What's Olde Isn't Necessarily New in the Digital Age

October 22, 2019

A few things that you may not remember about 1993. For starters, Czechoslovakia ceased to exist. Bill Clinton was sworn in as the 42nd President of the United States of America.  The World Trade Center was bombed. "Unforgiven" won the Best Picture at the Academy Awards. The Maastricht Treaty took effect and the European Union was established. President Clinton signed the North American Free Trade Agreement. Robert Michael Burns was a Junior Advisor with limited authority at Olde Discount Corporation. Who's Robert Michael Burns? What was Olde? You never realized that the Czech Republic and the Slovakia had replaced Czechoslovakia?

Case in Point

In a FINRA Arbitration Statement of Claim filed in February 2019 and as amended, associated person Claimant Burns sought the expungement of a settled customer complaint from his Central Registration Depository record ("CRD"). In the Matter of the Arbitration Between Robert Michael Burns, Jr., Claimant, v. Ameriprise Financial Services, Inc., Respondent (FINRA Arbitration Decision 19-00488). 

Respondent Ameriprise stated that it would not object to the requested expungement should Claimant prevail before the sole FINRA Arbitrator in terms of carrying his burden of proof. The customer did not contest the requested relief; and neither the customer nor Ameriprise appeared at the hearing.

A Matter of Exhaustion

The FINRA Arbitrator noted as a threshold matter that:

With respect to the underlying settlement agreement, Claimant filed an Affidavit stating the following: 

"On April 1, 2019, Claimant's counsel requested any relevant information, including the settlement agreement, for the customer from Respondent Ameriprise Advisor Services, Inc., but Respondent was unable to provide any responsive documentation. Claimant did not contribute to the settlement and Claimant does not have a copy of the settlement agreement. As such, Claimant's counsel has exhausted all avenues from which to obtain the settlement agreement" 

The Arbitrator noted that Claimant did not contribute to the settlement amount, and Claimant testified that the settlement was not conditioned on the underlying customer not opposing the request for expungement 

In the '90s

In recommending expungement, the Arbitrator made a FINRA Rule 2080 finding that the customer's claim, allegation, or information is factually impossible or clearly erroneous; and false. The Arbitrator offered a concise and compelling rationale:

By way of background, although the customer in the underlying arbitration was the wife (in her individual capacity and as Trustee of the trust account at issue), she and her husband signed the account application and a trading authorization granting the husband trading authority over the account. Claimant testified that the husband was the only person he met or dealt with throughout the life of the account. Claimant referenced only the masculine pronoun "he" throughout his testimony. Claimant said he never met or spoke with the wife. 

In or about 1993 -1995, Claimant was a Junior Advisor with limited authority at OLDE Discount Corporation. The firm did not accept, nor was Claimant authorized, to handle any discretionary accounts. Claimant was paid commissions only when he sold from a limited list of OLDE Discount Corporation researched and approved investments. Claimant could not and did not receive any commissions or compensation for the transactions, which were the subject of the customer complaint; to wit: unsolicited covered calls, which were selected by the customer's husband. 

Claimant had previously never written a covered call until the customer's husband specifically directed him to do so on the customer's behalf. The customer's husband had prior experience in writing covered calls and expressed to Claimant that he felt the covered calls were subject to less risk than purchasing the underlying stocks outright. In order to write covered calls, the customer's husband was required to sign option paperwork, including an Option Risk Disclosure Statement prepared by OLDE Discount Corporation, which required the customer's husband to confirm his understanding and acceptance of the risks associated with options trading. 

The customer's husband was a sophisticated investor with 40 years of investment experience. The account at OLDE Discount Corporation represented approximately 25% of the customer's investments. Claimant dealt only with the customer's husband for the life of the account. Neither the customer nor her husband complained to Claimant or to anyone else at OLDE Discount Corporation while the account was open. 

Approximately one month after the account was transferred out of OLDE Discount Corporation, the wife filed an arbitration with NASD. Claimant testified that after the case was filed, the husband telephoned Claimant and told Claimant that he had nothing to do with filing the arbitration. 

OLDE Discount Corporation settled the arbitration for a fraction of the amount requested. Claimant did not contribute any funds to the settlement and was not directly involved in the settlement negotiations. 

The customer was served on September 4, 2019 with a copy of the Statement of Claim and Notice of Expungement in this case. The customer did not file anything with FINRA in response. 

Claimant's testimony was credible and thorough. On the basis of his testimony and expungement hearing exhibits filed on October 1, 2019, the Arbitrator finds that the customer's claim, allegation or information is false, and factually impossible or clearly erroneous.  

Bill Singer's Comment

Compliments to the sole FINRA Arbitrator for a comprehensive and persuasive rationale! Personally, I'm satisfied that justice was done here for Burns. 

The Public Investors Advocate Bar Assoaciaiton ("PIABA") published THE PIABA FOUNDATION / 2019 STUDY ON FINRA EXPUNGEMENTS / A SERIOUSLY FLAWED PROCESS THAT SHOULD BE STOPPED IMMEDIATELY TO PROTECT THE INTEGRITY OF THE PUBLIC RECORD (October 16 2019) https://piabafoundation.org/wp-content/uploads/2019/10/Expungement-Study-101519-FINAL-VERSION.pdf. Among the key recommendations of the PIABA Expungement Report were that FINRA immediately halt all expungement proceedings pending the imposition of procedural safeguards; and that an independent investigation promptly commence to review the regulator's expungement protocol. As I noted in the Securities Industry Commentator" (October 16, 2019):

All in all, the PIABA Report makes a number of fair and compelling points that must be addressed. Similarly, the four bullet-points of recommendations noted above present relatively reasonable first-steps towards fixing the broker expungement system. That being said, PIABA, by definition was the Public Investor ARBITRATION Bar Association but now seems to be the Public Investor ADVOCATE Bar Association -- as a long-time opponent of Wall Street's mandatory public-customer and associated-person arbitration process, I found myself viewing PIABA as fostering an unfair, biased, and conflicted system of mandatory arbitration. With the organization's apparent rebranding, much of my ambivalence attendant to its self-professed mission has dissipated. Accordingly, I applaud PIABA's efforts to initiate long overdue reforms to mandatory arbitration of all stripes; and, as such, I also hope to see a similar report prepared by advocates for the beleaguered associated person community. 

Finally, this is merely a situation where the chickens have come home to roost. For too long, FINRA, the self-styled Wall Street self-regulatory-organization, has adamantly and obstinately disenfranchised such critical marketplace stakeholders as the very public customers represented by PIABA and the hundreds of thousands of associated persons who work at the regulator's member firms. See, for example, "Bill Singer Submits Rare FINRA Comment" (BrokeAndBroker.com Blog / June 1, 2017)" http://www.brokeandbroker.com/3487/finra-comment-singer/

There are practitioners involved in the arbitration/expungement process who only work one side of the proverbial Street -- be that advocating only for public investors or only for industry parties.  In the debate over the appropriateness of FINRA's expungement process, unfortunately, the most strident (and often most unenlightened) positions are ascribed to those who represent only industry clients or only public customers.  All of which fosters the trench-warfare nature of the ongoing battle for hearts and minds.

I am a former regulator who also worked in-house at brokerage and investment advisory firms; and in my law practice, I represent industry participants, public customers, and whistleblowers. As a result of that panoramic experience, I am empathetic to all sides of the expungment debate. Notwithstanding, FINRA's expungement process is an abomination that does a disservice to the public investor while somehow managing to impose unfair burdens on associated persons. 

As Burns v. Ameriprise demonstrates, conduct that occurred before the dawn of Social Media and the Digital Age is often at issue in current expungement cases. PIABA makes very strong and credible arguments that even in this day and age, FINRA's expungement process wrongfully erases (or rewrites) online histories. As PIABA correctly warns, the lack of disclosure (or the removal of previous disclosure) may thwart investors' due diligence. In contrast, expungement advocates cite the unfairness of false/defamatory online disclosures that harm an associated person, who never agreed to any settlement with the public customer, never contributed financially to any settlement with the customer, never had a hearing on the merits of the case, and, with the passage of time, was shown to have been a victim of defamation or falsehoods. Regrettably, PIABA's Report failed to fairly address the harm that many industry men and women suffer by their inability to timely contest an erroneous disclosure  -- some of which may fester for years and cause significant financial damages via lost potential clients dissuaded by false allegations and baseless assertions that remain online. Similarly, expungement advocates seem content to run profitable mills that churn out huge numbers of applications for relief without considering that the public is often left blind and fumbling in the dark when trying to discern Wall Street's good guys from the bad guys. Like I said earlier, it's all taken on the hue of trench-warfare with no one daring to raise their heads or wander into No Man's Land. 

I have long argued that expungement should never, ever have been an "arbitration" process, but should have been placed within the regulatory realm. Towards that end, associated persons must be given an opportunity to promptly contest before a regulatory panel any customer-complaint and termination disclosure. The emphasis here is on an expedited process that would serve to quickly protect the associated person's reputation without leaving public investors exposed. Further, the costs and fees for such an expungement should be waived in the event that the associated person is deemed a prevailing party; and in egregious cases, the regulatory panel should be empowered to award attorneys' fees against any member firm that knowingly posted false or defamatory disclosures.