In a recent case on appeal to the SEC, it turns out that FINRA had accepted a former Merrill Lynch registered representative's Arbitration Statement of Claim and charged him for said filing. Then FINRA moved his case forward towards discovery and hearing dates. A FINRA arbitrator held an evidentiary hearing. About a week after the hearing, but before the arbitrator issued an award, a FINRA Case Administrator sent the Claimant-rep a letter denying use of the FINRA arbitration forum. The Claimant had entered FINRA's expungement turnstile but then was trapped inside it.
The 2018 AWC
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, David W. Ingle submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted.
In the Matter of David W. Ingle, Respondent (FINRA AWC 2016049110501 / April 10, 2018)
The AWC asserts that from May 2013 to February 2016, David W. Ingle was registered with Merrill Lynch, Pierce, Fenner & Smith, Incorporated. In accordance with the terms of the AWC, FINRA imposed upon Ingle a $10,000 fine and an 18-month suspension from associating with any FINRA member in all capacities. As alleged in part in the AWC, in "June and November 2015, Ingle created and distributed two proof of funds letters that contained misleading statements. Ingle's actions violated FINRA Rule 2010."
So . . . in 2018, a former Merrill Lynch rep with no prior disciplinary history agrees to settle allegations by FINRA that he had engaged in misconduct some three years earlier in 2015. In the scenario of one of the customers at issue, the AWC asserted that:
[I]ngle drafted and issued a proof of funds letter on Merrill Lynch letterhead stating that a business linked to the prospective client had the financial capacity to consummate a $278 million real estate purchase with no financing.
Although Ingle had reason to believe the prospective client had the financial capacity to consummate the real estate deal, the letter was misleading because the prospective client held no funds or securities at Merrill Lynch at the time Ingle drafted the letter.
In the scenario of the second customer at issue, the AWC asserted that:
In November 2015, Ingle drafted and issued another proof of funds letter on firm letterhead stating that a firm client had in excess of $57 million in cash at Merrill Lynch or its affiliate bank.
Although Ingle was familiar with the client's financial capacity and believed the client had the financial capacity to consummate the anticipated transaction, this letter was misleading because the client did not actually have the cash or securities at Merrill Lynch or its affiliate bank at the time Ingle drafted the letter.
Ingle's undoing seems to have been prompted by the allegations in the AWC that contrary to Merrill Lynch's policies, he "did not submit either letter for review prior to sending." As to each clients' purported need for the letters, the AWC notes that in "each case, the transaction contemplated by the proof of funds letter did not materialize." Not sure if you caught that last bit, so let me reiterate the fact that the contemplated transactions never went forward. Does the lack of completion of the underlying deals justify Ingle's failure to comply with his firm's protocol for drafting a Proof of Funds Letter? In my opinion, the answer is a resounding "NO." This is one of those times when despite the fact that there may not have been any measurable harm, there still was a foul. On the other hand, did Ingle's cited misconduct warrant the imposition of both a $10,000 fine and an 18-month suspension? Based upon the facts as presented in the AWC, I'm not convinced that the combined sanctions were appropriate; however, as I often note with AWCs, if Ingle signed off on the settlement and he was satisfied with paying out the bucks and doing the time in the penalty box, that's a matter of his prerogative and discretion. If he can live with it then so can I.
It's what Ingle does next that really has me scratching my head . . .
2021 FINRA Arbitration Statement of Claim
Let's fast forward a few years from Ingle's 2018 FINRA AWC:
In February 2021, Ingle filed a statement of claim against Merrill Lynch in FINRA’s arbitration forum seeking to expunge the employment termination information described above from the CRD. He alleged that he had issued two firm-authorized proof of funds letters while he worked at Merrill Lynch. He further alleged that, without Ingle’s involvement, a client’s nephew had used Ingle’s legitimate letters to create a fraudulent proof-of-funds letter. Ingle therefore alleged that the CRD’s information that Merrill Lynch discharged him because he provided an inaccurate proof of funds letter was defamatory in nature and misleading, and thus he requested expungement on that basis.
FINRA’s Dispute Resolution Services (“DRS”) initially accepted Ingle’s expungement claim for arbitration. In April 2021, Merrill Lynch filed an answer to Ingle’s statement of claim, opposing Ingle’s expungement request. Merrill Lynch argued that Ingle was not entitled to expungement of the employment termination information for several reasons, including because he had entered into an AWC with FINRA regarding the same underlying conduct. Merrill Lynch’s answer also attached Ingle’s AWC as an evidentiary exhibit.
Later in April 2021, DRS appointed an arbitrator and scheduled an initial prehearing the parties. In May 2021, the parties jointly requested that the final hearing be conducted via videoconference, and the arbitrator issued an order granting that motion. In late May 2021, the arbitrator issued another order indicating that the parties had opted out of an initial prehearing conference but had proposed dates for discovery and for the final evidentiary hearing. The arbitrator therefore set discovery deadlines and the date for the final evidentiary hearing, although those dates were later extended. In April 2022, the parties submitted hearing exhibits, and Merrill Lynch’s submitted exhibits again included Ingle’s AWC.
at Pages 3 - 5 of In the Matter of the Application of DAVID W. INGLE For Review of Action Taken by FINRA (SEC Opinion, '34 Act Rel. No. 99258; Admin. Proc. File No. 3-20893)
https://www.sec.gov/files/litigation/opinions/2024/34-99258.pdf [Ed: footnotes omitted]:
FINRA Rules 12203(a) and 13203(a) provide that the Director of DRS (the “Director”) “may decline to permit the use of the FINRA arbitration forum if the Director determines that, given the purposes of FINRA and the intent of the [relevant FINRA Arbitration] Code, the subject matter of the dispute is inappropriate.”21 “Only the Director may exercise” this authority.22 But here, the Director’s letter to Ingle denying him access to the arbitration forum does not address that FINRA sent the letter after DRS had already accepted Ingle’s claim for arbitration—indeed, after the arbitration hearing had already taken place. Thus, the letter does not explain how FINRA’s denial of access to the arbitration forum comported with FINRA Rules 12203(a) and 13203(a), even though FINRA had previously allowed access to the forum by allowing the arbitration hearing to take place.
The denial letter also does not explain FINRA’s conclusion that a claim to expunge nonregulatory action information is an improper subject matter for FINRA arbitration if the information arises from the same circumstances as a regulatory action. Although the denial letter notes that regulatory action information cannot be expunged from the CRD, that alone does not explain why non-regulatory action information arising from these same circumstances cannot be expunged from the CRD. And Ingle is not requesting to expunge the regulatory action information—that is, the information about the AWC—from the CRD. In addition, although the denial letter notes that a provision in the AWC provides that Ingle will not take any action denying or casting doubt on the AWC’s findings, the denial letter does not address the AWC’s further statement that this provision does not affect Ingle’s “right to take legal or factual positions in litigation or other legal proceedings in which FINRA is not a party.”
at Page 6 of the SEC Opinion
Bill Singer's Comment
As I have long noted, I am not a fan of FINRA's expungement process -- whatever that mess was in the past or is now. Pointedly, I am wary of associated persons laundering their industry records via the civil process of a FINRA arbitration when I think that such an undertaking must be solely a regulatory matter. As I see it, expungements should not be adjudicated by FINRA arbitrators but by FINRA regulators -- and since I think that FINRA is an often incompetent and frequently inept regulator, I'm not all that comfortable with having FINRA discharge any regulatory role. When all is said and done, FINRA's expungement process frequently seems like a turnstile at which you pay the fare, enter into the rotating device, and emerge on the other end. All of which takes on the hue of a profit-center for FINRA rather than the serious function of regulation.
In response to Ingle's appeal, the SEC remanded the matter back to FINRA because, in part, the FINRA Director of Arbitration's "letter to Ingle denying him access to the arbitration forum does not address that FINRA sent the letter after DRS had already accepted Ingle’s claim for arbitration."
FINRA charged Ingle the fare.
They let him walk into the turnstile.
Then they locked the turnstile before he could pass through.
Then they told him to leave the premises.
The SEC sures as hell doesn't have that answer. Making matters worse, we are now waiting on FINRA to come up with some belated, lame-ass explanation.
Who is going to pay for the waste of time that Ingle experienced replete with legal fees and costs because FINRA failed to explain why it did what it did?