The Problem for A Merrill Lynch Registered Rep Seeking the Expungement of a Settled FINRA Arbitration

October 25, 2022

Removing published, public, customer complaints from a registered representative's industry record is serious business with serious ramifications. FINRA version of expungement involves arbitration. It shouldn't. Expungement should be presented to a regulatory panel. Making matters worse, FINRA's expungement program is a travesty, which in the case of customer complaints ends with little more than a "recommendation" that requires the registered rep to go to court for a confirmation. That's more time and more money. Consider the evolution of two customers' complaint against Merrill Lynch, the ensuing settlement, and the expungement petition of an unnamed rep. 

2021 FINRA Arbitration Award

In a FINRA Arbitration Statement of Claim filed in December 2019, public customer Claimants Scottow A. King and Camille C. King asserted breach of fiduciary duty, negligence, negligent supervision, fraud, breach of contract, violation of sections 10(b) of the Securities Exchange Act and Rule 10b-5 of the Securities and Exchange Commission, and violation of the Texas Securities Act. Claimants sought between $100,000 and $500,000 in compensatory damages, and rescission, punitive damages, interest, costs, and attorneys' fees.
In the Matter of the Arbitration Between Scottow A. King and Camille C. King, Claimants, v. Merrill Lynch, Pierce, Fenner & Smith Inc, Respondent
(FINRA Arbitration Award 19-03553 / August 2, 2021)

As characterized in the FINRA Arbitration Award:

[T]he causes of action related to Claimants' allegations that Respondent recommended that Claimants open a new account to invest in the Harvest Volatility Management, LLC ("Harvest") Collateral Yield Enhancement Strategy ("CYES"), which Claimants asserted was a high risk and unsuitable options investment strategy that Respondent falsely represented as a low risk strategy.

Respondent Merrill Lynch generally denied the allegations and asserted affirmative defenses. On May 24, 2021, the parties settled the dispute and, accordingly, the FINRA Arbitration Panel made no determination as to the causes of action.

Expungement Hearing

On June 9, 2021, Respondent Merrill Lynch filed a Motion of Expungement on behalf of unnamed party Gordon Huntington Harper and sought to expunge the references to the Kings' arbitration claims from his Central Registration Depository record ("CRD").  According to online FINRA BrokerCheck disclosures as of October 25, 2022, FINRA Arbitration 19-03553 settled on June 4, 2021, in the amount of $150,000 with no contribution from Harper, who is noted in the online database as denying the customers' allegations and "was not asked to, nor did he, contribute towards the settlement." 

After conducting a telephonic hearing on July 21, 2021, at which neither Claimants nor their counsel participated, the FINRA Arbitration Panel recommended the expungement of Harper's record. In part the FINRA Arbitration Award asserts that:

The Panel finds that Claimants' allegations of unsuitability and misrepresentation of information are false in that they are not supported by the evidence in the record or the testimony or evidence presented at the hearing. There is no indication that the investment complained of was unsuitable for Claimants in conjunction with their entire portfolio and risk tolerance level. 

During the approximately 3-year period Claimants held their Harvest account, their portfolio generated a significant profit - net of any Harvest losses and of costs and expenses. The Harvest strategy was a suitable fit for Claimants' portfolio because it had the potential to generate a relatively high-level of income while allowing them to retain their principal - a desire repeatedly requested by Claimants. Claimants had been advised that the Harvest account volatility could be significant during market surges and elected a strategy of remaining in the Harvest account while awaiting its return to its basis value. There is no indication of misrepresentation in that the record, evidence, and testimony presented at the expungement hearing show that Harper's communications with Claimants regarding the risks and benefits of the Harvest investment were continuously transparent and complete. Additionally, Claimants had many years of experience investing in securities and trading options.

Here the Problem as NDTX Sees It

Notwithstanding Harper's victory in obtaining the FINRA arbitrators' recommendation of his desired expungement, you shouldn't lose focus on the fact that the FINRA Arbitration Award is little more than a piece of paper or a digital file. In and of itself the Award is virtually worthless because it is by its own terms a mere "recommendation" of expungement by a FINRA Arbitration Panel. As a federal court aptly summarized the predicament:

Here's the problem for Harper: Merrill reported the Kings' lawsuit to the Central Registry Depository ("CRD") and mentioned that the Kings' suit related to Harper. Consequently, people looking through the CRD can see that the Kings' suit related to Harper. Presumably, Harper doesn't want that blight on his CRD record.

Merrill thus asked a FINRA arbitration panel to expunge the Kings' complaint from Harper's CRD record. The panel held a hearing, which the Kings failed to attend. The panel then issued an award recommending expungement of all references to the Kings' arbitration from Harper's CRD record (the "Award"). 

In this Court, Harper sought to confirm the Award. Although Harper properly served the Kings, they have failed to appear. Harper thus obtained a clerk's entry of default, and now moves for a default judgment.

at Pages 1 - 2 of Gordon Huntington Harper, Petitioner, v. Scottow A. King And Camille C. King, Respondents (Opinion/Order, United States District Court for the Northern District Of Texas ("NDTX"), 22-CV-00097 / October 18, 2022)

To Default Or Not

Petitioner Harper  nervously awaits the ruling of a federal judge as to the recommendation of three FINRA arbitrators in favor of the expungement of two public customers' complaints (notwithstanding that Harper's name is nowhere to be found in the docket of parties in the FINRA Arbitration Award). As was the case with the July 2021 FINRA Expungement Hearing/Award, the Kings didn't appear for the federal court proceedings. Accordingly, Petitioner King has asked NDTX to deem the Kings as defaulting Respondents in his motion to the federal court. The Court ordered a Default Judgment based upon the following factors:

[T]he Court finds that (1) there are no material facts in dispute because the respondents failed to file any responsive pleadings; (2) there has not been substantial prejudice; (3) the respondents' continued failure to participate in this litigation clearly establishes grounds for the default; (4) there is no reason to think the respondents are acting under a good-faith mistake or excusable neglect; (5) a default judgment is not harsh because the judgment would merely confirm a FINRA arbitration award; and (6) the pleadings, lack of response, and consequent failure to plead a meritorious defense indicate a lack of good cause for the Court to set aside the default judgment. . . .

at Pages 3 - 4 of the NDTX Opinion/Order

Narrow Judicial Review

Notwithstanding Respondents no-show, the Court doesn't just grant the requested relief. NDTX next reviews the Petition to determine if the requested relief is appropriate. In a very concise explanation/rationale granting Harper's Motion for a Default Judgement and confirming the FINRA Arbitration Award, the Court states [Ed: footnotes omitted]:

Harper "seeks an Order confirming the Award recommending expungement" of the Kings' suit "from Mr. Harper's CRD record." "[J]udicial review of an arbitration award is extraordinarily narrow." Under the Federal Arbitration Act, a district court may vacate an arbitration award only 

(1) where the award was procured by corruption, fraud, or undue means; (2) where there was evident partiality or corruption in the arbitrators, or either of them; (3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of the party have been prejudiced; or (4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made. 

Those are the "only grounds upon which a reviewing court may vacate an arbitrative award." Courts cannot vacate an arbitration award "for a mere mistake of fact or law." "The burden of proof is on the party seeking to vacate the award, and any doubts or uncertainties must be resolved in favor of upholding it." 

Because the Kings have failed to respond, they have not cited any grounds on which this Court could vacate the award. Harper asserts that "there are no grounds for modifying, correcting, or vacating the Award." The Court agrees and finds no grounds to vacate the award.
at pages 4 - 5 of the NDTX Opinion/Order

Bill Singer's Comment

Compliments to NDTX Judge Brantley Starr who managed to explain the facts and the law, and get his business done in all of five pages!

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