February 10, 2022
Another day and another court is forced to ponder an imponderable FINRA Arbitration Award. In today's installment, a federal court read the record of the denial of an expungement claim but can't discern "any basis on which the FINRA panel could have rested its decision." Not a glowing endorsement of FINRA's mandatory arbitration protocol. And as our publisher Bill Singer angrily notes, not a glowing endorsement of FINRA's lackluster and apparently lackadaisical Board of Governors. At what point does even one FINRA Governor stand up for fairness and due process?
The 2021 FINRA Expungement Arbitration
In a FINRA Arbitration Statement of Claim filed in February 2021, associated person Claimant Gross sought the expungement of a termination explanation from his Form U5. Respondent HSBC did not contest the requested relief. In the Matter of the Arbitration Between Adam Gross, Claimant, v. HSBC Securities (USA) Inc., Respondent (FINRA Arbitration Award 21-00392 / September 3, 2021) https://www.finra.org/sites/default/files/aao_documents/21-00392.pdf
In full text with no edits, redactions, or revisions, this is what FINRA published under the heading "AWARD":
After considering the pleadings, the testimony and evidence presented at the hearing, and any
post-hearing submissions, the Panel has decided in full and final resolution of the issues
submitted for determination as follows:
1. Claimant's claims are denied in their entirety.
Now, mind you, FINRA had impaneled a Non-Public Arbitrator, a Public Arbitrator, and a Public Arbitrator/Chair to preside over Claimant Gross's claim. Moreover, FINRA charged HSBC a $1,900 Member Surcharge and a $3,750 Member Process Fee for the honor and privilege of having the ability to defend against the claim of a former employee. On top of all of that, FINRA charged Claimant Gross $2,250 in Hearing Session Fees for one pre-hearing session and one hearing session. And those three arbitrators couldn't so much as muster up even the briefest of summaries as to what Claimant Gross sought to have expunged -- even a mere generality of the nature of the offensive language; and, the exalted FINRA Arbitration Panel didn't deign to offer any rationale for denying Claimant's claim.
FINRA Rules 13805 and 13904
Just for the hell of it, let's reprint in full FINRA Code of Arbitration Procedure for Industry Disputes Rule 13805: Expungement of Customer Dispute Information under Rule 2080 and Rule 13904: Awards:
Rule 13805: Expungement of Customer Dispute Information under Rule 2080 [Ed: highlights added]:
In order to grant expungement of customer dispute information under Rule 2080, the panel must:
(a) Hold a recorded hearing session (by telephone or in person) regarding the appropriateness of expungement. This paragraph will apply to cases administered under Rule 13800 even if a claimant did not request a hearing on the merits.
(b) In cases involving settlements, review settlement documents and consider the amount of payments made to any party and any other terms and conditions of a settlement.
(c) Indicate in the arbitration award which of the Rule 2080 grounds for expungement serve(s) as the basis for its expungement order and provide a brief written explanation of the reason(s) for its finding that one or more Rule 2080 grounds for expungement applies to the facts of the case.
(d) Assess all forum fees for hearing sessions in which the sole topic is the determination of the appropriateness of expungement against the parties requesting expungement relief.
Rule 13904: Awards [Ed: highlights added]:
(a) All awards shall be in writing and signed by a majority of the arbitrators or as required by applicable law. Such awards may be entered as a judgment in any court of competent jurisdiction.
(b) Unless the applicable law directs otherwise, all awards rendered under the Code are final and are not subject to review or appeal.
(c) The Director will serve the award on each party, or the representative of the party.
(d) The panel shall endeavor to render an award within 30 business days from the date the record is closed.
(e) The award shall contain the following:
(1) The names of the parties;
(2) The name of the parties' representatives, if any;
(3) An acknowledgement by the arbitrators that they have each read the pleadings and other materials filed by the parties;
(4) A summary of the issues, including the type(s) of any security or product, in controversy;
(5) The damages and other relief requested;
(6) The damages and other relief awarded;
(7) A statement of any other issues resolved;
(8) The allocation of forum fees and any other fees allocable by the panel;
(9) The names of the arbitrators;
(10) The dates the claim was filed and the award rendered;
(11) The number and dates of hearing sessions;
(12) The location of the hearings; and
(13) The signatures of the arbitrators.
(f) The award may contain a rationale underlying the award.
(1) This paragraph (g) applies only when all parties jointly request an explained decision.
(2) An explained decision is a fact-based award stating the general reason(s) for the arbitrators' decision. Inclusion of legal authorities and damage calculations is not required.
(3) Parties must make any request for an explained decision no later than the time for the prehearing exchange of documents and witness lists under Rule 13514(d).
(4) The chairperson of the panel will be responsible for writing the explained decision.
(5) The chairperson will receive an additional honorarium of $400 for writing the explained decision, as required by this paragraph (g).
(6) This paragraph (g) will not apply to simplified cases decided without a hearing under Rule 13800 or to default cases conducted under Rule 13801.
(h) All awards shall be made publicly available.
(i) Fees and assessments imposed by the arbitrators under the Code shall be paid immediately upon the receipt of the award by the parties. Payment of such fees shall not be deemed ratification of the award by the parties.
(j) All monetary awards shall be paid within 30 days of receipt unless a motion to vacate has been filed with a court of competent jurisdiction. Absent specification to the contrary in the award, when arbitrators order opposing parties to make payments to one another, the monetary awards shall offset, and the party assessed the larger amount shall pay the net difference. An award shall bear interest from the date of the award:
(1) If not paid within 30 days of receipt;
(2) If the award is the subject of a motion to vacate which is denied; or
(3) As specified by the panel in the award.
Interest shall be assessed at the legal rate, if any, then prevailing in the state where the award was rendered, or at a rate set by the arbitrator(s).
May Contain a Rationale
Just going by the highlighted sections above in FINRA Rule 13904, an industry-dispute FINRA Arbitration Award should contain a "summary of the issues, including the type(s) of any security or product, in controversy. . ." The Award will be made publicly available and, go figure, but when it comes to stating a rational for the disposition of the case, in its infinite wisdom and in a half-assed nod to due process, FINRA decided that the best option is that an Award "may contain a rationale underlying the award." Not shall contain. Not must contain. Not should contain. But, y'know, "may" contain. Of course, FINRA cynically offers the so-called "Explained Decision" option but that requires "all parties jointly request an explained decision," which may explain the paucity of such explained decisions because if one of the parties won't join in with the request then the Rule says it ain't gonna happen. On top of that, FINRA imposes a $400 honorarium for the privilege of having the Chair of the Arbitration Panel write the Explained Decision.
As to FINRA Rule 13805, which applies pointedly to Gross' expungement claim, about the only obligation imposed upon an arbitrator(s) is to hold an expugnement hearing. Just going by the language of 13805(c) you don't even need to "indicate" anything of substance in the Award in the event that you deny the requested expungement because an Award is only required to indicate "which of the Rule 2080 grounds for expungement serve(s) as the basis for its expungement order" and, well, y'know, if the decision is that there is not basis for such an order then there wouldn't be a needc to cite the predicate grounds.
When a Summary Ain't So Much Even That
In the Gross FINRA Arbitration Award, I don't think we even got a "summary of the issues" as required by Rule 13904, and I sure as hell think the three-arbitrator-Panel emphasized the "may" aspect of providing a "rationale," and opted to say nothing. Why is FINRA's say-nothing default policy harmful in advancing the goals of public protection and industry fairplay? For starters, you'd sort of think that the industry's largest self-regulatory-organization, FINRA, might feel an obligation to ensure that its Arbitration Awards disclose enough information about intra-industry disputes against one a large member firms such as HSBC, so as to alert the public and the industry's associated persons about any developing trends -- and, you know, while we're at it, howsabout alerting FINRA to emerging problems? On top of that, the way Wall Street works, its customers and associated persons are forced into mandatory arbitration against FINRA member firms and effectively denied redress for most disputes in court. Strike out the mandatory arbitration provision in any New Account Form or Employment Application and see if any FINRA member firm will open a new account for you; and, for good measure, complain to FINRA about this contract of adhesion and see how the regulator responds. It's one thing when an industry's culture of collaboration forces contracts of adhesion upon the public and its future employees; however, it's quite another when the industry has been granted to luxury of self regulation but the self-regulatory-organization looks the other way.
Having effectively swept all the facts in dispute under the rug provided by FINRA Rule 13904, Wall Street brokerage firms often beat a hasty retreat to the very courts whose steps have been barred to the industry's customers and associated persons pursuant to mandatory arbitration. At times, the brokerage firms are in court seeking a temporary restraining order or a remand to arbitration; however, other times, the whole hasty retreat to the court thing appears a cynical effort to ramp up costs and extend delays. Ahhh, the gamesmanship of litigation! Ironically, when mandatory arbitration disputes wind up in court -- be that via appeal or motion practice -- a lot of details that are suppressed under the rubric of "summary of the issues" and the pay-for-play "explained decision" come out in the wash before the court.
Gross Files SDNY Complaint / October 21, 2021
Unlike the half-assed piece of garbage that FINRA had the audacity to post as the purported FINRA Arbitration Award for Claimant Gross's expungement case, we learn something of substance from a Complaint filed by Gross in the United States District Court for the Southern District of New York ("SDNY") against HSBC following the charade of a FINRA Arbitration Award.
For starters, we finally learn in the Complaint whether Gross was a janitor, stockbroker, banker, analyst, or trader -- in fact, he alleges that he was formerly employed by HSBC "in the position of Managing Director." Don't bother looking in the FINRA Arbitration Award for that background reference, it ain't there. Next, let me stand aside and allow Plaintiff Gross to unleash his anger against his former employer and FINRA:
MR. GROSS' EMPLOYMENT
5. On September 11, 2020, Mr. Gross' counsel delivered a letter to Jeanine L.
McHugh, Esq. detailing Mr. Gross' legal claims asserting that Mr. Gross was retaliated against
because he objected to unlawful conduct that constituted investor fraud and federal securities
6. The sending of counsel's letter resulted in settlement negotiations that ultimately
resulted in a comprehensive resolution of the legal dispute.
7. The two principle terms of the settlement were: 1) a payment of settlement
compensation to Mr. Gross; and 2) HSBC's agreement not to oppose an application by Mr.
Gross of expungement of his U-5 that contained a false explanation for his termination from
8. The false U-5 badly compromised Mr. Gross' professional career.
9. On February 12, 2021 Mr. Gross filed a Statement of Claim with FINRA seeking
expungement of his U-5. [For a copy of filed Statement of Claim see Exhibit "A"]
10. In connection with that Statement of Claim, a FINRA hearing was held on
August 27, 2021.
11. At the hearing, HSBC offered no defense to Mr. Gross' claims.
12. At the hearing, testified to the events that resulted in his termination including the
misconduct HSBC accused him of and why those charges were entirely false.
13. In particular, Mr. Gross testified that HSBC accused him of communication with
a particular prospective HSBC client utilizing unapproved applications. Mr. Gross unambiguously testified that he at no time communicated with that particular person utilizing
unapproved application sand further, and in any event, did not discuss HSBC business with that
particular person on any occasion. [For a copy of a certified transcript created from a FINRA
audio recording of the hearing See Exhibit "B"]
14. Mr. Gross' testimony that he violated no HSBC internal rules or policies was
plain, straightforward, and uncontradicted.
15. On September 3, 2021, in an entirely unexplained decision, FINRA ruled against
Mr. Gross and refused to expunge his U-5.
16. FINRA's decision was arbitrary and capricious and entirely divorced from any
evidence presented at the hearing having no basis in fact or law.
17. FINRA's decision has badly damaged Mr. Gross' professional career by allowing
a false and defamatory reason for termination to remain on Mr. Gross' U-5.
CAUSE OF ACTION
18. Pursuant to Fed. R. Civ. P. 10(c), plaintiff repeats and realleges each and every
allegation contained in paragraphs "1" through "17" as if repeated and incorporated herein.
19. The FINRA panel acted in utter bad faith and arbitrary and capriciously by failing
to expunge Mr. Gross' U-5.
20. As a consequence of the above, the FINRA panel should be enjoined and required to expunge Plaintiff's U-5.
SDNY Order and Opinion / February 8, 2022
Following the filing of his Complaint, Gross was required to alter his status from a Plaintiff to a Petitioner because in seeking to enjoin the FINRA Arbitration Panel and requiring it to expunge his Form U5, he was forced to confront the legal issue that "FINRA regulations do not create "a free-standing 'expungement' cause of action" against an employer like HSBC. . ." at Page 3 of Adam Gross, Petitioner, v. HSBC, Respondent (Order and Opinion
, SDNY, 21-CV-08636 / February 8, 2022)
After reforming his Complaint into a Petition to Vacate the FINRA Arbitration Award, SDNY treated the latter as superseding the former. Notwithstanding the reformation, Respondent HSBC denied that it had retaliated, discriminated or otherwise violated Petitioner Gross' rights but still did not oppose the Petition to Vacate.
In granting Gross's Petition to Vacate and remanding the matter to the FINRA Arbitration Panel, SDNY Judge Paul A. Crotty unleashes his disdain for the piss-poor nature of FINRA's arbitration process:
The FINRA panel provided no explanation for its denial of Gross's petition. Despite FINRA Rule 13805(c), it seems it is "standard" for expungement awards, or the denial thereof, to be "bereft of findings of fact or conclusions of law."
at Page 5 of the SDNY Order and Opinion.
Bereft indeed, as has been cited in many BrokeAndBroker.com articles over the years! Even allowing that arbitrators are not expected to write opinions in most cases, Judge Crotty admonishes that:
But "the absence of explanation may reinforce the reviewing court's confidence that the arbitrators engaged in manifest disregard" of the law, especially when the FINRA panel appeared to reach a conclusion -- that Gross's Form U-5 was accurate and should not have been expunged -- that neither side had advocated for. . . .
at Page 5 of the SDNY Order and Opinion
Having built as near to a full head of steam as was likely in keeping with his judicial demeanor, Judge Crotty offers this observation:
Nor can this Court discern, from the record, any basis on which the FINRA panel could have rested its decision. The evidence at the arbitration hearing was undisputed that Gross had not violated HSBC rules or practices. Having reviewed the arbitration submissions, the hearing transcript, and the award, the Court cannot "discern what possible findings the arbitrators could have made that would justify their disposition of the case . . . On remand, the arbitration need not necessarily reach a different conclusion, but it must provide some explanation for its award so that this Court can ensure there has been no manifest disregard of the law.
at Pages 5 - 6 of the SDNY Order and Opinion
Bill Singer's Comment
Please feel to supplement my above appraisals of FINRA's ineptitude in Gross v. HSBC.
As I have long and often noted, there appears to be little if any "quality control" exercised by FINRA when it comes to reviewing-before-publication many (if not most) of its published works, be they arbitration awards or regulatory decisions. Time and time again we are confronted with the question as to whether someone, anyone, in management reviews a given publication and bothered to ask for a clarification or an explanation. Although some of the blame must come to rest at the thresholds of FINRA's many C-Suites, inevitably all roads lead to FINRA's lackluster Board of Governors. Is there no one on that less-than-illustrious Board who will take up the challenge to reform FINRA's arbitration process? Exactly how many more glaring examples such as Gross must be brought to the Governors' attention before someone raises a hand at meeting and proposes something other than ordering lunch? Clearly, the gerrymandered process by which FINRA Board seats were allocated and elective seats filled has produced a group of Wall Street overseers who lack the resolve to fix what's broken and fear that any expression of dissent will prompt their removal.
Way back in pre-Covid 2017, a disgruntled Schwab customer filed a FINRA Arbitration Statement of Claim complaining about the release of his records to the IRS. Then the dispute wound up in federal court. Then back in arbitration -- sort of. Then back in federal court. In 2021, four years after the hostilities began and in the middle of Covid, things moved on to Zoom hearings, but the customer didn't want to argue his case via Zoom. He said that's not what he bargained for way back when things started. As kids used to say like it or lump it, and, accordingly, the parties proceeded to Zoom hearings and Zoom court proceedings.
At the end of my December 27, 2021, blog above, I added this parting shot:
FINRA Has NO PART IN DECIDING THE AWARD???????
Finally, but by no means "last but not least," I feel invited by the facts in Cristo to reiterate my often voiced complaint (bordering on derision) with this inappropriate preamble that is inserted without consent into each and every FINRA Arbitration Award, as set forth in Cristo:
Awards are rendered by independent arbitrators who are chosen by the parties to issue final, binding decisions. FINRA makes available an arbitration forum-pursuant to rules approved by the SEC-but has no part in deciding the award.
See some samples of FINRA arbitration issues from the BrokeAndBroker.com Archive:
You know those days when you just want to pull the covers over your head and not get out of bed? Well, FINRA had one of those days. As to what caused all of FINRA's anxiety, let's start with these words in a court's order about a FINRA public customer arbitration hearing: "The transcripts satisfy the Investors' burden of proving the fraud on the panel by clear and convincing evidence. The audio tapes, which were not available to the Investors until after the close of the hearing, confirm that Wells Fargo' s key witness used the delay caused by the medical emergency to materially change his testimony and offer perjured testimony in direct contravention of the earlier testimony. In addition, counsel for Wells Fargo inserted himself as a fact witness and purported to testify to the Panel himself to support the changed story."
- FINRA Customer Claimant Says Arbitrators Left Out Zeros In Award February 8, 2022
- Veteran Stockbroker Sues For Unjust Termination Involving Sales Goals and Outside Business Activities November 19, 2021
- Two of Three FINRA Arbitrators Ironically Disappear In Unexplained Expungement Award November 16, 2021
- No Margin For Error With Options Expiration November 1, 2021
- UPDATE: No Rationale And No Explanation In FINRA Arbitration Decision August 18, 2020
- UPDATE: No Rationale And No Explanation In FINRA Arbitration Decision July 20, 2020
- Federal Courts Okay FINRA Unexplained Arbitration Decision March 30, 2020
- No Rationale and No Explanation In FINRA Arbitration Decision October 8, 2019
- Wells Fargo Banker and Broker Loses Humpty Dumpty FINRA Arbitration June 24, 2019
- Wells Fargo Found Guilty of Defaming Stockbroker for Storing Customer Property June 3, 2019
- Bleak Marshall Family Drama Hits FINRA Arbitration December 4, 2017
- Absurd Unexplained Public Customer FINRA Arbitration Decision October 20, 2017