the FINRA Arbitrator in today's case: "Respondents utilized the online access to the accounts." In the past, customer disputes often took on the nature of a he-said-she-said battle in which allegations were made that there were no communications and that the customer was left in the dark or the stockbroker had no inkling that the customer was unhappy. In order to prove or disprove such communications, lawyers would introduce calendar notations, letters, and old-fashioned phone logs. These days, proof of communications may be more easily demonstrated via emails, instant messages, cellphone/landline logs, and the digital footprint of an Internet Service Provider ("ISP") tag, which can disclose from where a website was accessed, what files were viewed or downloaded, when the online interaction occurred and for how long. Digital records may demonstrate that a customer regularly monitored her account and did so during the workday from her office computer and at nights/weekend from her home laptop. Such disclosures could be used to defend against allegations that a customer had no understanding of the transactions in her account and lacked the ability to independently access such information other than by telephoning her stockbroker. On the other hand, the lack of digital activity could be used to underscore that the customer relied upon her stockbroker, who engaged in unauthorized trading, transferred funds from her account without permission, and fabricated bogus account statements that he hand delivered to the client in an effort to cover up his fraud.

The FINRA Arbitrator noted the history of the Lichtenfelds' accounts and investment products. Pointedly, the Arbitrator noted considered that the accounts at issue were not new accounts opened at Claimant Faro's firm but had been opened at another broker-dealer and "transferred in." Moreover, the Arbitrator gave weight to the fact that there was a continuity in the type of investment products held in the former accounts, which suggests that the customers were comfortable with such investments and had a degree of familiarity with same. The opening of a customer's first-ever brokerage account and the existence of solicited trades in pennystocks, leveraged ETFs, or other hot-button products, however, could prove critical in showing that a given customer was unsophisticated and under the control of a stockbroker.

The nature and the extent of the relationship between the Lichtenfelds and Faro also came under the FINRA Arbitrator's scrutiny. Pointedly, the customers demonstrated some loyalty and confidence in their stockbroker because after Faro "left his employer, Respondents followed him. It was not until Respondents' attorney was going to file a claim against Claimant's employer at the time of the dispute that Respondents left Claimant at their counsel's advice." As such, customers should carefully weigh their actions in remaining with a stockbroker after they complain about his misconduct or poor performance. If your written complaints say one thing but your actions say another, you may find that your actions speak louder than words.

Finally, brokerage firms are not insurance companies guaranteeing against loss. With potential profit comes risk. The mere demonstration of loss does not mean it was the fault of a stockbroker. As noted in today's expungement case "There was a market crash/decline in 2008/2009. In 2010, Respondents' accounts had improved and Respondents were making money . . ." In going through her "suitability" checklist, the FINRA Arbitrator ticked off a number of boxes in Faro's favor. She found that the preferred securities were not unsuitable. She found that said investments were diversified, not over concentrated, and that the customers "were comfortable with them." The Arbitrator considered some disputed allocations in the customers' portfolio and determined that Faro "could not predict the crash or that Lehman would file for bankruptcy. Placing the annuities in an IRA with a death benefit and living benefit is what Respondents wanted." The mirror image of such findings would be that an arbitrator was persuaded by customers that their losses were not caused by macro-economic market conditions but by horrific and unsuitable investment advice. Furthering such a pro-customer finding would be proof that the customers had expressed concerns and reservations about a proposed investment but their resistance was overcome by what is shown to be dubious advice by a stockbroker, who did not disclose a higher pay-out on the product. Similarly, proof of how that same stockbroker was investing his other customers during the relevant times may show that he was pushing a particular stock or strategy regardless of each customer's unique needs.

Download a PDF copy of Bill Singer Esq.'s analysis of FINRA's Expungement Rules

  • 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

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