October 2, 2018
BrokeAndBroker.com Blog publisher Bill Singer, Esq. has this thing about FINRA's expungement process -- he does not like it. Bill finds that it is a system rigged against the little guy and comes off more as an obstacle course than a path to achieving justice. In today's featured FINRA expungement arbitration, we come across the plight of a Merrill Lynch rep who was burdened with a ten-year-old mark on his record for something that was not of his doing. Without question, a customer sued and obtained a sizable $200,000 settlement. Clearly, the mere size of the settlement should give any regulator pause before rubbing an eraser against such a disclosure. On the other hand, the rep didn't pay a penny towards the settlement and, as the facts will show, didn't have anything to do with any wrongful aspect of the transactions that generated the customer's losses. Indeed, there are times when you are simply in the wrong place at the wrong time through no fault of your own.
Case In Point
In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in February 2018 and amended thereafter, associated person Claimant Sharpe asserted defamation in connection with his request for an expungement of a customer complaint from his Central Registration Depository records ("CRD"). Although Respondent Merrill Lynch had entered into a settlement with the customers, Claimant Sharpe did not contribute. Claimant also sought $1 in compensatory damages. In the Matter of the FINRA Arbitration Between lain Sharpe, Claimant, vs. Merrill Lynch, Pierce, Fenner & Smith Inc., Respondent (FINRA Arbitration 18-00520, September 27, 2018)
Respondent Merrill Lynch asserted affirmative and other defenses, objected to the $1 in damages, but took no position regarding the requested expungement and did not contest the relief during the hearing.
The customers who had filed the complaint at issue were provided with notice of the expungement hearing but did not participate.
The sole FINRA Arbitrator recommended the expungement of the customer complaint and made a FINRA Rule 2080 finding that the claim, allegation, or information is factually impossible or clearly erroneous and false; and that Sharpe was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation, or conversion of funds. Pointedly, the Arbitrator offered this rationale:
Bill Singer's Comment
Claimant neither recommended nor executed the transactions that formed the
basis of the Customer Complaint. These transactions were recommended and
executed by a different Merrill Lynch broker, and Claimant was named in the
Customer Complaint merely because he was the primary financial advisor for the
Customers. Claimant attempted to convince the Customers to reallocate away
from the holdings at issue. Furthermore, the losses sustained through these
transactions were due to the unforeseen collapse of Freddie Mac and Fannie
Mae preferred securities in 2008. This unique event does not indicate that the
recommended transactions were unsuitable at the time they were executed.
Accordingly, Claimant was not involved in causing the Customers' losses that
formed the basis of the Customer Complaint; the claim, allegation or information
is therefore clearly erroneous; and the claim, allegation, or information is false,
thus satisfying the criteria under FINRA Rule 2080.
Per the reporting of the settlement to FINRA by Merrill Lynch, it is clear that the
Customer Complaint was settled by Merrill Lynch for significantly less than the
damages sought. It was settled to avoid the cost and uncertainty of arbitration,
and was settled without admission of fault on the part of Claimant. Claimant was
not required to contribute to the settlement, and has not previously sought
expungement of this occurrence. Neither Merrill Lynch nor the Customers
presented any opposition to the expungement request. Given the foregoing, no
regulatory or investor protection value exists to justify the Customer Complaint's
continued inclusion on the CRD system with respect to Claimant.
According to online FINRA BrokerCheck records as of October 2, 2018, Sharpe was first registered in 1999, and has apparently spent his entire career at Merrill Lynch.
Sharpe's BrokerCheck record discloses five items under the heading of "Customer Dispute," of which three were denied by the firm and a fourth proceeded to an NASD Arbitration resulting in the customer's claim for about $39,000 yielding a $5,000 joint-and-several award against Merrill Lynch and Sharpe, who did not contribute. The fifth matter is the only matter involving a settled customer dispute and, therefore, is presumably the matter at issue in the expungement application. That settled matter, which will be expunged from Sharpe's record, involved a $1 million claim for alleged misrepresentation and unsuitable recommendations in 2007 and 2008 that was settled in 2011 for $200,000, which is 20% of the original demanded damages. In the "Broker Statement" of the BrokerCheck disclosure, it is stated:
THE MATTER WAS SETTLED FOR BUSINESS REASONS TO AVOID THE COST AND UNCERTAINTY OF AN ARBITRATION. MR. SHARPE WAS NOT THE BROKER OF RECORD AT THE TIME THE PURCHASES WERE MADE. HE DID NOT CONTRIBUTE TO THE SETTLEMENT.
So . . . let's do a brief recap concerning the customer arbitration at issue:
As set forth on FINRA's BrokerCheck as of October 2, 2018:
- Complaint alleged misconduct in 2007 and 2008;
- Complaint was filed in 2010;
- Complaint was settled in 2011;
- $200,000 settlement reflected an 80% reduction from the damages sought; and
- Sharpe did not contribute anything to the settlement;
As stated in the FINRA Arbitration Decision recommending expungement for Sharpe:
- Claimant neither recommended nor executed the transactions that formed the basis of the Customer Complaint.
- Transactions were recommended and executed by a different Merrill Lynch broker, and Claimant was named in the Customer Complaint merely because he was the primary financial advisor for the Customers.
- Claimant attempted to convince the Customers to reallocate away from the holdings at issue.
- Losses sustained through these transactions were due to the unforeseen collapse of Freddie Mac and Fannie Mae preferred securities in 2008.
- This unique event does not indicate that the recommended transactions were unsuitable at the time they were executed.
- Accordingly, Claimant was not involved in causing the Customers' losses that formed the basis of the Customer Complaint.
Sharpe's case is yet another example of why FINRA's expungement process needs to be overhauled. So . . . you tell me . . . and do so without rolling your eyes . . . why the hell was the customer complaint even on Sharpe's industry record? Why should Sharpe have been forced to hire a lawyer and incur the expense of time and money to have the customer claims removed? Given the unique facts at hand, shouldn't someone at FINRA have been empowered to authorize the removal of this matter from Sharep's CRD? Does no one at FINRA give a damn about the plight of the men and women whose reputations have been unfairly dragged into Wall Street's gutter and can't afford to hire a lawyer to eradicate the stain?
All of which leads me to a simple question: Why the hell is a registered rep's request for an expungement of a customer complaint an "arbitration" matter and not a "regulatory" matter?
For godsakes, enough with this crap already! Set up an Expungement Panel within FINRA's Office of Hearing Officers and provide for an accelerated "on paper" review with plenary power to order an expungement in lieu of an arbitration panel's mere "recommendation." In cases where OHO can't adjudicate solely on the pleadings, then provide for an expedited hearing. If the states will not sign on to granting such plenary expungement powers to FINRA's OHO, then create a panel composed of a NASAA officer and a FINRA officer and have that regulatory body meet monthly for the limited purpose of timely adjudicating expungement requests. This is the box. This is outside the box. There is nothing wrong with thinking outside the box when it comes to righting a wrong.
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
READ the BrokeAndBroker.com Blog Expungement Archive