UBS FINRA Expungement: Good news and bad news for unnamed stockbroker

February 23, 2011

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Claim filed in July 2009, two trusts alleged causes of action against UBS Financial Services, Inc.("UBS") including breach of contract, negligence, and failure to supervise pertaining to the trusts's investment in Fannie Mae (FNMA) Preferred Stock. Claimants sought not less than five-figure awards. In the Matter of the Arbitration Between King Credit Shelter Trust, Edwin King, Trustee; Bypass Trust of the Allderdice 1990 Living Trust DTD 9/5/01, Charlene Allderdice, Trustee, Claimants versus UBS Financial Services, Inc., Respondent (FINRA Arbitration 09-04009, February 22, 2011).

Respondent UBS generally denied the allegations and asserted various affirmative defenses.

On December 21, 2010, the Claimants notified FINRA that the parties settled and that Claimants dismissed the claim in its entirety with prejudice.

All of which brings us to the end of the lawsuit but the beginning of a saga for an unnamed party.

Expungement Request

On December 27, 2010, Respondent UBS contacted FINRA to request an expungement hearing for non-party stockbroker Daryl R. Faris, and thereafter, on January 6, 2011, Faris's Motion for Expungement Recommendation was submitted to the three FINRA arbitrators. In January 2011, the FINRA Arbitration Panel conducted hearings on the expungement request and although the Claimants did not attend, they also did not oppose the request.

Side Bar: According to FINRA records, Faris was first registered in 1972 and joined UBS in 1983.  During his three-decade Wall Street career, his history discloses one prior customer matter, dating back to 1990 when an NASD Arbitration Panel awarded a complaining customer under $2,000, as against nearly $12,000 in sought damages for failure to execute an order. Faris left UBS for another FINRA member firm in January 2010. 

Split Decision

In deciding Faris's request for an expungement, the three FINRA arbitrators issued a split decision, which although not a rare event is nonetheless unusual enough as to be noteworthy.

Majority Rules

The majority of the three-member FINRA Arbitration Panel recommended the expungement of all reference to the customers' arbitration from Faris's Central Registration Depository ("CRD") records.

In justifying the decision to grant Faris's expungement, the majority of the three-member FINRA Arbitration Panel found that Faris acted in a proper manner with his clients Edwin King and Chariene Allderdice. Although the Claimants represented that they were unsophisticated investors, the majority of the panel believed this to be inaccurate. In reaching that conclusion, the two arbitrators noted that UBS's New Account Documentation indicated that Mr. King had 25 years of investment experience.

Similarly, the majority of the panel found as inaccurate the Claimants' representation that they relied heavily on Faris's recommendation. In reaching that conclusion, the two arbitrators believed Faris's testimony that he recommended against the FNMA purchase because he deemed it risky and overly aggressive -- which he attributed to its higher relative yield. In accepting Faris's explanation, the two panelists gave credence to the fact that none of Faris's other clients were placed by him in the particular FNMA preferred - with the exception that at a later date and after a substantial price drop, another client bought two small allocations on an "unsolicited" basis.

Although the Claimants claimed that Faris did not properly advise of the FNMA risk, the majority of the panel found that such was indeed disclosed via a FNMA Preferred Fact Sheet that was conveyed to the clients (and which King picked up at Faris's office).

Finally, the two concurring arbitrators noted that Faris was not named in the arbitration and Claimants chose not to participated in the expungement hearings.

Not Convinced

The dissenting arbitrator explained that he could not conclude that the Claimants' allegations were "false" or that any other basis under the rules existed to warrant expungment. Notwithstanding, the dissenter found that Faris had presented himself at the in-person hearing as a competent broker, and seemed to testify with candor.

Noting that Faris made only one sale of the FNMA Preferred to any other customer - among the approximately 600 household accounts that he serviced - the dissenter conceded that, at a minimum, Faris was not a strong proponent of the security in contention. Nonetheless, the dissenter seemed caught on whether FINRA Rule 2080: Obtaining an Order of Expungement of Customer Dispute Information from the Central Registration Depository (CRD) System, required a finding that there was no "reasonable basis" for the claim. Ultimately, the lone arbitratror could not overcome that threshold and suggested that there could be reasonable explanations supportive of Claimants' allegations.

For example, the dissenter questioned whether he knew "for certain" exactly what conversations transpired nearly three years earlier between Faris and King, and, as such, he seemed compelled to allow that the customer might have reasonably construed Faris as recommending the purchase of the FNMA - particularly since Faris initiated the subject phone call and the topic.  Clearly the dissenting arbitrator was not persuaded to the extent that his co-panelist were that Faris was merely going through the motions of informing the client of the availability of the FNMA issue but had expressed only tepid support.

The dissenter found the Claimants' accounts to be overly concentrated in the financial sector and in callable preferred shares, which, when taken together, raised questions as to the suitability of the FNMA Preferred purchase. Moreover, the dissenter noted that contemporaneous press accounts warned about a possible FNMA default.

As to the Claimants' alleged financial experience and sophistication, the dissenter downplayed that issue and was not prepared to so easily relieve Faris of the responsibility of better allocating the portfolios. Pointedly, the dissenter was not persuaded that the Claimants, both in their late 70s were capable of understanding the materials provided to them.

Bill Singer's Comments: I'm a bit torn on this case. Based upon my reading of the Decision, I find the majority's recommendation of expungement to be reasonable and fairly based upon any arbitration panel's prerogatives. On the other hand, I commend the dissenter for fashioning a credible counter-position and taking the time to explain his rationale.

Nonetheless, I am more persuaded as to the majority's decision. While I fully and sincerely respect the dissenter's wrestling with the "reasonable" alternative explanations for the conduct at issue, it seems to be that the burden of proof must at least be initially carried by a public-customer Claimant alleging that a firm's or individual's conduct was inappropriate. In this case, the fact that Faris was not even named in the arbitration, must be given some appropriate weight -- although such an omission from a litigation caption has many tactical and strategic considerations that do not automatically deem an unnamed party as without fault.

Whether the dissenter got it right or not is not of great consequence. Ultimately, the Claimants settled the case and presumably obtained some compensation for their claims. The more important issue is that we have been presented with a thoughtful FINRA Arbitration Decision that explains both the majority's and the dissenter's positions. I thank these three arbitrators for their exceptional service.

Side Bar: Pursuant to Notice to Members 04-16, Faris must obtain confirmation from a court of competent jurisdiction before the CRD will execute the expungement directive. Unless specifically waived in writing by FINRA, parties seeking judicial confirmation of an arbitration award containing expungement relief must name FINRA as an additional party and serve FINRA with all appropriate documents.