We're in a high-stakes football game. It's coming down to crunch time. It's the fourth quarter. There are only seconds left for the last play. It was supposed to be fourth down and two yards. The refs huddle. They walk over to your opponent's sideline. They talk to the other team's coach. There's more huddling. Then the whistle blows and you're told that it's not fourth and two but fourth and, ummm, let's see here, sure, fourth and 22. A recent FINRA arbitration seems to have moved the goal line in the midst of an expungement hearing. Then again, maybe the refs called a foul but forgot to blow the whistle. Or maybe they blew the whistle but no one heard it. Or maybe they changed a rule in the middle of the game and it was enforced as time was about to run out.
Case in Point
In a FINRA Arbitration Statement of Claim filed in March 2020, associated person Claimant Jethmal sought the expungement of customer dispute information from his Central Registration Depository record ("CRD") for unsettled Occurrence #1483628 and settled Occurrence #1072302. Respondents Solid ISG and Westrock Advisors did not file Submission Agreements and did not participate at the hearing. Although notified of the expungement request and hearing, the customers involved with the underlying dispute did not participate at the hearing. In the Matter of the Arbitration Between Anil Ishwar Jethmal, Claimant, v. Solid ISG Capital Markets, LLC and Westrock Advisors, Inc., Respondents(FINRA Arbitration "deciAward" 20-00949) [Ed: the "Award" is actually titled as: "deciAward," which is likely a typo].
The sole FINRA Arbitrator Steven Gary Leventhal recommended the expungement from CRDfor unsettled Occurrence #1483638, but denied the requested expungement for settled Occurrence #1072302.
Unsettled Occurrence #1483628
In recommending the expungement of unsettled Occurrence #1483628, the Arbitrator made a FINRA Rule 2080 finding that the customer's claim, allegation, or information is false; and offered this rationale:
The testimony and documentary evidence established that the customer chose
to mirror the trading activities of another investor, held the investment at issue for almost
three years before filing a complaint despite receiving trade confirmations and monthly
statements, and sustained a loss due to a decline in the market. The customer complaint
was denied by the employing firm. The customer did not file a claim with FINRA Dispute
Settled Occurrence #1072302
In denying the expungement of settled Occurrence #1072302, Arbitrator Leventhal offered this rationale:
In the complaint relating to Occurrence Number 1072302, the Arbitrator relied upon the
testimony of Claimant and the information set forth on Claimant's BrokerCheck Report. The
customer alleged unsuitability, unauthorized trading, churning, and omission of fact. Claimant
testified that the customer chose to mirror the trading activities of another investor, and
sustained a loss due to a decline in the market. Claimant noted that the customer made no
complaint during three years of trading. Claimant argued that the allegations of unauthorized
trading and churning are impossible because the account was non-discretionary, and that the
claims of unauthorized trading and lack of suitability are inherently inconsistent. Claimant further
argued that the settlement of the customer complaint for 7.7% of the amount claimed is
inconsistent with a claim of wrongdoing. Claimant notes that the customer is the plaintiff in an
unrelated personal injury lawsuit. These arguments by Claimant might well have prevailed at a
hearing on the underlying customer complaint, but they do not establish that the customer's
allegations were impossible or otherwise false or erroneous. The arbitration rules set a high bar
for expungement claims. It is not sufficient that an underlying claim be unlikely or that a defense
be plausible. The Arbitrator finds that the Claimant has not established that the allegations are
impossible or otherwise false or erroneous, or that the Claimant was not involved in the alleged
investment-related sales practice violations.
Bill Singer's Comment
At issue in Jethmal's expungement requests is a customer(s) who is/are mirroring trades of another investor. In light of the so-called "mirroring," it would appear that the customer(s) was/were not relying (or solely relying) upon their stockbroker's trade recommendations. Moreover, the customer(s) held the trade at issue for three years before complaining -- so, we are not presented with allegations attendant to in-and-out day trading or even short-term trading. Accordingly, as Arbitrator Leventhal notes, during those three years of holding onto the positions, the customer(s) received trade confirms and statements disclosing and confirming the positions. Further, after the initial complaint was denied by Jethmal's employer firm, the customer(s) failed to take further steps in the form of litigation.
As you may have noticed in the paragraph immediately above, I've used "(s)" and "was/were" in referencing the two cited occurrences. I resorted to that clumsy prose because I'm not quite sure whether we're talking about two customers with two separate but similar complaints, or one customer with two separate complaints. The FINRA Arbitration Award states in part that [Ed: highlighting added]:
On October 16, 2020, Claimant advised that the customers in Occurrence Numbers 1483628 and 1072302 ("customers)") were served with the Statement of Claim and with notice of the date and time of the expungement hearing.
. . .
The customers did not participate in the expungement hearing. The Arbitrator found that the customers had notice of the expungement request and hearing.
Solely referencing Arbitrator Leventhal's above statements in the Award, it seems that there were at least two separate customers. Given the significant overlap of the fact patterns presented in the Award; i.e., the mirrored trades and three-year-holding-periods, it seems like we could be dealing with the same customer but one who traded through multiple accounts. That's an important distinction as to whether the arbitrator was considering the complaints of the same customer spread over multiple accounts versus multiple customers with a similar complaint. After all, if an arbitrator is judging the credibility of the same customer and finding that individual not credible in terms of one complaint, then you'd sort of think that the trier of facts would extend such credibility concerns against that same customer, who has filed a second complaint against the same stockbroker. Frankly, given the extensive overlap in the fact patterns set forth in the two occurrences, the Award should have better addressed the issue as to why there was so much in common between what appear to be two customers.
In his "Report," Arbitrator Leventhal set out a number of factors that I personally found favorable for Jethmal's requested expungement of both occurrences; however, Leventhal then throws this curveball:
[T]hese arguments by Claimant might well have prevailed at a hearing on the underlying customer complaint, but they do not establish that the customer's allegations were impossible or otherwise false or erroneous. The arbitration rules set a high bar for expungement claims. It is not sufficient that an underlying claim be unlikely or that a defense be plausible. The Arbitrator finds that the Claimant has not established that the allegations are impossible or otherwise false or erroneous, or that the Claimant was not involved in the alleged investment-related sales practice violations.
As far as I knew, the standard of proof in a civil proceeding such as a FINRA arbitration was the "preponderance of evidence" and not the higher, criminal standard of "beyond a reasonable doubt." When Arbitrator Leventhal references his understanding that the "arbitration rules set a high bar for expungement claims. It is not sufficient that an underlying claim be unlikely or that a defense be plausible," I'm not quite sure I understand the parameters of the so-called "high bar" or where it is codified as a standard of proof. If a Claimant demonstrates by a "preponderance of the evidence" that a customer's complaint is unlikely or implausible, I would argue that a favorable recommendation of expungement should be forthcoming from a FINRA Arbitrator. Some might argue that a "clear and convincing" standard should pertain to expungements. Others may believe that the ultimate "beyond a reasonable doubt" standard is the most appropriate. Like I said, my expectation is that in a civil proceeding, we use the preponderance of evidence, but, if you feel differently, that's great: Just be prepared to cite to me some codification of where FINRA promulgates a standard of proof for a Claimant's burden in an expungement hearing. It appears that Arbitrator Leventhal posits that the such a Claimant must present proof subject to a "high bar" that imposes a more stringent standard than preponderance of the evidence -- and that such a raised burden of proof must show that the customer's complaint is "impossible or otherwise false or erroneous." Indeed, Leventhal appears to cite to FINRA Rule 2080 in support of his position; and that Rule states, in part that:
FINRA Rule 2080. Obtaining an Order of Expungement of Customer Dispute Information from the Central Registration Depository (CRD) System
(a) Members or associated persons seeking to expunge information from the CRD system arising from disputes with customers must obtain an order from a court of competent jurisdiction directing such expungement or confirming an arbitration award containing expungement relief.
(b) Members or associated persons petitioning a court for expungement relief or seeking judicial confirmation of an arbitration award containing expungement relief must name FINRA as an additional party and serve FINRA with all appropriate documents unless this requirement is waived pursuant to subparagraph (1) or (2) below.
(1) Upon request, FINRA may waive the obligation to name FINRA as a party if FINRA determines that the expungement relief is based on affirmative judicial or arbitral findings that:
(A) the claim, allegation or information is factually impossible or clearly erroneous;
(B) the registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation or conversion of funds; or
(C) the claim, allegation or information is false. . . .
I have never viewed FINRA Rule 2080 as akin to a FINRA Rule of Evidence. By the Rule's own terms, it merely addresses how one would obtain "an order from a court." Pointedly, Rule 2080(b)(1)(A - C) promulgates the bases upon which FINRA "may waive" being named as a party in the follow-on court proceeding subsequent to the FINRA expungement arbitration. Note that it is a disjunctive "or" that sets the test for (1)(A - C) and not a conjunctive "and." Arbitral findings that (1)(A), (B), or (C) were proven would still seem subject to the civil standard; namely, "preponderance of the evidence." It may well be that Arbitrator Leventhal adjudicated Jethmal's expungement requests by the accepted civil standard notwithstanding the reference to some "high bar." Unfortunately, I am bound by the four corners of FINRA's Award and I can't figure out why the first occurrence warranted a recommendation of expungement but the second occurrence did not. That is not to argue Leventhal's findings but merely to critique the content and context offered in the Award. Frankly, Leventhal penned an articulate document and is clearly entitled to his opinions and interpretations.
As best I can tell, the only significant difference in the fact patterns of the two occurrences cited by Jethmal is that one did and one did not settle. Which is not to argue that the arbitrator got his decision wrong or that he utilized an inappropriate burden of proof; however, it is to suggest that the Award fails to satisfactorily address such issues. I have long criticized the quality of FINRA's Arbitration Awards. If Leventhal's declination of Jethmal's request for expungement of the settled occurrence was justified, then FINRA is being justly hoisted with its own petard. Given my history of chiding FINRA for a lack of "quality control" about its dubious pre-publication review of its various published materials, I will take this opportunity to note my displeasure with the published form of Jethmal.
Finally, before you are too quick to anger, consider some of this background information:
Online FINRA BrokerCheck records as of December 30, 2020, disclose that Jethmal was first registered in 1988. Under the heading "Regulatory -- Final," BrokerCheck discloses that in 1996 the State of Georgia denied Jethmal registration status based upon its finding that he was "not of good business reputation." In part the online disclosure from 1996 states under "Allegations":
APPROXIMATELY 27 CUSTOMER COMPLAINTS HAVE BEEN FILED AGAINST MR. JETHMAL DURING THE PERIOD OF TIME IN WHICH HE HAS BEEN REGISTERED AS A SECURITIES AGENT.
In response to those allegations, Jethmal offered this "Broker Statement":
I RECEIVED NO NOTIFICATION WITH REGARDS TO THE PENDING ACTION. I WAS UNABLE TO RESPOND TO THE STATE'S REQUEST. THE STATE SUBSEQUENTLY DENIED ME REGISTRATION. I INTEND TO APPEAL THIS DENIAL.
Online FINRA BrokerCheck records as of December 30, 2020, disclose under the heading "Customer Dispute -- Settled" five disclosures for "Status Dates" running from 1994 to 2020.
Online FINRA BrokerCheck records as of December 30, 2020, disclose under the heading "Customer Dispute -- Closed-No Action / Withdrawn / Dismissed / Denied" one disclosure for "Status Date" 2009.