FINRA Arbitrator Denies Expungement For Legally Meritless Customer Complaints

June 11, 2019

Two public customers complained about the conduct of their stockbroker. He denied the charges. A FINRA Arbitration Panel of three public arbitrators dismissed the claims. Thereafter, two of the arbitrators recommended expungement. The third didn't agree. To her credit, the Dissent sure as hell stood her ground -- although some might argue she was standing on legal quicksand.

Case In Point

In a FINRA Arbitration Statement of Claim filed in May 2017, public customer Claimants asserted fraud in violation of Section 10(b) of the Securities Exchange Act and Rule 10b-5; financial damages and emotional distress; negligent misrepresentation; breach of fiduciary duty; violation of the Pennsylvania Unfair Trade Practices and Consumer Protection Law; Section 10(b) violation; neligence; violation of Pennsylvania Securities Act of 1972; and common law fraud. Initially, Claimants sought in excess of $50,000 compensatory damages (reduced to $25,538 during the hearing); $150,000 treble damages; interest; costs, and fees. Because of what the FINRA Decision characterizes as his "medical problems," Claimant Ira Adelman did not attend the hearings. In the Matter of the Arbitration Between Ira Adelman and Robin Adelman, Claimants, v. Richard Grobman , Oppenheimer & Co., Inc., and Stephen Todd Walker, Respondents (FINRA Arbitration Decision 17-01069)

Respondent Grobman did not submit an Answer. Respondents Oppenheimer and Walker generally denied the allegations and asserted various affirmative defenses, and Walker also sought the expungement of the matter.

Two Respondents Dismissed

In August 2017, Claimants dismissed their claims with prejudice against Respondent Grobman. In February 2019, Claimants dismissed their claims against Respondent Oppenheimer and entered into a settlement.

Hearings? What Hearings?

It's not particularly clear as to what hearings proceeded during this arbitration. Claimants had dismissed their claims against Respondent Grobman and Respondent Oppenheimer, but there is no indication that the customers had settled with Respondent Walker. As such, one would expect that Claimants proceeded with their claims against Respondent Walker and that the arbitrators also considered Walker's expungement request; however, the FINRA Arbitration Decision asserts that:

The Arbitrators conducted a recorded telephonic expungement hearing on May 13, 2019 so the parties could present oral argument and evidence on Stephen Todd Walker's request for expungement. 

During the expungement hearing, which lasted more than 5 hours, Claimants' counsel, Lynne Lechter, Esq. and Ernest Sasso, Esq., appeared at the hearing, made an opening statement, cross-examined and re-crossed witness Respondent Walker, introduced evidence through witness Claimant Robin Adelman and made closing arguments. Claimant also filed an opposition to Respondent Walker's motion for expungement comprising of 13 pages and 7 attached exhibits.  

As referenced above, the FINRA Arbitration Panel conducted a five-hour "expungement hearing," which doesn't quite make sense because there's no indication that prior to that point that the Claimants had settled with and/or dismissed their claims against Respondent Walker. Nonetheless,  the FINRA Arbitration Panel states in part that the Panel decided that:

1. Claimants' claims are denied in their entirety. 

2. The Majority of the Panel recommends the expungement of all references to the above-captioned arbitration from registration records maintained by the Central Registration Depository ("CRD"), for Respondent Stephen Todd Walker . . .

Oddly, there is no reference whatsoever to any plenary evidentiary hearing sessions in the FINRA Arbitration Decision -- but there is reference to the conduct of a five-hour expungement hearing. I'm sort of guessing that there were evidentiary hearing sessions because the FINRA Arbitration Decision sets forth after the Panel's presentation of facts, Award, rationale, and Dissent, the following charges under the  heading "Hearing Session Fees and Assessments":

Eight (8) hearing sessions @ $1,125.00/sessions = $9,000.00
Hearing Dates: 
March 12, 2019 2 sessions
March 13, 2019 2 sessions
March 14, 2019 2 sessions
March 15, 2019 2 sessions

Two (2) hearing session on expungement request @ $1,125.00/session = $2,250.00
Hearing Date: 
May 13, 2019 2 sessions 

Bill Singer's Comment

The FINRA Arbitration Decision states that two of the three Public Arbitrators (the "Majority") made a FINRA Rule 2080 finding in favor of granting Respondent Walker's expungement request based upon findings that:

The allegations of fraud, negligent misrepresentation, state securities law violations, and breach of fiduciary duty recited in the CRD do not promote meaningful investor protection. The Arbitrators unanimously determined that the Claimants did not prove any of the claims asserted in the Statement of Claim. . . . 

The Majority offers in pertinent part the following rationale for recommending the expungement of the Adelman's complaints from Walker's CRD:

The gravamen of Claimants' claims is that Respondent Walker induced Claimants to purchase 2,500 shares of Duff and Phelps Select Energy MLP Fund (Fund) at $20.00 per share for a total cost of $50,000. 

During the time Claimants owned the 2,500 shares in the fund, while Respondent Walker was their financial advisor at Oppenheimer, the value of their investment in the Fund decreased approximately $14,000.00. However, the Fund generated for Claimants $3,150.00 per year in dividends during the entire time Claimants owned their 2,500 shares in the fund. The Panel finds that the production of income fit Claimants' investment objectives. 

The testimony at the hearing on the underlying case reveals that Claimants were not employed at the time of making the investment; the Claimants depended on income from investments for their living expenses and tax payments. Shortly after Claimants transferred their accounts to Oppenheimer and Respondent Walker became their financial advisor, it was agreed that Claimants were spending more money than they earned and that they would have to limit their spending as well as change the asset allocation in their accounts to produce more income. Respondent Walker constructed a diversified portfolio that provided income to meet expenses. 

One of the investments that was purchased for Claimants' account was the Duff and Phelps Fund. Duff and Phelps was founded in 1932 and has offices around the world. Morningstar rated the Fund with 4 stars overall and 4 stars for a 3 year outlook. The fund paid $3,150.00 per year (6%) in dividends. The Fund fell into the Energy Risk Profile of the Wells Fargo Securities Equity Research Primer midway between less risk and more risk. The Panel finds that the Fund was a suitable investment for the Claimants in view of the overall portfolio and their investment objectives. 

Claimants in their Statement of Claim, allege "Claimant Robin Adelman repeatedly directed Respondent Walker to sell their fund, but he refused. Claimants complained to Respondent Grobman, to no avail." Claimant Robin Adelman repeated these allegations during her testimony at the hearing. 

During the evidentiary hearing more than 25 emails from Claimant Robin Adelman to Respondent Walker were accepted into evidence. In many of the emails Claimant Robin Adelman expressed concerns with her investments in the Fund. However Claimants have failed to produce a single email or any other credible evidence supporting a contention that Claimants directed Respondent Walker to sell their shares in the Fund. In one email, Respondent Walker specifically asked Claimant if she wanted to sell her shares in the Fund, Claimant did not reply. 

Respondent Grobman testified during the evidentiary hearings that Claimants never complained to him regarding their purchase of the Fund nor complained to him about the failure by Respondent Walker to carry out their instructions to sell the Duff Phelps Fund.   

Respondent Walker left Oppenheimer to work at RCB in March, 2016. Claimants' accounts were assigned to Mr. Silverman, whose manager was Respondent Grobman. Both Messrs. Silverman and Grobman met with the Claimants shortly after Respondent Walker left Oppenheimer. During the meetings Claimants' accounts were reviewed and several positions in the accounts were sold. Claimants 2,500 shares in the Fund were not sold at that time. 

Respondent Grobman testified at the evidentiary hearings that when he met with Claimants after Respondent Walker left Oppenheimer Claimants raised no concerns regarding their Fund investment and did not tell him to sell their 2,500 shares in the Fund. Claimants did not sell the 2,500 shares in the Fund until August, 2016 approximately 5 months after Respondent Walker left Oppenheimer. 

During the evidentiary hearings, evidence was introduced showing that Claimant Robin Adelman was an investor with at least 10 years of experience, that she read, and understood her account statements, and that she understood risk. Robin Adelman sent Respondent Walker numerous emails reflecting her continuous monitoring of investments. She acknowledged cycles in investments. She posed questions based on research she performed. There is no evidence to support allegations of fraud or negligent misrepresentation. Claimant Robin Adelman acknowledged receipt of the Duff & Phelps Select Energy Fund Investor Brochure and preliminary prospectus. She complained about ability to print out such a long document; there is no complaint about inability to read the information in a digital format. Claimant Robin Adelman asked to go over the prospectus with Respondent Walker but explained how difficult it is to squeeze in time to talk. She posed specific questions in her July 10, 2014 email. For reasons stated previously, Respondent Walker recommended the Fund in good faith, not for some nefarious undisclosed reason. 

The Claim of breach of fiduciary duty is clearly erroneous as well as false. The Panel determined that Walker was subject to the suitability standard, not the fiduciary duty standard. Walker was not a trustee of any investment account. Walker was not a fiduciary of any ERISA fund in which the Adelmans were participants or beneficiaries. The parties presented evidence on suitability of the Duff-Phelps investment. Walker cannot be subject to both a suitability and fiduciary duty standard.  

The claim of "emotional distress" is clearly erroneous as a matter of law. Evidence was not presented to support a claim of intentional or negligent emotional distress under Pennsylvania law. Claimants presented no argument or evidence to show that "emotional distress" is a violation of securities laws. 

The Majority of the Panel recommends the expungement based on affirmative findings that the claims are false and meritless. Furthermore, the claims of breach of fiduciary duty and "emotional distress" are clearly erroneous as well as false.  . . .

The Majority's rationale above is comprehensive and certainly makes a case for dismissal of the Claimants' claims and the recommendation of expungement. Parting ways with her colleagues, one of the Public Arbitrators filed the following "Dissenting Opinion":

The Panel has unanimously decided to deny Claimants' Claims in their entirety. Claimant Robin Adelman had extensive investing experience and the ability to determine whether a recommended investment was unsuitable. Robin Adelman was also knowledgeable in directing how her investment portfolio should be handled with respect to sales and purchases. 

The Majority of the Panel has decided to grant Respondent Stephen Todd Walker's request for expungement. I, Mary S. Wyatte, dissent from this decision for two reasons. First, expungement should be denied in order to preserve the transparency and integrity of the CRD system. Mr. Walker currently has two disclosures on his CRD which involve complaints similar to Claimants' complaint. Claimants' complaint should likewise be disclosed. It is important for other investors to be aware that Respondent has left behind dissatisfied clients, even if claims have been settled or denied. Second, expungement in this case does not meet the requirements of FINRA Regulation 2080. Although the legal basis for Claimants complaint was clearly without merit, the facts upon which the complaint is based, for the most part, were not false or erroneous.  

With all due respect to the Dissent, I don't believe that the FINRA Arbitration Code has a rule that calls upon arbitrators to "preserve the transparency and integrity of the CRD system," and, moreover, I'm not so sure that the CRD system is all that transparent or infused with integrity to begin with. 

Similarly, I'm still trying to wrap my head around the Dissent's argument that it's okay to deny an expungement request when the "legal basis" of a customer complaint is without merit because the underlying facts were "not false or erroneous." Frankly, I'm troubled by that position. 

Imagine that you are charged with speeding through a red light at the corner of Main Street and Oak Road. The "facts" upon which the charge is based are "not false or erroneous" because there was a red light at the corner of Main Street and Oak Road when your vehicle approached. On the other hand, a videotape clearly shows that you were not speeding and, in fact, came to a full stop at the red light where you waited until it turned green. 

Using the Dissent's logic, your speeding and red-light charges should not be expunged from your driving record or the court's docket because the "facts upon which the complaint is based, for the most part, were not false or erroneous" even though the "legal basis" for the charges "was clearly without merit" and the charges were dismissed. Oh, and let's not forget to factor in the need to "preserve the transparency and integrity" of the justice system because we want to make sure that other motorists are "aware" that you were charged with speeding and blowing through a red light, even though those charges were denied by you and dismissed after you proved that they were without merit!

For the moment, let's not debate the wisdom or fairness of FINRA's expungement process. I respect and appreciate the sincere and valid criticism of the process by consumer advocates. I acknowledge the legitimate gripes of industry advocates who also view the process as flawed. I have voiced my support for both camps as the facts of a given case merit. Which brings me to the sole point of my comment. In today's expungement case, we have only public arbitrators (not industry arbitrators), and they dismissed the customers' claims as essentially without merit. The Dissent conjures up the dangerous doctrine that an associated person could be found not guilty of charges deemed to be without legal merit by a panel of independent public arbitrators (in contradistinction to a settlement or voluntary dismissal by the complaining customer); but, in order to preserve the "integrity" of some electronic database, the Dissent would sacrifice that individual's good name and industry record. Are we channeling l'affaire Dreyfus

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