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Colorado Court Shuts Down FINRA Over Expungement Confirmation
May 16, 2018
You ever go to a meeting where it seemed that everyone showed up on time, they started the presentations at the designated hour, and then, just as things began to roll, some idiot executive walks in late? Can someone please get me a cup of coffee, two sugars, a little milk, and, if there's a warm cheese danish left, I'll take that, otherwise, I'll take anything with cinnamon. Oh, where's the nearest outlet, I need to plug in my phone. Thanks -- please, don't allow me to interrupt anything. Did we already cover Item One in the agenda? You did? Sorry but could you just catch me up, briefly. Did we place orders for lunch yet? Yeah, there's always that idiot. Speaking of idiots arriving late and messing things up for everyone, consider a recent FINRA expungement arbitration in which the industry Claimant wins but FINRA decides to intervene by way of a partial objection in court to the confirmation of the award.
Case In Point
In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in June 2017, Claimant Sean Michael Murphy sought an expungement of what are referred to in the FINRA Arbitration Decision as occurrences numbers 1399143, 239491, 1289679 and 1176513 from his Central Registration Depository record ("CRD"). Also, Claimant Murphy sought $1 in compensatory damages. In the Matter of the FINRA Arbitration Between Sean Michael Murphy, Claimant, vs. Eastbrook Capital Group LLC Maxim Group LLC Nichols, and Safina, Lerner & Co., Respondents (FINRA Arbitration 17-01566, February 9, 2018).
Respondent Eastbrook Capital and Respondent Nichols, Safina, Lerner & Co. Inc. did not file an Answer or sign a Submission Agreement, and did not appear at the hearing.
Respondent Maxim Group filed an Answer, signed a Submission Agreement, opposed the request $1 in damages, but did not oppose the requested expungement.
Claimant Murphy withdrew his request for $1 in compensatory damages.
Getting the Word Out
The FINRA Arbitration Decision asserts that;
On or about January 2, 2018, Claimant notified the customers related to occurrence numbers 1399143, 239491, 1289679 and 1176513 of the expungement request and of their right to participate and testify at the expungement hearing and he provided the customers with a copy of the Statement of Claim.The Arbitrator conducted a recorded telephonic expungement hearing on February 6, 2018 so the parties could present oral argument and evidence on Claimant's request for expungement.
The FINRA Arbitration Decision explains that:
[T]he Arbitrator did not review the settlement documents related to occurrence numbers 239491 and 1289679 because they could not be located. However, Sean Murphy testified that he contributed to both settlements and that the settlements were not conditioned on the customers not opposing the request for expungement. . .
Award
The sole FINRA Arbitrator recommended the expungement from CRD of all references to occurrence numbers 1399143, 239491, 1289679 and 1176513. The FINRA Arbitration Decision admonishes that the Arbitrator's recommendation is made with the;
understanding that, pursuant to Notice to Members 04-16, Sean Michael Murphy 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.
The Arbitrator offered the following rationale, in part, as set forth in the FINRA Arbitraiton Decision:
Occurrence number 1399143: This complaint for unauthorized trading was examined by the Claimant's employer, and the complaint was found to be false. In addition, the customer wrote an e-mail requesting that the complaint be withdrawn.Occurrence number 239491: The complaint in this matter was for selling a stock at an unauthorized price. While Claimant settled the customer's claim for $3,900.00 because the brokerage firm that employed Claimant had gone bankrupt, the customer later wrote a letter stating that there might have been some miscommunication on his part as to the price for which the subject security was sold. Claimant said no price was ever required by the customer and was sold at market.Occurrence number 1289679: This complaint for breach of fiduciary duty in the amount of $250,000 simply should not have been brought as a matter of law, since there were no laws or regulations in place at the time of the alleged breach which would have allowed for such a claim to go forward. Additionally the complaint against Claimant was brought some five years after he left Eastbrook, his former employer, which is a terminated member of FINRA. The Claimant testified that a lawyer's retainer to contest this claim would have been $20,000, and because of that he settled with the customer for $9,999. Because the complaint was not based on valid law, I find it false; because the Claimant's settlement was such a small portion of the damages claimed, I find it inconsequential. Claimant's record should be expunged.Occurrence number 1176513: The complaint alleged unauthorized transactions. The customer was recorded on tape approving the purchase of the subject security in contradiction to his complaint. He never pursued the complaint in any form.
So . . . lemme see here . . . we got a:
- customer emailing the firm that his complaint should be withdrawn;
- customer writing a letter indicating that there may have been a miscommunication;
- complaint that "should not have been brought as a matter of law," and
- tape recording of a complaining customer that contradicts the customer's version of events.
FINRA's Partial Opposition to Confirmation
Seven months after filing his FINRA arbitration seeking the expungement of the four occurrences, Murphy emerged victorious, and on February 20, 2018, he filed a Motion to Confirm Arbitration Award. Alas, Murphy hit a bump in the road to the courthouse. Apparently, on April 16, 2018, FINRA partially opposed Murphy's Motion to Confirm the arbitrator's expungement recommendations.
1998 NASD Arbitration
As best I understand FINRA's argument, the self-regulatory-organization contends that one of the four occurrences was a 1998 NASD arbitration in which Murphy was found liable. Accordingly, FINRA appears to assert that as to that occurrence, in 2018 a FINRA arbitrator is precluded as a matter of law from re-litigating the earlier case. Following research of the issues, the BrokeAndBroker.com Blog located a copy of the NASD Arbitration Decision in Joe Williams, Claimant, v. Nichols, Safina, Lerner & Co. Inc., and Sean Murphy, Respondents (NASD Award, 97-03915 / March 4, 1998).
https://www.finra.org/sites/default/files/aao_documents/97-03915-Award-NASD-19980304.pdf
In the 1998 Williams NASD arbitration, the public customer alleged that respondents had failed to execute in a timely manner a sell order and sought $3,900 in damages. It would appear that this 1998 NASD arbitration is referenced in the 2018 FINRA Arbitration Decision as Occurrence 239491. The Sole NASD Arbitrator found Respondent Murphy liable and ordered him to pay to Williams $3,900 and a $125 reimbursed filing fee. The NASD Arbitration Decision asserts that "the claims against respondent Nichols, Safina, Lerner & Co. Inc. were stayed due to respondent's Chapter 7 Bankruptcy Voluntary Petition."
In the 1998 Williams NASD arbitration, the public customer alleged that respondents had failed to execute in a timely manner a sell order and sought $3,900 in damages. It would appear that this 1998 NASD arbitration is referenced in the 2018 FINRA Arbitration Decision as Occurrence 239491. The Sole NASD Arbitrator found Respondent Murphy liable and ordered him to pay to Williams $3,900 and a $125 reimbursed filing fee. The NASD Arbitration Decision asserts that "the claims against respondent Nichols, Safina, Lerner & Co. Inc. were stayed due to respondent's Chapter 7 Bankruptcy Voluntary Petition."
Seller's Remorse?
As noted in the 2018 Murphy FINRA Arbitration Decision, after the 1998 Williams NASD Arbitration Decision had been rendered, "the customer later wrote a letter stating that there might have been some miscommunication on his part as to the price for which the subject security was sold. Claimant said no price was ever required by the customer and was sold at market." As such, the cited customer letter and its admissions were never presented during the 1998 NASD arbitration. The letter would represent new information or evidence.
Murphy's Answer to FINRA
The BrokeAndBroker.com Blog obtained a copy of Murphy's Answer to Respondent's Partial Opposition to Motion to Confirm Arbitraton Award (April 23, 2018) http://brokeandbroker.com/PDF/MurphyAns.pdf As noted in pertinent part in the Answer:
C. The 2017 Arbitration Award is Not an Impermissible Collateral Attack on the Previous AwardRespondent argues that Murphy's request for expungement of the Challenged Disclosure seeks to collaterally attack the adverse arbitration award in the 1997 arbitration because Murphy failed to timely challenge the March 4, 1997 award under either Colorado law or the Federal Arbitration Act. This argument fails because Murphy's request for an expungement hearing in 2017 is entirely separate from the liability hearing held in 1997. FINRA does not have a rule that required Murphy to request expungement prior to or during the 1997 arbitration. In addition, Murphy was able to present new evidence at the 2017 expungement hearing in the form of a letter from the underlying customer that was written two months after the 1997 arbitration was closed. The investor at the heart of the Challenged Disclosure submitted a letter on May 6, 1998, stating that although he and Murphy had a dispute regarding a trade in the investor's account, Murphy "handle[d] the situation to the best of his ability and in a timely fashion" Exhibit E, Letter, Joe Williams, dated May 6, 1998. The arbitrator in the 2017 award relied on this new evidence in his decision. Therefore, Murphy did not have a chance to fully present his case in the 1997 arbitration. Further, Respondent was fully aware of the 1997 arbitration at the time that Murphy participated in the 2017 arbitration. However, Respondent made no attempt to challenge the expungement hearing until after the 2017 award was granted. Therefore, Respondent's challenge of the 2017 award is moot.Accordingly, the 2017 arbitration award is not an Impermissible Collateral Attack on the 1997 arbitration.
Pages 7 - 8 of the Answer
Colorado Court Confirms Expungement
In considering Murphy's and FINRA's arguments, the Colorado District Court essentially adopted the rationale set forth in Murphy's Answer and granted his Motion to Confirm the expungement of all four customer occurrences on Murphy's CRD. Sean Michael Murphty, Petitioner, v. Financial Industry Regulatory Authority, Inc., Respondent (Order Confirming, District Court Broomfield County, Colorado, 2018-CV-30052 / May 15, 2018)
http://brokeandbroker.com/PDF/MurphyOrder.pdf
http://brokeandbroker.com/PDF/MurphyOrder.pdf
Bill Singer's Comment
What the hell is FINRA thinking here?
FINRA charged Murphy for filing his arbitration in which he clearly spelled out the bases for his request for an expungement. Ka-ching.
FINRA charged Murphy for pre-hearing and hearing sessions. Ka-ching. Ka-ching.
FINRA charged Murphy for the services of an independent Arbitrator, who adjudicated the matter and published a decision that FINRA posted on its website. Ka-ching.
About a year after FINRA accepted Murphy's arbitration filing and after a decision was rendered and published -- now, at this belated hour -- FINRA awakens from its stupor and contests the confirmation of the recommended expungement of one customer complaint. Outrageous!
I'm not saying that FINRA never, ever has a legitimate reason to oppose an expungement -- to the contrary, there are many compelling investor concerns that could move the regulator to argue its points in court. That being said, FINRA has an obligation to the public and the industry to be fair and to act timely and to provide reasonable notice of its intentions. None of that took place in Murphy's expungement confirmation. What FINRA did accomplish was to jack up Murphy's legal costs and protract his expungement during its intervention into the confirmation process.
After ringing up its cash register on several occasions during the prior year, FINRA rambled into court and, for the first time, raised an objection that it could have noted earlier. Not one single aspect of Murphy's expungement case was concealed from FINRA. FINRA should review all expungement claims from the point in time when it charges for their filing, and, thereafter, promptly inform the parties as to whether any such sought expungement would be challenged during a court confirmation. If nothing else, this could allow the parties and the FINRA Arbitration Panel to address such concerns and create a more comprehensive record for a court. Thankfully, there are still some feisty industry lawyers like Doc Kennedy who keep FINRA honest -- or as close to that approximation as is possible.